Top 9 Differences Between Holding and Subsidiary Company

Introduction

The Companies Act of 2013 provides entrepreneurs considerable freedom in selecting or registering any type of corporation for their enterprises. The company law has established a variety of entities, including limited liability partnerships, private limited companies, public limited companies, and one-person companies. 

Company law also includes the notions of a holding and subsidiary company. Companies that are holding and subsidiaries may register under any of the categories specified by company law.

People and organizations that are new to the business world frequently confuse the two. Therefore, understanding the distinction between a holding and subsidiary company is crucial.

What is a holding company?

A holding company is a particular kind of business that holds a sizable percentage of the stock or voting rights in subsidiaries, which are other businesses. A holding company’s main function is to keep and manage investments in different companies, not to participate in the day-to-day activities of its subsidiaries.

Qualities of a Holding Company:

Ownership of Subsidiaries: Either via voting stock ownership or contractual arrangements, a holding company maintains a controlling interest (often greater than 50%) in its subsidiaries.

Control and Governance: Although a holding company may use its ownership position to exercise control over its subsidiaries, it usually stays out of the day-to-day operations and management of those companies. Alternatively, it can give its subsidiaries financial support, governance control, and strategic direction.

Investment Strategy: Holding Companies frequently maintain a diverse portfolio of holdings across a range of markets and sectors. Companies might buy subsidiaries for tactical purposes, like breaking into untapped areas, varying their sources of income, or making use of business-to-business synergies.

Financial Reporting: Holding Companies usually include their subsidiaries’ financial statements in their financial reports. This consolidation gives stakeholders a thorough understanding of the group’s economic performance and aids in the evaluation of the holding company’s investment holdings.

What is a subsidiary company?

A subsidiary is a separate legal entity that falls under the parent company’s or holding company’s jurisdiction. Control over the subsidiary’s management and operations is granted to the parent company, which holds the majority of the subsidiary’s voting stock or shares.

Qualities of a Subsidiary Company:

Ownership: A parent company is a different business that owns a subsidiary, either fully or partially. With majority ownership (generally greater than 50%) in the subsidiary, the parent business has control over the subsidiary’s decision-making procedures.

Control and Management: Although a subsidiary functions as an independent legal entity, the parent business nevertheless has the last say over it. The parent business has the authority to select directors for its subsidiary and to decide on important matters, including financial policies, strategic direction, and large investments.

Operational Independence: Subsidiary Businesses continue to function somewhat independently and autonomously from the parent business. They have their workforce, operational frameworks, business plans, and management teams. Major choices, though, might need parent company clearance.

Financial Reporting: Income statements, balance sheets, and cash flow statements are only a few of the financial statements that subsidiaries generate on their own and keep their records. To give a complete picture of the group’s economic performance, these financial statements can be included into the parent company’s financial reports.

What Sets a Holding Company Apart from a Subsidiary Company?

The following is a summary of the main distinctions between a holding and subsidiary company:

Authority and Possession

One of the most important distinctions between a holding and subsidiary company is control and ownership. The subsidiary firm is under the holding company’s authority. A subsidiary company, on the other hand, operates independently under its management structure, even while the parent company wholly or partially owns it.

Liability

Unlike a subsidiary firm, which has unlimited responsibility, a controlling company has limited liability. Liability only extends to the holding company’s interests in the subsidiary businesses. 

However, all of the parent company’s assets are included in the subsidiary company’s liability and are not free from it. One of the main distinctions between a holding company and a subsidiary is liability.

Accounting Statements

In India, there are differences in the financial reporting standards for holding corporations and subsidiaries. Both must adhere to this prerequisite. Because it must create and submit financial reports for both the holding company and its subsidiary, a holding company’s task can be a little more challenging in this situation. Conversely, a subsidiary business just needs to submit the report itself.

Tax Repercussions

In India, holding companies and subsidiary companies have different tax ramifications. Since a holding company can profit from the tax reductions granted to its subsidiaries, it may have tax advantages. 

It is also required to pay a dividend distribution tax on the dividends received from its subsidiaries. A subsidiary company, on the other hand, is required to pay taxes on its income and deduct taxes from any dividends it distributes to its parent company.

Regulations Needed

Different regulatory requirements apply to holding corporations and subsidiaries in India. The Companies Act of 2013 and any other applicable laws, rules, and regulations must be followed by a holding company. There are also applicable board meetings, regular audits, and other compliance requirements.

Operations and Management

A holding company does not participate in its subsidiaries’ daily operations. It only has supervisory authority and takes part in important managerial choices. A subsidiary, on the other hand, operates autonomously and has its management structure, albeit the parent company does have some say over important decisions.

Pattern of Shareholding

Shareholding is the primary distinction between a holding company and a subsidiary firm. Shares of a subsidiary company are held by a holding company, not the other way around. 

Holding company shares is so important that they have the power to influence subsidiary decision-making. The shareholding structure may also differ based on the ownership structure and magnitude of the investment.

Identity and Branding

Subsidiaries of a holding company may conduct business under multiple names and maintain unique brand identities. Customers and investors may be more familiar with the name of the holding company’s subsidiary than with the name of the holding company itself.

Risk Assessment

A holding company can lower total risk by distributing the risk of its investments among several subsidiaries in different markets and geographical areas. Conversely, a subsidiary company can be vulnerable to hazards specific to its location and industry, and a variety of outside circumstances could have an impact on its success.

To sum up, understanding the nuances of holding and subsidiary companies under the Companies Act of 2013 is essential to both legal compliance and corporate governance. 

Within the Indian corporate sector, this connection model facilitates risk management, strategic business expansion, and effective resource usage. For additional questions, get in touch with Lawgical Adda’s specialists.