Tuesday, July 17, 2007

Holding companies – why are they the flavour of the season?

What is a holding company? How did this form of a corporate structure come about?

Any company which holds a substantial portion of the equity of another is called the holding company of the latter. This has a bit of history. While reading modern Indian history, some of you would have come across a phrase called ‘Managing Agency’. The managing agency has come about during the first wave of industrialization in British India. Under the arrangement, somebody would own a company and somebody else (the managing agency) would run it for a fee. This arrangement suited many businessmen who were based in Britain but had their operations in India. Sometimes, the managing agency also owned substantial stakes in the operating companies. This system was finessed by Indian entrepreneurs to gain control over their own operating companies. As a result, over time, managing agencies were transformed into proxy holding companies.

Holding companies have again become the flavour of the season, with many corporates floating a number of holding companies. Why this sudden rush? The answer lies in the soaring stock market valuations. Promoters are looking for new ways to unlock valuations hidden in operating companies, as well as improve their overall valuations to facilitate fresh capital raising.