Under the companies Act, 1956, a holding company is any company which holds more than half of the equity share capital of other companies or controls the composition of the board of directors of other companies.
Holding company first came into existence in the US. It was created to overcome the restrictions imposed by the Anti-trust legislation. They were formed because businessmen wanted to have concerns under common control and within the framework of law.
Definition of Holding Company
In the words of Haney,
“a form of business organization which is created for the purpose of combining other corporations by owning a controlling amount of their stock”.
Types of holding companies
The following are the different types of holding companies:
1. Parent holding company: It comes into existence when an organization in existence acquires controlling stake in existing companies or starts new companies under its control. For e.g. Tata Tea has acquired controlling stake in Tetley, a UK tea company. In this case, Tata Tea is the parent holding company.
2. Offspring company: A new company started by some existing company with the objective of exercising control. For example, ECC (Engineering Construction Corporation Ltd.,) was set up by L&T (Larsen & Toubro Ltd.,) as its subsidiary. L&T is the parent holding company and ECC is the offspring company.
3. Pure holding company: A company which is established primarily for uniting and controlling the subsidiaries. For e.g. in the Tata group, Tata Sons Ltd., was established for uniting and controlling the various subsidiaries. TV Sundaram Iyengar and Sons is the holding company of the TVS group.
4. Proprietary holding company: A company which holds the entire stock issued by its subsidiaries.
5. Intermediate holding company: A holding company of a subsidiary, but is itself controlled by another holding Company.
6. Finance holding company: It does not control the affairs of other companies. It earns profits by financing the operations of other firms.
7. Investment holding company: It does not control the affairs of other companies. It invests in the securities of a number of companies. Its members derive the benefit of diversified investment.
8. Primary holding company: A holding company which is not a subsidiary of any other company. For example, Unilever Ltd., set.up HLL (Hindustan Lever Limited) as its subsidiary. Unilever Ltd., which is the holding company is not a subsidiary of any other company and is therefore a primary holding company
9. Mixed holding company: A holding company which runs its own business and also controls the business of its subsidiaries. For e.g. ICI Ltd., set up Indian Explosive as its subsidiary. ICI Ltd., runs its own business and also controls the business of Indian Explosives.