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Preface: This post was originally published in 2022 and has been updated on February 26, 2025, to provide you with the most current and accurate information.
A holding company controls other companies by owning a majority stake or at least 50% stake in their shares. It oversees other companies’ strategic decisions and activities. However, it does not directly manage their day-to-day operations. Our article will serve as a guide if you want to learn what a holding company is, its benefits, disadvantages, and registration process.
Section 2(46) of the Companies Act 2013 describes what a holding company is. According to this section, a company is said to be a holding company if it holds or owns a minimum of 50% of the other companies and has the authority to make management decisions, influence and control the company’s board of directors. The business that is controlled by the holding company is known as a subsidiary. In a nutshell, a holding company is a company that holds at least half of a subsidiary company’s total stakes.
Examples of holding companies in India are Tata Sons and Aditya Birla Capital. Tata sons is Tata Group’s holding company and promoter. Aditya Birla Capital is the holding company for Birla Group’s financial services business.
An example of a holding company in the US is Berkshire Hathaway. It is a holding business run by Warren Buffet. It owns large stakes in Geico, Dairy Queen and Duracell.
The key benefits of holding companies in India are as follows:
By establishing a holding company, you can exercise control over other entities with less investment. This is because full ownership is not required to achieve control.
Another key benefit of a holding business is that it is guarded against liabilities of their subsidiaries. When subsidiaries incur losses, the creditors cannot demand repayment from the holding company.
Holding businesses are not actively involved in the day-to-day operations of their subsidiaries. They allow the managers in the subsidiaries to retain their roles. The owner of the holding co. gains advantage from this fact since they merely need to keep an eye on operations without having to get involved significantly.
Holding businesses can control multiple subsidiaries by owning a significant portion (50% or more). This allows it to manage numerous entities without having to own them entirely. Hence, a small-business owner can expand control over multiple entities using relatively small investment by setting up a holding company structure.
Each subsidiary falling under a holding business operates as an independent legal entity. Therefore, in case a subsidiary faces a lawsuit, other subsidiaries and holding company’s assets get liability protection. This reduces overall liability risk to the corporate group.
Generally, a holding company retains the existing management team when acquiring subsidiary companies. Doing so allows the latter to continue day-to-day activities to carry on as usual. The holding businesses only have to intervene at the time of strategic decision-making and of course, overall monitoring.
A holding co. separates different segments of a business into separate subsidiaries. This can effectively isolate risk within each individual segment. This means that if one segment of businesses underperforms or faces financial challenges, it won’t necessarily impact other segments due to the fact they are separate legal entities. In the single-company structure, this is not possible.
Assets like property, equipment and cash investments are held by a holding business rather than subsidiaries. Therefore, these assets remain safe from the creditors and business risks pertaining to the operational side.
A holding co. can reduce duplicate costs by centralizing the administrative services (such as Human Resources, Finance and Legal Support) across its subsidiaries. It can provide these services once and share them with all the subsidiaries. Doing so abolishes the need for each subsidiary to maintain separate, unnecessary functions.
Many holding companies file consolidated tax returns as it allows them to offset losses in one subsidiary with gains in another.
A holding business can generate a good amount of income from the dividends paid by its subsidiaries.
While a holding business comes with a tide of advantages, it does carry certain shortcomings. Some disadvantages of holding companies in India include the following:
Generally, holding companies tend to finance their acquisitions and investment by utilizing debt (like bank loans and corporate banks). Relying on debt instruments can leave holding businesses and their subsidiaries vulnerable to fluctuations in rate of interest and overcapitalization. This can hurt the overall value of the holding co. as well as its subsidiaries.
When a holding co. carries a large debt amount, its financial reports might not reflect its true financial health in an accurate manner. These reports might show a more positive picture than reality since the co. might use accounting practices to mask the debt burden’s severity. It can result in optimistic, misleading numbers to investors and creditors.
A subsidiary's senior management and staff are unable to decide on any significant matters pertaining to the course of their company. Instead, the holding business uses that power without much accountability or responsibility. Employees of the subsidiaries may become frustrated as a result of the arrangement's nature.
When a holding business owns a majority stake in a subsidiary, it can designate its own officers, directors, and management group to further the holding co's objectives. Minority shareholders may, at times, not be a part of the decision-making process as a result of this.
Usually, minority shareholders lack the political power and voting stock necessary to limit the holding business' influence.
It is true that a holding business is a specific type of business that primarily owns shares in other companies (subsidiaries) rather than engaging in its own business operations. However, holding companies themselves can be categorized into different types based on their structure and purpose.
The types of holding company include the following:
The pure holding businesses/companies solely exist to own and control other companies. Such companies do not participate in any other business activities beyond acquiring and holding shares in subsidiaries. The primary purpose of pure holding companies is to manage their ownership stake in other businesses. Their purpose does not include operating their own businesses directly. It’s all about ownership.
These companies are also known as holding-operating companies. Not only do they control other businesses but they also actively participate in additional business activities. They take on the tag of ‘conglomerates’ when they participate in other businesses alongside their subsidiary companies.
These businesses play dual roles as both holding companies and subsidiaries. An interesting aspect about these companies is that they enjoy an extra layer of privacy because they act as a bridge between a smaller subsidiary group and a larger parent company. These companies are typically exempt from obligation to disclose their full financial records due to their position within a complex corporate structure.
An immediate holding company is held by another holding company. However, this kind of holding company retains its voting stock despite being under a higher entity’s control.
Many entrepreneurs register holding businesses to protect their assets against liabilities. Holding company formation helps to shield personal assets from potential financial issues that arise within any individual subsidiary. Holding company registration involves the following steps:
Before you form a holding co., it is necessary to define your goals and objectives clearly. You must carefully consider the types of subsidiaries you want to control.
You must conduct research about them and take professional advice before you plan to acquire them. Additionally, you must come up with a strong plan as to how you would like to manage them effectively.
Now, you must select an entity type, such as a one person company, limited liability partnership or a private limited co.
You must consider all the pros and cons of these entity types before you make the final decision. You may connect with Registrationwala if you need professional advice related to this.
In this step, you must pick a suitable name for your business. Make sure it complies with the naming requirements set forth by the Ministry of Corporate Affairs (MCA). Also, make sure that the chosen name reflects your business goals and is unique in nature.
DSC stands for Digital Signature Certificate. You need this certificate for signing e-documents during the holding company incorporation process. Therefore, it must be secured prior to initiating the incorporation process online.
DIN stands for Director Identification Number. The proposed holding co’s directors must apply and secure DIN before initiation of the registration process.
You must prepare all the crucial holding business registration documents, such as Memorandum of Association (MoA) and Articles of Association (AoAs).
The MoA must clearly state the scope of activities your holding co. will participate in. The AoA must clearly outline how your holding co. will operate internally. These documents must explicitly state your intention to control subsidiaries.
File your incorporation documents along with necessary forms with the Registrar of Companies (RoC). For this, you must visit the MCA portal and pay applicable incorporation fees during the process.
Upon application approval, the RoC will issue your business a Certificate of Incorporation (COI), which will officially establish your holding business as a legal business entity. After receiving this certificate, you can commence business operations legally.
Holding companies are legal entities that control subsidiaries. The Companies Act 2013 governs them. To register a holding business in India, you must file an application with the RoC. For assistance in holding company registration, you may connect with us. Check Contact Details!
Q1. How does a holding business make money?
A. A holding business generates money from receiving dividends from the subsidiary companies it owns.
Q2. Which section of the Companies Act 2013 defines ‘holding company’?
A. Section 2(46) of the Companies Act 2013 defines a holding company. It states that a company is a holding company if it owns at least 50% of another company and has the authority to make management decisions, influence, and control the board of directors.
Q3. What are the types of holding companies?
A. The types of holding companies are: (i) Pure holding companies (ii) Mixed holding companies (iii) Intermediate holding companies and (iv) Immediate holding companies.
Q4. Who registers holding businesses in India?
A. The Registrar of Companies (RoC) registers holding companies in India.
Q5. What are companies controlled by holding companies called?
A. The companies controlled by holding companies are known as subsidiaries.
Q6. Do we need Digital Signature Certificates to incorporate holding companies?
A. Yes, individuals require Digital Signature Certificates to sign incorporation documents for registering holding companies.
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