Holding Company and Subsidiary Company
Holding Company and Subsidiary Company
1. Definitions
Holding Company
A holding company is a company that controls another company by owning a majority of its shares or having the power to appoint or remove the majority of its board of directors.
Essentially, it holds the “controlling interest” in another company.
Subsidiary Company
A subsidiary company is a company that is controlled by another company (the holding company).
The holding company either:
Holds more than 50% of the subsidiary’s voting shares, OR
Controls the composition of the subsidiary’s board of directors.
2. Legal Definition Under Companies Act, 2013
Section 2(46) - Holding Company:
A company is a holding company of another if:
It controls the composition of the board of directors, OR
It controls more than half of the total share capital.
Section 2(87) - Subsidiary Company:
A company is a subsidiary of another if that other company is its holding company as per above.
3. Key Characteristics
| Feature | Holding Company | Subsidiary Company |
|---|---|---|
| Control | Has control over another company | Controlled by holding company |
| Ownership | Owns majority shares or controls board | Majority shares controlled by holding company |
| Autonomy | Independent company, but exercises control | Separate legal entity but controlled |
| Liability | Not liable for subsidiary’s debts unless guaranteed | Separate liability from holding company |
4. Types of Control
Shareholding Control: Holding more than 50% shares.
Board Control: Power to appoint/remove majority directors.
Management Control: Influence over policy and decision-making.
5. Significance of Holding-Subsidiary Relationship
Holding company can exercise control over subsidiary’s policies and management.
Subsidiary retains separate legal identity — important for liability protection.
Holding company consolidates financial results of subsidiaries.
Used for group structuring, risk management, and business expansion.
6. Case Law Illustrations
✅ Salomon v. A. Salomon & Co. Ltd. (1897) AC 22 (House of Lords)
Established the principle of separate legal entity.
A company and its shareholders (including holding company) are separate legal persons.
Holding company is not liable for subsidiary’s debts just because it controls it.
Foundation for understanding the holding-subsidiary relationship.
✅ Tata Engineering & Locomotive Co. Ltd. v. State of Bihar (1965) AIR 40
The court considered the control exercised by the holding company over the subsidiary.
It showed how courts look at control in substance, not just form.
✅ Canara Bank v. Canara Sales Corporation (1986) 2 SCC 645
Supreme Court clarified that subsidiary companies have independent legal personality.
Holding company is not automatically liable for subsidiary’s obligations.
✅ Adhunik Steels Ltd. v. Orissa Manganese & Minerals Ltd. (1996) 8 SCC 254
Court looked at degree of control to determine the relationship.
Emphasized “control” can be direct or indirect, formal or informal.
7. Implications in Corporate Governance and Law
Holding companies must disclose details of subsidiaries in annual reports.
Separate financial statements are prepared for both but consolidated for the group.
Holding company is responsible for monitoring subsidiary’s performance and compliance.
In case of fraud or mismanagement, courts can pierce the corporate veil if subsidiary is mere façade or sham.
8. Summary
| Aspect | Holding Company | Subsidiary Company |
|---|---|---|
| Controls another company | Yes | Controlled by holding company |
| Legal personality | Separate legal entity | Separate legal entity |
| Liability | Not liable for subsidiary's debts (generally) | Liable for its own obligations |
| Control methods | Majority shareholding or board control | Subject to holding company’s control |
| Financial reporting | Consolidates financials | Prepares separate financials |
9. Quick Recap Question for You
What are the two main ways a holding company can exercise control over a subsidiary?
(You can try answering before I provide the answer!)
RELATED Blog
0 comments