A Brief Overview of Holding Company Structure in IndiaThe shareholder of a Private Limited Company can be anyone including an individual, another company, a trust, etc. In case shares of a Private Limited Company or Limited Company are held by another Company, the Company holding shares of the Private Limited Company or Limited Company is called a Holding Company, and the relationship created in this is called a Subsidiary and Holding Company.
What is Holding Company
As per provisions of The Companies Act 2013, a company controlled by another company is called a subsidiary company, and the controlling company is called a holding company. Thus control is used as the key parameter in the Act to determine company holding status and holding company/subsidiary company relationship. The control can be through various reasons including control of management or through ownership of shares, management rights, voting rights, etc. As per Companies Act, 2013, the world holding company is defined as a company about one or more other companies, meaning a company of which such companies are subsidiary companies.
What is Subsidiary Company
A subsidiary company is a company in which the company holding by control the composition of the Board of Directors, Management rights, voting rights, and/or by shareholding exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies. The composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power by it can appoint or remove all or a majority of the Directors.
Holding Company Subsidiary Company Relationship
As per provisions of The Companies Act 2013, a holding company subsidiary company relationship can be proved when:
- The holding company can control the composition of the Board of Directors of the subsidiary company
- The holding company holds more than 50% of the paid-up share capital of the subsidiary company.
The company can hold shares of the subsidiary company directly or by one or more of its subsidiary companies. In addition, in case holding Company ABC has a subsidiary Company XYZ and subsidiary Company XYZ has a subsidiary Company MNO, then subsidiary Company MNO will automatically become a subsidiary Company of ABC.
Possible reasons for creating Company Holding / Subsidiary Company structure
A holding company subsidiary company structure can be set up for purposes namely:
- Division of Business: In case any conglomerate has multiple business lines and wants to have an independent legal structure to show profit and performance and aims to list each and every business separately for valuation benefit.
- Tax Planning and foreign holding of shares: Any company planning to set up business in India needs to have a subsidiary instead of opening a branch office at times create another layer based out of Mauritius, Singapore, Hongkong, or the Cayman Islands to take tax holiday.
- Regulatory reasons: At times certain businesses are required to be operated through an independent company instead of as a division of the existing company
- Enabling Joint Ventures and alliances with technical experts.
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Advantages of Holding / Subsidiary Company Structure
- Flexibility in the transfer of shares/transfer of business/sale of company
- Flexibility in raising long-term debt in the form of equity, mezzanine, and debentures/bonds
- Flexibility in raising short-term debt in the form of loans, overdrafts, and commercial papers
- Better tax planning and possibilities for straightforward tax structuring. It allows businesses to take advantage of creating independent entities and avail tax breaks till businesses make a profit.
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