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    Advantages and Disadvantages of Holding Company

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    theekshana
    Holding companies have several advantages and disadvantages. The advantages include ease of formation without shareholder consent, pooling of large financial resources to undertake large projects, avoiding competition between subsidiaries in the same business, achieving economies of scale through centralized purchasing and selling, and maintaining secrecy of operations and decision making. However, disadvantages are over capitalization reducing shareholder returns, potential misuse of power by management, exploitation of subsidiaries, manipulation of information for personal gain, concentration of economic power, and risk of creating secret monopolies that harm competition and consumers.

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    Advantages and Disadvantages of Holding Company

    Uploaded by

    theekshana
    308 views2 pages
    Holding companies have several advantages and disadvantages. The advantages include ease of formation without shareholder consent, pooling of large financial resources to undertake large projects, avoiding competition between subsidiaries in the same business, achieving economies of scale through centralized purchasing and selling, and maintaining secrecy of operations and decision making. However, disadvantages are over capitalization reducing shareholder returns, potential misuse of power by management, exploitation of subsidiaries, manipulation of information for personal gain, concentration of economic power, and risk of creating secret monopolies that harm competition and consumers.

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    Advantages and disadvantages of holding company

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    Holding companies have several advantages and disadvantages. The advantages include ease of formation without shareholder consent, pooling of large financial resources to undertake large projects, avoiding competition between subsidiaries in the same business, achieving economies of scale through centralized purchasing and selling, and maintaining secrecy of operations and decision making. However, disadvantages are over capitalization reducing shareholder returns, potential misuse of power by management, exploitation of subsidiaries, manipulation of information for personal gain, concentration of economic power, and risk of creating secret monopolies that harm competition and consumers.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    308 views2 pages

    Advantages and Disadvantages of Holding Company

    Uploaded by

    theekshana
    Holding companies have several advantages and disadvantages. The advantages include ease of formation without shareholder consent, pooling of large financial resources to undertake large projects, avoiding competition between subsidiaries in the same business, achieving economies of scale through centralized purchasing and selling, and maintaining secrecy of operations and decision making. However, disadvantages are over capitalization reducing shareholder returns, potential misuse of power by management, exploitation of subsidiaries, manipulation of information for personal gain, concentration of economic power, and risk of creating secret monopolies that harm competition and consumers.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Advantages and disadvantages of holding company

    Advantages

    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.

    Disadvantages

    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.

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