Holding Company
Mr. Chander Sawhney
Vice President
When a company is holding a large chunk of investments in other companies and it's not having any material business operations of its own, it is called a "Holding Company". A holding company typically does not have its own business operations other than the retention and management of assets in anticipation of future sale or trade or may be as a part of its corporate structure. The holding company thus derives its income primarily through the return on assets held for investment purpose. To be particular, income of holding company is only the dividends received by it from the investments made in other companies.

Valuation of Holding Companies
There are two ways to look at value of a holding company:
1. Value based on Income
As the income of a holding company may be negligible when compared to the value of its  underlying assets i.e. investments, it doesn't make sense to value it based on income.

2. Value Based on Assets
Thus the value of a holding company need to be based on the underlying assets ot holds i.e. based on the value of its subsidiary companies. therefore a valuer should evaluate the company based on more on the value of its assets than on the value its operating income. It is worth noting that the subsidiaries and holding company are separate legal entities.

Valuation Discounts Applicable to Holding Companies
When Valuing Holding companies a valuer should consider three basic types of discounts as the value of a holding company does not follow sum of parts rule, and generally it's seen that the value of a holding company is significantly less than the sum value of all its subsidiaries. The value of holding company suffers from three types of discounts majorly:

1. Liquidation Discount
As such the value of holding company is based on the sum values of its subsidiaries. However liquidation discount is generally provided for built in or embedded capital gains even when no liquidation is planned, more so as far as the value if assets of the subsidiary to pass to the holding company, it must pay taxes. Holding period, rate of tax etc. may determine this discount.

2. Discount for Lack of Control
The holding company value also gets discounted on account of lack of control, for example a holding company holds 100% stake in a subsidiary and a holding company holds 15% stake in a company. Both have different values preposition i.e. the one in which 100% stake is held have a controlling value and the one in which 15% is held shall not command that much proportionate value. Often discount for lack of control on subsidiaries is applied. The less % of holding, the more the discount and vice-versa.

3. Discount for Lack of Marketability
Due to separate legal entity often more restrictions exists upon transfer of assets of subsidiary company by holding company which leads to discount for lack of marketability in the hands of the holding company.
Under any investment, the buyer is concerned with the holding period, the risk exposure and the cash return. the longer the term to liquidity, greater the risk of sale and lower the dividend yield, the higher the marketability discount.

Empirical Research for Holding Company Discount
Under few of the research on holding company discount carried in Indian context, it is observed that the holding company trades at a value significantly less than its Net Asset Value (NAV), sometimes as low as 50%.

Can Such Discounts be Mitigated?
As discussed above, the value of a pure holding company with no operating assets of their own trade at a heavy discount to their NAV. But this discount can in certain cases be mitigated and in some cases trade at a premium depending upon:
1. Future expectation from  the Company
In cases where markets expect some M&A-consolidation of the holding company- the holding company is generally valued near to its NAV or its discounts set on the lower side if it holds controlling stake in subsidiary companies. This is because, due to the M&A reorganization of the holding company and subsidiaries, there may exist only single entity having direct control on all assets.
A holding company that is expected to sell its stake in other companies/ other investments also tend to trade at a lower discount since the value of the holding company's investments are realized and expectation of dividend by the shareholders increases.
2. Dividend paid by Subsidiaries
It is generally seen that holding companies which receive dividends from their subsidiaries trade at a lower discounts as compared to other holding companies which do not receive a dividend.
This is because the only income of a pure holding company is dividends received from its subsidiaries. Also holding companies are expected to pay out dividends received from its subsidiaries to its own shareholders since dividend distribution tax is exempt for the holding company if it distributes dividend in the year it receives from its subsidiary.
3. Type of Investment Made
If a holding company's investments include holding a controlling stake in other companies, then it generally trades at a lower discount than a company holding a non-controlling stake in other companies. This is due to the level of control the holding company has on its subsidiary and also sales of its subsidiary are reflected in the consolidated financial statements of the holding company.

Our Comments
It has been generally observed that valuers apply a holding company discount in the range of 40% to 60% of the NAV of its holding companies. But adjustments should be made to the discount depending on the dividends paid and received by the holding company and also expected future scenario of the company. The type of investments the holding company holds also has an impact on the discount, that should be applicable for holding company in question. It may also be stated that reorganization of holding company may also result in Value Creation.

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