Here are the notes on holding and subsidiary companies, along with some multiple choice questions (MCQs) and answers:
What are holding and subsidiary companies?
A holding company is a company that owns a controlling interest in one or more other companies, called subsidiaries. The holding company does not necessarily have to be involved in the day-to-day operations of the subsidiaries, but it does have the power to appoint and remove directors, approve budgets, and make other major decisions.
A subsidiary company is a company that is controlled by another company, called the parent company or holding company. The parent company can control the subsidiary through a majority ownership of shares, voting rights, or by having its own directors appointed to the subsidiary’s board of directors.
How are holding and subsidiary companies defined in the Companies Act 2013?
The Companies Act 2013 defines a holding company as “a company of which one or more other companies are subsidiary companies” (Section 2(46)). A subsidiary company is defined as “a company in which a holding company has a controlling interest” (Section 2(47)).
What are the different types of holding companies?
There are three main types of holding companies:
- Pure holding companies: These companies do not have any active business operations. Their sole purpose is to own and control other companies.
- Active holding companies: These companies have active business operations, but they also own and control other companies.
- Financial holding companies: These companies are financial institutions that own and control other financial institutions.
What are the advantages of using a holding company structure?
There are several advantages to using a holding company structure:
- Tax benefits: Holding companies can be used to reduce taxes by taking advantage of different tax rates and deductions. For example, a holding company can be located in a country with a lower tax rate than the subsidiaries.
- Liability protection: Holding companies can provide liability protection for the parent company and its shareholders. If a subsidiary company goes bankrupt, the creditors of the subsidiary cannot go after the parent company or its shareholders.
- Capital raising: Holding companies can be used to raise capital for the subsidiaries. This can be done by issuing shares or bonds in the holding company.
- Management and control: Holding companies can be used to centralize management and control of the subsidiaries. This can make it easier to manage a large and complex business.
What are the disadvantages of using a holding company structure?
There are also some disadvantages to using a holding company structure:
- Complexity: Holding company structures can be complex and expensive to set up and maintain.
- Regulation: Holding companies are subject to more regulations than other types of companies.
- Tax compliance: Holding companies must comply with tax laws in multiple jurisdictions.
MCQs on holding and subsidiary companies
- Which of the following is not a type of holding company?
- Pure holding company
- Active holding company
- Financial holding company
- Subsidiary company
The answer is (c). A subsidiary company is not a type of holding company. It is a company that is controlled by a holding company.
- Which of the following is not an advantage of using a holding company structure?
- Tax benefits
- Liability protection
- Capital raising
- Increased complexity
The answer is (d). Increased complexity is not an advantage of using a holding company structure. It is a disadvantage.
- Which of the following is a requirement for a company to be considered a subsidiary of another company?
- The parent company must own at least 51% of the subsidiary’s shares.
- The parent company must have a majority of the voting rights in the subsidiary.
- The parent company must have its own directors appointed to the subsidiary’s board of directors.
- All of the above.
The answer is (d). All of the above are requirements for a company to be considered a subsidiary of another company.