The +ves:
Secondly, it can assist in raising capital
based on the consolidated financial strength of its subsidiaries, which
otherwise could be difficult for each individual subsidiary company.
Flexibility to reorganize and structure finances is also available for
individual businesses. Another key advantage of a holding company
structure is that while it allows investment in multiple businesses
under one parent company, it also ringfences each business from the
risks of the other, by preventing the business performance of one
business from affecting the performance and valuation of another.For
investors, this offers the option to gain an exposure to any preferred
business along with the flexibility to structure the investment (as
debt, equity etc.) to meet their investment objectives.
The -ves:
As per the regulatory framework in India, holding companies which do
not undertake any operations and are engaged only in the business of
holding investments in other companies, may be classified as Non-banking
Financial Companies (‘NBFC’). There are a separate set of regulations
applicable to NBFCs in India, which need to be complied with. Also,
foreign investment in such investment holding companies is subject to
approval from the Foreign Investment Promotion Board of India. According
to the new Companies Act 2013, a company will be regarded as a holding
company of another, if the former holds or controls more than 50% of the
total share capital of the latter, i.e., equity (voting and otherwise)
and preference share capital. This is significantly wider than the test
under the Old Act and will have an impact on the determination of
related-party transactions, inter-company loans, etc.In addition to a cumbersome regulatory framework, the holding company
structure has certain inefficiencies that need to be recognized. For
instance, in cases where the holding company is not the sole owner of
its group companies, distribution of dividends is accompanied by two
layers of dividend distribution tax. Secondly, there is a requirement
for a holding company to transfer a part of its profits to its reserves
which may result in trapped cash that is difficult to upstream to the
ultimate shareholders. Thirdly there is limited liquidity for minority
shareholders in a holding company as the promoters can retrieve profits
from the subsidiaries disproportionately through mergers and demergers;
due to which minority investors often seek fall back options along with
related structures to secure an exit. As a consequence, the capital
markets have often attributed a ‘holding company discount’ when valuing
such companies.
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