Holding Companies
Holding Companies
COMPANIES
MEANING
A holding company is company or firm that owns other companies outstanding stock.
It usually refers to the company which do not produce goods or services itself, rather its only
purpose is to owning shares of other companies.
Holding company allow the reduction of the risk for the owners and can allow the ownership
and control of a number of different companies.
Meaning
Holding company is a company which has control over the other companies by either of
the following:
2. hold more than half in nominal value of its equity share capital.
The holding company also benefit from the subsidiary’s goodwill and reputation, while
being sheltered by risk faced by subsidiary in the case of legal issues, tax liabilities and
lawsuits.
When raising a capital a larger holding company has more diversity of asset than an
individual company, which makes raising capital easier.
ADVANTAGES
If the holding company owns 80% of voting stock of another company ,the holding
company can qualify for tax free dividends.
DISADVANTAGE
Problem of monopoly: A holding company tries to create monopoly over the market.
Monopoly is always against the public interest. Its fixes a higher prices and consumers
suffers a loss.
Costly management: a holding company spends a lot of money on officers and offices. All
the units are managed by central authority. So its costly to maintain the proper control on
large numbers of subsidiary companies.
Disadvantage
Minority intrest is ignored: the interest of minority shareholders are ignored and the
members of holding company are dispose of every resolution for their own interest.
Misuse of funds: the directors of the company enjoys unlimited power and they take
undue advantages.
Holding companies in india
Subsidiary Company
The holding company provides the subsidiary company with buying power, research and
development funds, marketing money, employees, technical expertise and other features
which otherwise it could not afford or accomplish alone.
The parent company can provide the monetary means and capability to jump start new
companies and products.
Ability to offset profits and losses of one part of a business with another
Disadvantages
The consolidated profit and loss A/c of holding companies and its subsidiary companies
are prepared to show the operating activities of the company.
The items appearing in the profit and loss a/c of both the individual companies are
aggregated in the consolidated profit and loss a/c.
Continue.
Prepare the profit and loss a/c. amounts relating to inter company transaction entered in
the adjustment column and are subtracted.
All inter company operating transactions such as purchase and sales of goods, interest on
loans among the companies are eliminated.
Dividend received by the holding company from the subsidiary company should be
eliminated.
The balance in holding company column will represent the total profit and loss made by
the company as a whole.
Consolidation of the balance sheet
It is where the balance sheet of the holding company and the subsidiary company is
combined.
Holding company acquires more than 50% of the shares which may be either premium or
at discount price.
If the amount paid by the holding company for the shares of the subsidiary company is
more than its proportionate share in the asset of the subsidiary company, the difference is
considered as goodwill.
Thank You