What is Holdco?

Types of Holdco

The types of holding companies are listed below: –

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#1 – Pure

A Holdco solely formed to acquire stock in other entities is termed pure. Such a holding company is only engaged in developing stock in different companies and does not wish to participate in other commercial activities.

#2 – Mixed

A holding company acquiring stock in other entities and performing itsbusiness activitiesBusiness ActivitiesBusiness activities refer to the activities performed by businesses to make a profit and ensure business continuity. read more is vested with a mixed Holdco status. Hence, it is known as a holding-operating entity.

#3 – Immediate

A holding company that acts as a subsidiary companySubsidiary CompanyA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company.read more of another entity is an immediate holding company. Such a Holdco retains control or voting stock of other entities.

#4 – Intermediate

A holding company can be vested with an intermediate status if the same acts as a holding company of one company and a subsidiary of another company.

Example of Holdco

Let us discuss an example of Holdco.

XYZ Ltd. recently bought 56% AB Corporation Ltd. shares and continues its regular trading activities. Can XYZ Ltd. be affirmed with the status of a holding company? If yes, then what type of holding company?

Solution:

Any company may defer the status of a holding company if it acquires more than 50% of the shares of a subsidiary. From the above case, we can see that XYZ Ltd. has gained more than 50% shares, that is, 56% share of AB Corporation Ltd. Hence, the same can be deferred with the status of a holding company. XYZ Ltd. is a mixed holding company as it continues with its regular trading activities even after gaining control over AB Corporation Ltd.

Advantages of Holdco

There are several different advantages of the Holdco as follows: –

  • Easy to Form One: Forming a Holdco is easy. One can purchase the shares of the proposed subsidiary company from the open market without needing to take approval from its equity holders.Large Capital: When a holding company gains control over a subsidiary company, its financial resources are clubbed together and shown in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more accordingly. It enhances the capital for both the parent and its subsidiary company.Elimination of Competition: The competition between a parent company and its subsidiary can eliminate if both of them are participants of one common industry.Maintenance of Secrecy: A holding company system’s authority and decision-making get centralized. Hence, confidentiality does not get impacted at all.Avoidance of Risks: The risks and repercussions faced by a subsidiary company will have a negligible impact on the holding company, and it can even resell the stakes it has held in the subsidiary whenever it feels like it.Tax Effects: Holding companies that have acquired 80% or more of stocks in their subsidiary can file consolidated tax returns and avail of tax benefits.

Disadvantages of Holdco

The different limitations and drawbacks of the Holdco include the following: –

  • Misuse of Power: The members of a Holdco have a financial liability that is completely insignificant compared to their monetary powers. It may either lead to misuse of power or irresponsibility or both.Over Capitalization: The pooling of capital of both Holdco and its subsidiaries can also allow a company to suffer from overcapitalizationOvercapitalizationOvercapitalization refers to a scenario wherein a Company raises a capital amount that is way more than the worth of its fixed assets. It means that a Company’s capitalized value becomes more than that of its actual market value. read more. In such a scenario, the equity holders will not receive a fair return on investment.The Exploitation of Subsidiary Companies: The subsidiary companies might be forced to purchase products and services from the holding company at higher prices. The subsidiaries may also be compelled to sell their goods at a low price to Holdco. Whatever the case is, one cannot deny the exploitation of subsidiaries.Secret Monopoly: The creation of secret monopolies will prevent new companies from entering the industry and take every possible measure to eliminate competition. In such a market, the customers might also be charged unjust prices for goods and services.

Important Points

Some of the important points of the Holdco include the following: –

  • For an entity to qualify as a holding company, it must hold over 50 percent of the stock (hedge fundsHedge FundsA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques.read more, private equity funds, public stocks, etc.) in one or more entities or have appointed a majority of the directors for the other company.Limited partnerships and limited liabilityLimited Partnerships And Limited LiabilityLimited liability refers to that legal structure where the owners’ or investors’ personal assets are not at stake. Their accountability for business loss or debt doesn’t exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read more entities are examples of subsidiary companies.A subsidiary company whose shares are owned entirely by a holding company is WOS or a  wholly-owned subsidiaryWholly-owned SubsidiaryWhen a company’s almost all of the outstanding shares are owned by another company (parent) then it can be said that it is a wholly-owned subsidiary of that company and it is controlled by the parent company. For example, Walt Disney Entertainment owns 100% of Marvel Entertainment which produces movies.read more.Establishing Holdco is less expensive and less legally complicated than consolidation or merger.A holding company is also known as a parent company Parent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary’s directions and policies.read more.The transactions between a holding company and its subsidiary are related party transactions. Accordingly, these transactions must comply with all the relevant restrictions on related party transactions.Transactions between a holding company and its subsidiary are eligible for stamp duty relaxations.The above-stated exemptions are not ordinarily available, and one can avail of the same only with the help of separate notifications.

Conclusion

A Holdco or a holding company is an entity that purchases and owns shares in one or more entities. It allows the parent company to gain the right to influence its subsidiary company and control its business decisions.

Reasons like tax optimization, ease of formation, large capital, avoidance of competition, asset protectionAsset ProtectionAsset protection refers to a set of legal strategies that debtors preemptively implement to protect their wealth from being seized by creditors. It also enables asset owners to avoid taxation and mortgage payment default without violating the debtor-creditor law.read more, investment management, etc., are sufficient to define why entrepreneurs are opting to own shares in another company instead of a merger or consolidation these days.

However, there are also disadvantages associated with holding companies, misuse of power, exploitation of subsidiaries, over-capitalization, etc. Therefore, companies must wisely choose and handle the rewards and repercussions of the decision to become a parent or subsidiary company.

This article is a guide to what is Holdco. Here, we discuss the top 5 holding company types, examples, advantages, and limitations. You can learn more from the following articles: –

  • Debt Consolidation CalculatorConglomerateWhat is Public-Private Partnership?Examples of Holding Company