Define holding company and subsidiary company.

Ans.

MEANING OF HOLDING COMPANY

According to Section 2 (46) of the Companies Act, 2013 “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. It is clear that holding company is one, which has one or more subsidiary companies and enjoys control over them. Legally, holding company and its subsidiaries have distinct and separate entities, but in practice they work as a group and collectively they are called a ‘Group of Companies’. It is worth mentioning that holding company develops and nurtures subsidiary companies and on this basis holding company is also known as a ‘Parent Company’.

MEANING OF SUBSIDIARY COMPANY

According to Section 2 (87) of the Companies Act, 2013, ‘Subsidiary Company’ or ‘subsidiary’ in relation to any other company (that is to say the holding company), means a company in which the holding company:

(i) controls the composition of the Board of Directors; or

(ii) 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.

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation- For the purposes of this clause:

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) 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 exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(d) ‘layer’ in relation to a holding company means its subsidiary or subsidiaries.

MEMBERSHIPOFHOLDING COMPANY

A subsidiary company can not become a member in its holding company and in this context any transfer or allotment of shares by a company to its subsidiary company is considered void. However,

(1) A subsidiary company may hold shares in the holding company as the legal representative of a deceased member of the holding company or (2) as trustee, unless the holding company or any subsidiary thereof is beneficially interested under the trust concerned.

A subsidiary may continue to be a member of its holding company if it was a member thereof at the commencement of the Act or before becoming a subsidiary of the holding company. In such a case, the subsidiary shall not have any voting right in respect of shares held.

WHOLLY OWNED AND PARTLY OWNED SUBSIDIARY COMPANIES

A wholly owned subsidiary company is one in which all the shares with voting rights of 100% are owned by the holding company. In such a subsidiary company, there will be no minority interest as all the shares with voting rights are held by the holding company.

In a partly owned subsidiary, only the majority shares (more than 50%) are owned by the holding company, i.e., all the shares of subsidiary company are not owned by the holding company. In such a subsidiary company minority interest exists as less than 50% shares with voting rights are held by outsiders other than the holding company.