Advantages and Disadvantages of Holding Company
Merits or Advantages of Holding Companies
The following are the merits of holding companies:
1. Ease of formation
It is quite easy to form a holding company. The promoters can buy the shares in the open market. The consent of the shareholders of the subsidiary company is not required.
2. Large capital
The financial resources of the holding and subsidiary companies can be pooled together. The company can undertake large scale projects to increase its profitability.
3. Avoidance of competition
Competition between holding and subsidiary companies can be avoided if they are in the same line of business.
4. Economies of large scale operations
The buying and selling of the holding company and the subsidiaries can be centralized. It can enjoy the advantage of quantity discount and better credit terms because of bulk purchases. It can also get better terms from buyers in case of sales.
5. Secrecy maintained
Secrecy can be maintained as the authority and decision making are centralized. It can protect itself from adverse publicity.
6. Risks avoided
In case the subsidiaries undertake risky business and fail, the loss does not affect the holding company. It can sell its stakes in the subsidiary company.
Demerits or Disadvantages of Holding Companies
The following are the demerits of holding companies:
1. Over capitalization
Since capital of holding company and its subsidiaries may be pooled together it may result in over capitalization. Shareholders would get not get a fair return on their invested capital.
2. Misuse of power
The financial liability of the members of a holding company is insignificant in comparison to their financial power. It may lead to irresponsibility and misuse of power.
3. Exploitation of subsidiaries
The holding company may exploit the subsidiary companies. The subsidiaries may be compelled to buy goods from the holding at high prices. They might be forced to sell their produce to the holding company as very low prices.
4. Manipulation
Information about subsidiaries may be used for personal gains. For example information of the financial performance of subsidiary companies may be misused to indulge in speculative activities.
5. Concentration of economic power
There is concentration of economic power in the hands of those who manage the holding company. Such concentration of economic power is harmful to the general economic welfare.
6. Secret monopoly
It may lead to the creation of secret monopolies. These secret monopolies may try to eliminate competitors and prevent entry of new firms. They may exploit consumers by charging unreasonable prices.
