Holding company structure

Holding companies are a tool used by promoters to retain management
control over companies with minimum amount of investment.

Assuming you want to retain management control of a company A which
has 100 Crs of paid up capital. You need to shell out 33 crs. to get
33% share which can give you control if no other shareholder hold that
much stake. Assuming you have a holding company B where you have
management control with 51% stake. If B holds 33% stake in A then B
gets management control over A.
Now think how much you will have to pay to get 51% of B ? Assuming B
the only asset of B is its holdings in A and its paid up capital is 33
crs. You will have to pay only 17.5 crores to get management control
over B and by virtue of its 33% stake in A you get management control
over A.

This is one of the many benefits promoters get using holding company
structure. You can create a pyramid of holding companies and get
management control over large companies with personal holdings as
small as 5 -10%.

Other benefits include fooling the creditors to supply loans of
disproportionate sizes. As a promoter your interest would lie in
retaining control with as minimum investment possible. If you get the
creditors to pay 100 cr loans on equity of 50 crs, you can get 33%
stake in a company with 150 crore assets , by paying just 17 crs.
Obviously no sane banker should pay loan as high as this but here the
holding company comes to rescue. For instance, Reliance paid loans
worth 12000 crs. to Reliance Infocomm when Reliance Infocomm's equity
was around 450 crs, that to at 8% interest rates.

That's another reason why its is unreasonable to expect the promoters
to unlock the value by resolving such structures even though the
holding companies remain undervalued for long periods of time. They
can keep increasing their stake in the holding company by creeping
acquisition.

In nutshell, the investors of the holding companies fund your
investment in the subsidiaries and help to getting top management
positions with fat pay checks as large as 1-2% of net profits of the
subsidiary.

that's why the investors have to bee very cautious and very patient
when dealing with investments in holding companies. Its a complicated
business and should never be attempted unless you know enough abut
these tricks