What is meant by Holding and Subsidiary company?

A company which controls another company is knows as the holding company and the company so controlled is the subsidiary company.

Section 4, provides that:-

A company is a holding company if it

1. Controls the composition of board of directors of another company.
2. Holds more than half of the nominal value of equity share capital of another company.
3. Is a subsidiary of any company which is in twin a subsidiary of another company.

Restrictions:

If it is authorized by the memorandum only then a company can become a member of another company, but under section 42(1) a company excepts in certain specified cases cannot become a member of its holding company, if any allotment or transfer of shares takes place in a company to its subsidiary or nominee for its subsidiary it will be void.

There are two cases where section 42(1) will not apply. They are as follows.

1. Where, the subsidiary is concerned as a legal representative of a deceased member or
2. Where the subsidiary is concerned as a trustee unless the holding company or a subsidiary or it is beneficially interested under the trust and is not so interested only by it in the ordinary course of a business.

At the time of the commencement of the companies Act, 1956 if a subsidiary was the member of its holding  company then it shall continue to be its members. But it shall not except in two cases mentioned in section 42(2) have any voting right at the holding company’s meeting.

As per sub-section (4) of section 42, the restrictions contained in sub-section (1) can be extended to the cases where a body corporate which is a subsidiary is not holding any shares in the holding company in its own name but through its nominee.

In the case of subsidiary company having any membership interest in the holding company which is either limited by guarantee or an unlimited company whether it has a share capital or not the prohibition contained in the sub-section (1) shall be applicable.