What Is a Holding Company
Usually when any of us is investing in a company for the first time we come across something called holding company. Today most of the successful companies that we see and hear were also holding companies. Let’s try and understand the meaning, how they work etc. Generally a holding company is one that does not have any operational activities or any other business. Instead of this they have assets owned by them in the form of shares or stocks in other corporate, limited liability companies, public traded stocks etc.
There are some advantages and disadvantages of holding companies. First let’s discuss the advantages:
Easy to form them: since there is no legal compliance it is very easy to form a holding company. The company that purchases the highest number of shares from the stock market can become a holding company.
Business is huge: since any company can purchase as many shares as possible, the holding company can collect large amount of capital and can expand its operations on a huge scale.
Foreign capital: since it has huge amount of capital it can also invest in foreign companies there by attracting foreign capital to expand its operations.
Goodwill enhanced: by attracting a large number of foreign capitals the goodwill of the holding company as well as its subsidiary companies is enhanced.
In spite of the above advantages there are a few disadvantages of holding companies:
- Holding companies forces monopoly in the market that leads to higher prices being fixed that gives rise to losses.
- Since the holding company can acquire as many shares from the stock market this leads to disproportionate wealth in the hands of a few.
- Cost of managing the holding companies and its subsidiary goes very high because the authority to control is centralized. This leads to spend more on number of work force and also office space to be rented.
- As the holding company holds majority of the shares the other share holder’s interest is looked down.
- There is a possibility of directors of holding companies to misuse the funds since they enjoy full power of the company.
- They may face a problem of over capitalization since there is no control over purchasing of shares by the holding companies. This in turn is very harm full for subsidiary companies as well.
- At times of depression and economic changes these holding companies cannot carry on their business profitably.
The main reason to go for a holding company is tax considerations, tax differences becomes a very significant factor in taking commercial decisions. Hence multinationals choose geographical locations to set up holding companies so that they get tax considerations.