Holding Companies: Definition, Advantages and Disadvantages

In this article we will discuss about the Holding Companies:- 1. Definition of Holding Companies 2. Advantages of Holding Companies 3. Disadvantages of Holding Companies.

Definition of Holding Companies:

A holding company is a company which controls another company known as subsidiary company by owning its majority of the shares carrying voting rights or controlling the composition of its board of directors Accounting Standard 21 on Consolidated Financial Statements gives the following definitions:

A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

A parent is an enterprise that has one or more subsidiaries.

A group is a parent and all its subsidiaries.

Thus, the Accounting Standard calls the holding company, a parent.

Advantages of Holding Companies:

Holding companies have been used extensively to further the combination movement. Particularly in the United States of America, the holding company device was found to be useful in bringing a number of companies under one control, and it is only when the combination movement gathered momentum that holding companies became popular.

The advantages of holding companies are as under:

1. Subsidiary companies maintain their separate identities and as such they maintain their goodwill.

2. The public may not be aware of the existence of combination among the various companies and, therefore, the fruits of monopoly or near monopoly may be enjoyed without resentment in the minds of the people.

This, however, is clearly a disadvantage from the social point of view, because, if there is a monopoly, the public ought to know.

3. The persons controlling the holding company need invest a comparatively small amount in order to control the subsidiary companies. If, for example. A, a holding company, has two subsidiaries, B and C and if B and C in turn have three subsidiaries each, the persons who have the majority of shares in A will be able to control eight other companies.

Had these companies been amalgamated, a much larger amount would have been required in order to control the concerns.

This, again, is a disadvantage from the social point of view, because it may lead to ir­responsibility.

4. By maintaining the separate identities of various companies, it would be possible to carry forward losses for income tax purposes.

5. Each subsidiary company has to prepare its own accounts and, therefore, the financial position and profitability of each undertaking is known.

6. Should it be found desirable that the control of the holding company be given up, it can be easily arranged; all that is required is that the shares in the subsidiary companies should be disposed of in the market.

Disadvantages of Holding Companies:

The disadvantages of holding companies are the following:

1. There is a possibility of fraudulent manipulation of accounts, especially if the accounts of various companies are made up to different dates.

2. Inter-company transactions are often entered at fanciful or unduly low prices in order to suit those who control the holding companies.

3. There is the danger of the oppression of minority shareholders

4. There may be accounting difficulties in appraising the financial position of companies due to inter-company transactions carried on at too high or too low prices.

5. The shareholders in the holding company may not be aware of the true financial position of the subsidiary companies.

6. Similarly, the creditors and outside shareholders in the subsidiary companies may not also be aware of the true financial position.

7. The subsidiary companies may be forced to appoint persons of the choosing of holding companies as directors or other officers at unduly high remuneration.

Whatever the advantages and disadvantages, the holding company has come to stay and the law now wisely tries to regulate its working. The law has defined a holding company and a subsidiary company. Private companies, subsidiary to a public company, do not enjoy the privileges given to private companies. Also, the law compels the holding company to give information about the sub­sidiary companies.