The short answer
A holding company is a company of which another company is a subsidiary. Under section 2(87), subsidiary status arises when the holding company controls the board’s composition or exercises or controls more than one-half of total voting power, alone or together with its subsidiaries. Each entity remains a separate legal person even when the group prepares consolidated financial statements.
Use the current rule, not a familiar label
This guide preserves the useful questions in the supplied draft but corrects outdated provisions, over-broad claims and unsupported price or timeline promises. The legal result depends on current law, the documents, the transaction date and the reader’s exact facts.
Official sources are linked at the end. Commercial service links are presented separately and do not replace primary law.
The statutory definitions and control test
Section 2(46) defines a holding company by reference to subsidiary status. Section 2(87) focuses on control of board composition or more than one-half of total voting power. A 50% shareholding alone may not satisfy the voting-power limb; shareholder agreements, differential rights and indirect holdings must be examined.
A wholly owned subsidiary has no outside economic shareholder at the relevant level, subject to nominee arrangements needed for statutory membership. A step-down subsidiary may be controlled through another subsidiary.
Separate legal identity is real, but not absolute insulation
The subsidiary owns its assets, contracts with customers, employs staff and bears its liabilities. The holding company owns shares, not the subsidiary’s underlying property. Group branding and consolidated reporting do not merge legal personality.
A parent can still create direct exposure through guarantees, co-borrowing, agency, wrongful instructions, sham arrangements, common-employer facts, contractual undertakings or statutory liability. Good governance avoids presenting the companies as interchangeable.
Who makes decisions inside the group?
The subsidiary’s board must act for that company and comply with directors’ duties. A parent may use lawful shareholder rights to appoint directors, approve reserved matters or alter strategy, but nominee directors are not relieved of duties to the subsidiary.
A group governance matrix should identify board matters, shareholder matters, delegated authority, bank mandates, procurement limits, data access and conflict procedures. Intercompany instructions should be documented through the right corporate organs.
Consolidated reporting and disclosure
Section 129 generally requires a company with subsidiaries to prepare consolidated financial statements in addition to its standalone statements, subject to applicable rules and accounting standards. Consolidation presents the group economically but does not replace entity-level books, audits or filings.
The group must also examine beneficial ownership, related-party disclosures, loans and investments, guarantees, charges and transfer-pricing records. Listed and regulated groups face additional SEBI, RBI or sector rules.
Intercompany loans, services and asset transfers
A holding-subsidiary label does not make every transaction automatically permissible or tax neutral. Sections 185, 186 and 188, board powers, member approvals, arm’s-length principles, GST place-of-supply rules, transfer pricing and withholding may apply.
Use written agreements for management services, licences, cost sharing, loans, guarantees, cash pooling, secondments and IP use. State the pricing method, deliverables, tax treatment, payment terms and termination rights.
Foreign subsidiaries and overseas parents
Foreign ownership or overseas investment adds FEMA, FDI policy, pricing, sectoral cap, reporting and beneficial ownership analysis. An Indian company investing abroad must assess the Overseas Investment Rules, Regulations and RBI directions; a foreign parent investing in India must follow the applicable entry route and reporting.
Tax residence, permanent establishment, place of effective management, withholding and transfer pricing should be designed around genuine functions and records—not merely the jurisdiction printed on an incorporation certificate.
When a group structure is useful—and when it is not
A group can ring-fence projects, separate investors, hold intellectual property, facilitate joint ventures or prepare a business for sale. It also adds audits, filings, banking, agreements, taxes, governance and information-security overhead.
If businesses share every employee, account, contract and decision without entity discipline, the supposed separation may deliver cost without real control. Model the recurring compliance and exit route before creating layers.
Feature: comparison that works on mobile
Relationship
Holding companyControls qualifying subsidiary
Subsidiary companyIs controlled under section 2(87)
Operations
Holding companyMay be pure or operating
Subsidiary companyMay conduct its own business
Assets
Holding companyOwns its shares and own property
Subsidiary companyOwns its operating assets
Board
Holding companyUses its own board
Subsidiary companyUses a distinct board owing duties to it
Accounts
Holding companyStandalone plus CFS where required
Subsidiary companyMaintains standalone books and filings
Liability
Holding companyNot automatically liable for subsidiary debts
Subsidiary companyPrimarily liable for its own obligations
Common mistakes
- Assuming 50% share ownership always makes a subsidiary
- Treating subsidiary cash as parent cash
- Using nominee directors as instruction-only agents
- Skipping intercompany agreements and pricing evidence
- Creating cross-border layers before FEMA and tax review
When this guide does not decide the answer
Joint ventures, associates, listed groups, NBFCs, insurance, banking, government companies and cross-border tax structures require additional rules beyond this general guide.
A four-stage action plan
Define: record the parties, asset, transaction and intended outcome. Verify: test the current law and evidence. Approve: prepare the correct documents, controls and authority. Review: file through the proper channel and retain acknowledgements.
Get the route and documents reviewed
TargoLegal can map the applicable law, identify missing records and organise the approvals and recurring compliance for the chosen route.
Request a structured consultationFrequently asked questions
Must a holding company be non-operational?
No. Indian law does not require every holding company to be a pure holding vehicle; it may also operate a business.
Does more than 50% shareholding always create a subsidiary?
The statutory test refers to board control or more than one-half of total voting power. Share classes and arrangements matter.
Is the parent liable for every subsidiary debt?
No, not automatically. Direct contracts, guarantees, conduct and specific statutes can create parent exposure.
Why are consolidated accounts prepared?
They present the financial position and performance of the group while entity-level legal identity and books remain separate.
Can an Indian company own a foreign subsidiary?
Yes, subject to FEMA’s overseas-investment framework, sector rules, reporting and tax analysis.
How current is this guide?
The primary-law review was completed on 24 July 2026.
