Advantages and Disadvantages of Holding Company

Merits or Advantages of Holding Companies

Advantages of Holding Companies

Advantages of Holding Companies

The following are the merits of holding companies:

1. Ease of formation

It is quite easy to form a holding company. The promoters can buy the shares in the open market. The consent of the shareholders of the subsidiary company is not required.

2. Large capital

The financial resources of the holding and subsidiary companies can be pooled together. The company can undertake large scale projects to increase its profitability.

3. Avoidance of competition

Competition between holding and subsidiary companies can be avoided if they are in the same line of business.

4. Economies of large scale operations

The buying and selling of the holding company and the subsidiaries can be centralized. It can enjoy the advantage of quantity discount and better credit terms because of bulk purchases. It can also get better terms from buyers in case of sales.

5. Secrecy maintained

Secrecy can be maintained as the authority and decision making are centralized. It can protect itself from adverse publicity.

6. Risks avoided

In case the subsidiaries undertake risky business and fail, the loss does not affect the holding company. It can sell its stakes in the subsidiary company.

Demerits or Disadvantages of Holding Companies

Disadvantages of Holding Companies

Disadvantages of Holding Companies

The following are the demerits of holding companies:

1. Over capitalization

Since capital of holding company and its subsidiaries may be pooled together it may result in over capitalization. Shareholders would get not get a fair return on their invested capital.

2. Misuse of power

The financial liability of the members of a holding company is insignificant in comparison to their financial power. It may lead to irresponsibility and misuse of power.

3. Exploitation of subsidiaries

The holding company may exploit the subsidiary companies. The subsidiaries may be compelled to buy goods from the holding at high prices. They might be forced to sell their produce to the holding company as very low prices.

4. Manipulation

Information about subsidiaries may be used for personal gains. For example information of the financial performance of subsidiary companies may be misused to indulge in speculative activities.

5. Concentration of economic power

There is concentration of economic power in the hands of those who manage the holding company. Such concentration of economic power is harmful to the general economic welfare.

6. Secret monopoly

It may lead to the creation of secret monopolies. These secret monopolies may try to eliminate competitors and prevent entry of new firms. They may exploit consumers by charging unreasonable prices.


Leave a Reply

Recent Posts

Related pages

sole trading concern introductionprofitability index calculation exampleunderwrite def1us dollar in rupeesinsured perilinsurance proposals fire insurance marine insurancedisadvantages of organisation structuresubhiksha storesfigurehead manageradvantages and disadvantages of a capitalist economyzero based budgeting meaningcartel definition in economicsvertical merger real life exampleintra firmsole trading concern informationdefine impersonablesmall scale industries uttar pradeshcharacteristics of urbanisationdifference between managerial and financial accountingconclusiveness of certificate of incorporationbhel meaningtransactional and relationship marketingsinking fund method of depreciation exampledefine petty cash bookapproaches to tqmaccounting turnover formuladefine privity of contractqualities of enterprenuerjobber in stock marketsundry receivableswhat is the meaning of overhead costsmall business factoringmeaning of forfeitingthe ultra vires doctrineseven steps of the sales processpurpose of a cash budgetadvantages of participative leadershiptypes of shares and debenturesdisadvantages of questionnairesdefine mixed economy in economicsfinancial statement ratio analysis interpretationsebi fii regulationsultr viresdefine departmental storewhat is meant by ledgerdebentures as a source of financemeaning of sales quotasecuritised debt instrumentswhat are the functions of wholesalersdisadvantages of traditional commercemerits of cost accountingwhat is iou in accountingadvantages and disadvantages of data collectionveil corporatecif shipping term definitiondifference between financing and leasinghire purchase depreciationdefine management accountantexample of probability sampling and non probability samplingwhat is ecommerce and its advantages and disadvantagesprofitability ratio meaningdetermine payback periodpayback calculation formulalifting the veil meaningadvantages of payback methodwagers definitionforfaitingdefinition of consumer sovereigntysecond tier security marketfixed charge and floating chargeexplain incotermsmembers voluntary winding updirect materials usage variance formulahow do you calculate current ratio in accountingforecasting manpower requirementsadvantages of pricing strategies