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Wednesday, September 26, 2012

What is a holding company?

Holding companies owns outstanding shares of other companies. Outstanding shares are nothing but issued shares devoid of the treasury stocks.
Simply put, a holding company owns non-treasury shares of other companies.
The most famous example of a holding company is-warren Buffett led Berkshire Hathaway.
Some of listed Indian holding companies are as follows-
Tata Investment Corporation, Bajaj Holdings and Investments, Rane Holdings Ltd, UBHL (United Breweries Holding Ltd.), SIL Investments and a few more.
Holding companies are not involved in any production nor do they render services. Dividends and capital gains are the main sources of income for holding companies.
Holding companies may own shares of listed as well as non-listed companies.Besides shares, holding companies may also own bonds, mutual funds and other similar financial instruments.
Holding companies generally trade at 20-70% discount to their inherent values.

Double taxation: If a holding company owns less than 51 % stake of in subsidiary company, it becomes liable to pay DDT (Dividend Distribution Tax).
This means, when a holding company owns less than 51 % of its subsidiary company double taxation takes place- first the subsidiary company pays the DDT followed by the holding company paying the same.

When to buy a holding company share?

If a holding company with a good dividend paying track record is available at a steep discount to its inherent value or any of its unlisted subsidiaries is going to be listed resulting in value unlocking or any of its subsidiaries supposed to be benefiting with huge profit; one should do his due-diligence before taking a position.


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