Introduction
An
important development of recent times in the business world is the combining of
independent business units into a group or an economic unit. A company may
acquire either the whole or majority of shares of another company so as to have
a controlling interest in such a company or companies. The controlling company
is known as Holding or Parent Company and the company controlled is known as
Subsidiary Company.
Meaning of Holding
Company
Section 4 of the Companies Act, 1956 defines a
holding company. According to this section, one company can become the holding
company of another in any of the following three ways:
1.
By holding more than 50% of nominal value of the equity shares of the other
company i.e. the holding company holds the majority of voting power in the
subsidiary company.
2.
By controlling the composition of the Board of Directors of the other company
so that the holding company is able to appoint or remove the directors of the
subsidiary company.
3.
By controlling a holding company which controls another subsidiary or
subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a
subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.
Meaning of
“subsidiary Company”
A company is a “subsidiary” of
another company, its “holding company”, if that other company—
a)
holds a majority of the voting rights in it, or
b)
is a member of it and has the right to appoint or remove a
majority of its board of directors, or
c)
is a member of it and controls alone, pursuant to an agreement
with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.
Purpose
The
purpose of getting the control over another company may be to gain advantages
such as:-
1.
To eliminate of competition.
2.
To enjoy the economies of large scale of production.
3.
To achieve an assured market for the product of the company.
4.
To ensure a smooth supply of raw materials.
Accounts
Under
section 212 of the Companies Act, 1956 the following must be attached to the
Balance Sheet of a holding company:
1.
A copy of the Balance Sheet of the Subsidiary or Subsidiaries.
2.
A copy of the Profit & Loss Account.
3.
A copy of the Report of its Board of Directors.
4.
A copy of the Report of the Auditors.
a.
A statement of the holding company’s interest in the subsidiary.
b.
The profits of the subsidiary as far as they concern the holding
company.
Consolidation of
Balance Sheet & Profit & Loss Account
In
England, the holding company is required to present, in addition to its normal
Balance Sheet, a Consolidated Balance Sheet covering the holding company &
its subsidiaries & Consolidated Profit & Loss Account.
In
India, the law does not compel a holding company to prepare a consolidated
Balance Sheet & Profit & Loss Account. It is only for convenience that
these statements are prepared.
Shareholders
of a holding company are interested in knowing the affairs of the subsidiary
company as part of their money given to the holding company is invested in
subsidiary company. So it becomes safe for directors of the holding company to
disclose to the shareholders of the holding company the extent to which they
are entitled to the net assets of the subsidiary company. By way of consolidated
Balance Sheet, the investments of the holding company in the subsidiary company
are replaced by assets.
Consolidation
of Balance Sheet & Profit & Loss Account means the combining of the
separate Balance Sheet & the separate Profit & Loss Accounts of the
Holding company & its subsidiary company or companies into Single Balance
Sheet & a Single Profit & Loss Account.
The
purpose of a Consolidated Balance Sheet & Profit & Loss Account is to
show the financial position & Operating results of a group consisting of a
holding company & one or more subsidiaries. The consolidated statements are
reports of notional accounting entity which subsist on the view that the
holding & subsidiary companies are to be treated as one economic unit. The
Financial position & Operating results reported through the consolidated
statements are portrayed from the interest of the members of the holding
company.
Wholly owned
subsidiary company
When
all the shares of a subsidiary company are held or owned by the holding
company, the subsidiary company is known as a wholly owned subsidiary company.
Partly owned
subsidiary company
When
a majority of shares, but not all the shares of a subsidiary company are owned
by the holding company, the subsidiary company is known as a partly owned
subsidiary company.