In India, a subsidiary company is not allowed to acquire shares in its holding company. But if the subsidiary company had acquired shares in the holding company before it became the subsidiary or before the commencement of the Companies Act, 1956, the company can continue to hold the shares [section 42 (3)].
However, the subsidiary company will not be able to exercise any voting rights at the meetings of the members of the holding company.
From the accounts point of view, the profits belonging to the subsidiary company will have to be calculated taking into consideration the fact that it will have a right on the profit of the holding company also which, in turn, will claim its share of the profits of the subsidiary company.
A proper calculation of the subsidiary company’s profit is obviously necessary for ascertaining minority interest. But, as has been pointed out already, cost of control cannot be calculated without ascertaining the holding company’s share of capital profits of the subsidiary company.
This will again require taking into account profits of the holding company up to the date the holding company acquired control over the subsidiary company. It will be remembered that profits of the subsidiary company, even if revenue in nature up to the date of acquisition of control, are capital from the point of view of the holding company.
This will include that part of profits also which the subsidiary company claims from the holding company. Calculations of profits mentioned above will require algebraically equations; these are illustrated below.
While consolidating the balance sheets, paid up value of shares held by the subsidiary company will be deducted from the share capital of the holding company. Any excess amount paid (over the paid up amount) should be added to Cost of Control or Goodwill.
Following are the balance sheets of two companies H Ltd. and S Ltd. as on March, 2012:—