Holding Subsidiary Company (Meaning & Examples)

Section 2 (46) deals with the Holding Company, Section 2 (87) deals with the Subsidiary company. The article clearly explains what is Holding company and Subsidiary company, Meaning of Holding company and Subsidiary company, Relationship between the Holding company and Subsidiary company with the examples. Also Read our earlier posts on Public Company IndiaPrivate Company and  One Person Company (OPC). On the basis of control companies can be classified into holding, subsidiary and associate companies.

Holding company and Subsidiary company

Holding company :As per Section 2 (46), holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies.

Subsidiary company:

Section 2 (87) provides that subsidiary company or subsidiary, in relation to any other company (that is to say the holding company), means a company in which the holding company—

  1. controls the composition of the Board of Directors; or
  2. exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies, shall not have layers of subsidiaries beyond the prescribed limit. (Proviso to be notified)

For the above purpose,—

  1. a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
  2. the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
  3. the expression “company” includes any body corporate;

Meaning of Control

According to section 2 (27), control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

The Companies (Specification of definitions details) Rules, 2014

As per 2(1)(r) “total Share Capital”, for the purposes of sub- sections (6) and (87) of section 2, means aggregate of the:-

(a) paid-up equity share capital and

(b) convertible preference share capital.

Subsidiary company not to hold shares in its holding company [Section 19]

Section 19 (1) seeks to provide that subsidiary company shall not either by itself or through its nominees hold shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.

The reference in this section to the shares of a holding company which is a company limited by guarantee or an unlimited company, not having a share capital, shall be construed as a reference to the interest of its members, whatever be the form of interest.

Therefore, no company shall hold any interest in its holding company

Following are the circumstances, where a subsidiary can hold the shares of its holding company:

(a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or

(b) where the subsidiary company holds such shares as a trustee; or

(c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.

However, the subsidiary company referred above shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee, as referred to in item (a) or (b) aforesaid.

Example: company C is subsidary of company B
company B is subsidary of company A so,
company C is subsidary of company A

Holding company and Subsidiary company Relationship

As per provisions of The Companies Act 2013, a holding company – subsidiary company relationship can be proved when:

  • The holding company is able to control the composition of the Board of Directors of the subsidiary company
  • Holding company holds more than 50% of paid up share capital of the subsidiary company.

The holding company can hold shares of the subsidiary company directly or by one or more of its subsidiary companies. In addition, in case holding Company ABC has a subsidiary Company XYZ and subsidiary Company XYZ has a subsidiary Company MNO, then subsidiary Company MNO will automatically become a subsidiary Company of ABC.

Holding company & Subsidiary Company Examples

Tata Sons is the Holding Company and Tata Motors, TCS, Tata Steel are Subsidiary Companies.

Alphabet is the Holding Company and Google Inc is its Subsidiary.

Associate company

As per Section 2(6), “Associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

Explanation to section 2(6) provides that “significant influence” means control of at least twenty per cent. of total share capital, or of business decisions under an agreement.

To add more governance and transparency in the working of the company, the concept of associate company has been introduced. It will provide a more rational and objective framework of associate relationship between the companies.

Further, as per section 2 (76), Related party includes ‘Associate Company’. Hence, contract with Associate Company will require disclosure/approval/entry in statutory register as is applicable to contract with a related party.