Holding Company: What It Is, Advantages and Disadvantages

 Q. What is meant by Holding Company? Explain the advantages and disadvantages of Holding Companies. 

Ans. MEANING OF HOLDING COMPANY: A holding company is a company which controls another which controls another company by acquiring all or majority of its shares carrying voting rights or controlling the composition of board of directors. The company whose shares have been acquired is known as subsidiary company. The subsidiary company continues to operate as before because acquisition of controlling interest by another company does not result in its liquidation. 

ADVANTAGES OF HOLDING COMPANIES: 

(i) Easy Method of Acquiring Control: A company needs to invest comparatively a small amount in order to acquire control over other company through this method. 

(ii) Possibility of Maintaining Separate Goodwill: By maintaining the separate identities of holding and subsidiary companies, it would be possible to naintain their separate goodwill. 

(iii) Ascertainment of Separate Profitability and Financial Position: Since each subsidiary company has to prepare its own accounts, the profitability and financial position of each company is known.

(iv) Availing Income-Tax Benefits: By maintaining separate identities of holding and subsidiary companies, it would be possible to avail income tax benefits by carrying forward the losses of each company to the next year. This is not possible in case of amalgamation.

(v) Easy to Get Rid of Subsidiary: Whenever it is desired to get rid of the subsidiary company, it can be easily done by disposing off the shares of such company in the market.

(vi) Easy to Wind-up the Subsidiary: In case the subsidiary company is continuously running into losses, it can be easily wound-up.

(vii) Efficiency in Management: Since both the companies maintain their separate identity, the size of the holding company remains the same. It is easier to manage both the companies separately.

(viii) Elimination of Competition: Since both the companies are managed by the same group, competition between them is completely eliminated.

(ix) Benefit of Internal and External Economies: Both the companies can avail of the technical know-how and financial resources of each other. Hence, they are able to avail the internal and external economies.

(x) Other Advantages: Other advantages are:

I. Increase in goodwill and credit worthiness of both the companies,

II. Smooth supply of raw material,

III. Getting on assured market, and

IV. Pooling of resources whenever needed.

DISADVANTAGES OF HOLDING COMPANIES:

(i) Fraud in Inter-Company Transactions: Inter-Company transaction between holding and subsidiary are often entered at too high or too low priss in order to suit the holding company.

(ii) Fear of Oppression of Minority Shareholders: Subsidiaries company is run in a manner that suits the interest of holding company. Financial and other resources of the subsidiary are used to the benefit of holding company. As such there is always the danger of oppression of minority shareholder’s interests. 

(iii) Forced Appointment of Directors: Subsidiary companies are forced to appoint the directors or other officers chosen by the holding company. Their remuneration is also fixed by the holding company which may be too high.

(iv) Difficulty in Ascertaining the True Financial Position: Shareholders in the holding company may not be aware of the true profitability and the financial position of subsidiary companies. Likewise, creditors and the outside shareholders in the subsidiary Company also may not be aware of the true picture of the company.

(v) Fear of Mismanagement: Where the group has a good number of constituents and managerial ability is limited, there must be mismanagement resulting into ruin of the group as a whole.

(vi) Difficulties in Valuing the Inventory: Difficulties may be experienced while valuing the Inventory containing huge quantities of inter-company goods.

(vii) Speculation in Shares: By manipulation of profits, reserves, inter-company sales etc. directors may speculate in the shares of the subsidiary companies, when such shares are quoted in the stock exchange.

(viii) Creation of Secret Reserves: Secret reserves may be easily created by the unscrupulous directors to the detriment of the minority interest.

What is meant by Holding Company? Explain the advantages and disadvantages of Holding Companies.