Explore the nuances between holding and subsidiary companies, deciphering their roles and compliance within the regulatory framework of the Companies Act, 2013 in India.
Seldom is the structure of a business straightforward. The corporate structure varies as per the priorities and needs of the business. This is perhaps the biggest advantage the Companies Act, 2013 offers to entrepreneurs incorporating new establishments. In a few instances, a company might be independent, while in others it might be controlled by a parent company. The parent company thus holding control of the other company, may or may not control the stocks of the latter. The parent company here is called the holding company if it holds the stocks and is not involved with the business affairs of the subsidiary company.
In reality, though, the holding companies do have the competence to influence the discretion of the management of the subsidiary in pivotal areas. Yet, they are not authorized to take part in the business affairs of the subsidiaries. It might be interesting to note that, a holding company is essentially a parent company to its subsidiaries, but not all parent companies are holding companies with respect to the subsidiary companies.
Holding Company as Defined Under the Companies Act, 2013
The Companies Act, 2013, mentions that the holding company is one wherein it holds a minimum of 50% of shares of another corporate entity. The holding company, by virtue of this, has the privilege of being a part of the decision-making process of this entity and has a chance to influence the Board of Directors. In a nutshell, the major role of a holding company is controlling and administering the subsidiary companies.
Therefore, if the subsidiaries run a risk in the due course of business and face debts or losses, the holding company stays unaffected. On the other hand, one of the major perks of the relationship between a holding company and a subsidiary is the feasibility of accumulating a large capital to run the business. The companies can undertake competitive projects combinedly by pooling their assets together.
Subsidiary Company as Defined Under the Companies Act, 2013
As per the Companies Act, 2013, a subsidiary company is one whose operations are monitored or controlled by a parent company or a holding company. More than 50% of the shares of the subsidiary are held by the holding company. If 100% of the shares of the subsidiary are owned by the holding company, then it is considered to be a wholly-owned subsidiary. However, a subsidiary does not have the right to own shares of the holding company, except by the provisions stated in the governing statute.
By being administered by a holding company, a subsidiary firm gets to have very minimal regulatory compliances and diversified but calculated risks. Moreover, the subsidiary companies have a distinct legal status that is separate and unique from the holding company.
| S.No | Holding Company | Subsidiary Company |
| 1 | A holding company controls more than 50% of another company’s stock and hence has the ability to influence the decisions of the latter | The company is in control of another company that owns more than 50% of its shares |
| 2 | The company has the power to hire or fire the members of the board, directors, and other management personnel | A subsidiary has very little supervisory power over the operations of the company. Subsidiaries that operate independently, may also be controlled financially by the holding company |
| 3 | The holding company exercises its ownership rights over its subsidiaries | A subsidiary company is dependent on the holding company to arrive at key decisions |
| 4 | A holding company may invest in a number of subsidiaries, as a part of its investment strategy. This may also be carried out to minimise risks and for tax emoluments | When a company becomes a subsidiary of a respective holding company, all its subsidiaries become subsidiaries of that holding company |
| 5 | A holding company takes charge of the subsidiary and regulates the market competition for the subsidiary company | A subsidiary company finds shelter under its parent holding company to protect itself from unfair competition and other uncertainties that arise during the course of the regular business |
The holding company and subsidiary firm, although interdependent on each other, have a separate identity and operate in their own legal regimes while serving different purposes. Though the holding company has an influential role with respect to its subsidiary firm in the areas of management and administration, the latter enjoys autonomy in matters relating to day-to-day business affairs. The subsidiary companies must handle the power in their realm effectively in order to avoid the unnecessary interference of the holding companies and to discourage the unfair concentration of economic power by the holding companies. For further queries, you can reach out to our experts in Vakilsearch at any time.
Holding and Subsidiary Company in India under Companies Act, 2013:
In India, the Companies Act of 2013 delineates the framework for holding and subsidiary companies. A holding company controls the composition of the board of directors of another company, known as the subsidiary. The control is often exercised through ownership of the majority of shares or the ability to appoint directors. On the other hand, a subsidiary company is one whose affairs are controlled by another company, referred to as the holding company. This relationship signifies a significant level of influence or ownership.
Understanding the nuances between a holding and a subsidiary company is crucial. A holding company typically has a more extensive business scope and exercises control over multiple subsidiaries. It plays a strategic role in decision-making and resource allocation across the group. In contrast, a subsidiary company operates more independently, with its board of directors, yet is subject to the control or influence of the holding company.
The Companies Act of 2013 mandates specific compliance requirements for holding and subsidiary companies. It delineates the criteria for determining such relationships, the obligations of directors, and financial reporting norms. This legal framework ensures transparency, accountability, and fair business practices within the corporate structure.
Conclusion:
In conclusion, comprehending the intricacies of holding and subsidiary companies under the Companies Act, of 2013, is pivotal for corporate governance and legal adherence. This relationship model allows for strategic business expansion, risk management, and efficient resource utilization within the corporate sector in India. For any more queries, contact the experts at Vakilsearch.
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