What is a holding company? How does it differ from an investment company?
Holding is a familiar term, many of you may have heard it in news and economic articles. Or maybe when you were planning to invest for the first time, you definitely encountered a concept called a holding company. The English word holding means property, stock and ownership, but what exactly are holding companies and in what fields do they operate? It is a debate that we need to have detailed information about. In fact, holdings invest in several companies that have a common activity field.
“A company that owns the management shares of one or more other companies is called a holding company.”
What is a holding company?
A holding company is a joint-stock company that includes other subsidiary companies and the control of the subsidiary companies is directly under the management team of the main company. A holding company is a type of investment company.
In simpler terms, it can be said:
“A holding company is a company that supervises and controls one or more other companies.”
Holdings play a prominent role in the modern international and global economy. Holdings do not perform any operation, activity or business and only own the assets. These assets include the following:
- Shares of other companies like limited liability companies or partnerships
- Investment funds, hedge funds
- Common stocks, bonds
- Brands, patents, trademarks, copyrights and anything else of value
- Real estate, intellectual property
- Other high-quality shares that belong to Holding’s assets
One of the most valuable and high-quality stocks in the world is Johnson & Johnson Holdings, which is a holding company that does nothing when you buy its shares.
Johnson & Johnson Holdings owns 265 separate businesses. These businesses are divided into three main categories, i.e. sanitary ware, medical equipment and pharmaceuticals. Executive directors who play a key and fundamental role in companies that are under the direct supervision and control of Johnson & Johnson’s parent company.
The mother holding company has a lot of power and authority. In fact, holdings can support their subsidiary companies by reducing the cost of capital.
Features of the holding company
Holding companies have main and important features that make them different and special. Mother holding companies are divided into two general categories due to two important features among the main features.
The first two of the features described below are considered to be the main features of holding companies.
- One type of parent companies are joint-stock companies that, in addition to commercial operations, spend part of their capital on buying shares of other companies and are called controlling companies.
- The second type of mother companies are joint-stock companies, but in this case, they spend all their capital to buy shares of other companies and do not have commercial activities and are called holding companies.
- Holdings also protect assets against the bankruptcy of subsidiaries.
Why holding? What are the advantages and disadvantages? We will answer your mental questions in the following.
Advantages and disadvantages of the holding company
First, we will examine the advantages of investment holding, and then we will discuss its disadvantages. After knowing the advantages and disadvantages of holding, it is necessary to familiarize yourself with the registration rules of such companies.
Advantages of holding:
- Benefit from tax exemption
- Integration of policies
- Ease of forced liquidation of subsidiaries
- Compliance with the important principle of diversity in investment
- Eliminating the costly operation of transferring property title
- Guarantee repayment of loans with subsidiaries
- Since these companies are not manufacturers or services, their establishment is less risky.
- The possibility of complying with different laws in other countries due to the existence of independent legal personality of subsidiaries.
Disadvantages of establishing and forming a holding company:
- Ease of forced liquidation of subsidiaries
- Tax increases in this situation
Laws of registration of holding companies
If you intend to invest or operate in a holding company, there are certain rules and statutes that you must follow to register the holding company.
In other words, holding companies participate in active industries through the ownership of other companies’ shares.
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Determining the type of holding company
Holding companies include several categories. The types of holding companies are:
- Holding companies created from large companies. Like Iran Khodro Holding.
- Product holding, all of which companies produce one type of product.
- A supply chain holding company, all of whose companies carry out various activities towards a common goal, Mattel: oil holdings from exploration to distribution operations.
- Mixed holding is made up of companies with multiple activities.
- Documents required for registration of the holding company;
- Copies of identification documents of all members of the management team
- Providing a certificate of no criminal record from all members of the company
- Announcement of company establishment
- Representation letter from the parent company regarding the company registration
- Procedures for obtaining a license to form a holding company
- Conditions for obtaining approval for the establishment of the parent company:
Completing company license application forms and candidate profile questionnaire for the position of CEO or member of the management team.
- Conditions for granting an establishment license:
Completing the documents announced by the organization within the specified deadline and issuing a letter of permission to establish the company and registering it in the company registration office
- What are the conditions for granting an activity license after obtaining an establishment license?
After announcing the official approval for the establishment of the company, the applicants for company registration must register the company with the company registration authority within the stipulated deadline and submit the documents to the relevant organization. Finally, please note that there are two types of strategies for pursuing the parent holding companies. :
First, the shares of which companies should be purchased for control and supervision.
The second thing is, what management method is used to manage, control and supervise the subsidiary company.
What is the difference between holding companies and other investing companies? Have you ever wondered how they differ from each other? Is there a difference in their working style? Or what is your preference at all? Stay with us so you can make better decisions.
What is an investment company?
At the beginning of this article, we have given you information about holding companies and their types. Now it is necessary to know that in order to properly understand the nature of holding companies, it is better to first get acquainted with investment companies and to know what an investment company is and what is its definition?
In simple terms, an investment company is like an economic enterprise that allocates its capital to buy shares of companies, funds and other assets with the purpose of earning profit. Investment companies form and manage their investment portfolio according to the preferences of investors and the amount of risk they consider.
- An important feature of investment companies;
When buying shares of companies, investment firms do not want to get into their management structure and operational details. In fact, based on information such as stock value, dividend and the future of the company, it is decided how much of the investment portfolio should be allocated to each company.
- Management principles of investment companies for profit;
It is interesting to know the impact of the principles of portfolio management on the choices and decisions of these companies more than anything else. In fact, the main goal of investment companies is to form a combination of assets whose profit is the most optimal possible compared to the risk they bear.
Almost all the first investment companies prefer to operate and invest in specialized fields, because in this case they can perform a quick and deep analysis and measurement of the market situation.
- Dependence of the holding company on the investment company;
In fact, holding and investment companies are related. A holding company is a company that buys and maintains the shares of several different companies. It is also considered a type of investment company. But don’t forget that holdings have a fundamental and important difference from investment companies, and we will discuss these differences further.
The difference between holding companies and investment companies
Unlike investment companies, holding companies also claim management, in fact, they tend to participate in their internal decisions and policies by purchasing part of the companies’ shares.
On the other hand, investment companies do not show any special interest in the management and administration of subsidiary companies and make profits for their shareholders regardless of bias in their asset portfolio.
The concept and meaning of holding started almost from the last 5 decades and was formed with the emergence of different industries in Iran.
The steps to register investment and holding companies are the same. But they differ in the initial capital amount. That is, the minimum capital required for the formation of such companies, according to the announcement of the Stock Exchange, includes the following:
A- Holding of special shares: 50 billion rials
B- Holding of common shares: 100 billion Rials
But investment companies are registered in the form of special companies whose initial capital is one million Rials.
Holding companies usually allocate some of their capital to purchase shares in the company active in the automotive industry. In fact, they believe that influencing the company’s internal policies can provide more and better economic interests of the holding company.
The holding considers itself to be an expert in the field of investment companies’ activities and this is the main difference between them.
Investment companies generally sell shares if they have a good profit, but by nature, holding companies do not sell shares except in special and necessary cases.
The purpose of holding companies is to buy shares and have control over them, but the purpose of investment companies is only to receive profits from the purchase of company shares, and basically they have nothing to do with how the company is run.
Holding companies control and manage investable companies in a way. But are you familiar with the way of this control? Next, we will discuss this important difference that makes holding companies special.
Finally: the way of controlling investable companies by holding companies
The purchase of shares by the holding company from a certain company can influence the decisions of the company by selecting one or more members of the management team.
In order to control and exert its influence, the holding company selects the members of its management team professionally, and according to the statute and organizational chart, it takes over the process of taking over the elements and controlling it.
The holding company negotiates with the owners of the target company to control the investing companies and draws up a contract that includes, for example, the purchase of a specific block of company shares, decision-making authority, policy making, and even operational management of a part of the company.
Holding companies are subject to mechanical rules to enter subsidiaries. In fact, their limits are not predetermined, and the limits of these interventions depend on the form of the contract or agreement.
In order to specify the power of holding companies and also their control over investable companies, two terms of considerable influence and control are generally used.
Holding companies own shares of production and service companies under their portfolio. In fact, they control investable companies in this way, that is, they buy the shares of companies in order to register investment holdings.
