Holding Companies Legal requirements

This law prevents companies that hold public utilities from using their profits to pay for unregulated business activities. Side endeavors must be separated from the holding company. Although some utility companies argue that PUHCA restricts competition and no longer applies, repealing this law would result in the creation of several large utility companies and eliminate industry competition. Many believe that reform of this law should only take place as part of a thorough restructuring.

This law was originally passed to counteract the unfair business practices of large utility holding companies in the 1920s and 1930s. These businesses created complex pyramid structures that held shares in many subsidiaries. For example, at one point three holding companies controlled most of the industry with more than 130 subsidiaries. This resulted in inflated rates, hidden charges and fees, and a lack of accountability.

As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies.

As per Section 2(87) “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company:

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation. For the purposes of this clause:

(a) A company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) The composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) The expression “company” includes anybody corporate;

(d) “Layer” in relation to a holding company means its subsidiary or subsidiaries;

Company Includes Body Corporate:

• As per Sec 2(87) Company include a ‘Body Corporate’.
• As per Sec 2(11) body corporate includes a ‘Company incorporate out of India’.

Thus, an Indian company in which more than 50% shares are held by a foreign body corporate will be a ‘Subsidiary Company’.

Structure of a Holding Company

A simple holding company owns all the stock shares of at least one subsidiary. The shares of the holding company are owned by trusts or individuals. The holding company and subsidiaries each act as independent entities, with separate finances and bank accounts. They must enter into agreements with one another for assets and real estate. Often, one subsidiary serves to manage the holding company’s operations.

The Internal Revenue Code defines a personal holding company under two classification systems, which must be fulfilled to constitute this entity. These include:

• Personal Holding Company Income Test: The entity must possess at 60 percent or more of the adjusted ordinary gross income of the corporation in question for the associated tax year.
• Stock Ownership Requirement: At least 50 percent of the outstanding stock of the corporation must be owned by fewer than six individuals at any point during the second half of the associated tax year.

Benefits of Holding Companies

The holding company can own and control several companies, thus spreading its risk across markets and industries.

Holding companies reduce risk for the companies whose stock they hold by stabilizing the investment, making it more valuable. This attracts more buyers.

Risk management is enhanced by dividing assets across two or more companies. This allows liability to be limited to a single subsidiary, if it gets sued for example.

A product line can be sold or transferred easily and confidentially, without revealing trade secrets.

Subsidiaries that are completely owned by a holding company can be treated as pass-through tax entities. This eliminates the need to file a corporate tax return while maintaining limited liability.

Intellectual property (IP) can be licensed to several subsidiaries for various purposes.