If there are two companies listed in the same stock exchange, and one company owns shares in the other, that is a cross holding, i.e. when a security issue by one publicly listed corporation is owned by another company on the same listing.
Cross holding is also called cross shareholding.
Accountants need to be careful when determining the value of their company on the exchange if there is a cross holding. There is a risk of double-counting of the security’s value, which would distort the value of the two corporations.
In many conglomerates there is an intricate web of cross holdings.
For example, if Company XXX and Company YYY are both listed on the same stock exchange, XXX’s cross holdings in YYY need to be accounted for to make sure YYY’s value is not double-counted.
In many cases, a company will hold shares in several other companies in the same stock exchange. The more cross holdings a company has, the harder it becomes to value the companies properly.
The role of cross holding in corporate acquisitions and ousting management personnel needs to be considered carefully.
A publicly-traded company that owns shares in another one on the same listing has the same voting rights as other shareholders.
Cross holdings and the law
In some countries, major rivals are not allowed to have cross holdings (with each other). In March 2015, British telecom multinational Vodafone had to sell its 4.2% stake in India’s Bharti Airtel to comply with rules that prohibit cross-holding between rivals.
Vodafone said the sale followed the then new unified license regime in India which bans the holding by a group of an interest in more than one licensee company in the same service area.
The Law Dictionary defines cross shareholding as follows:
“Minority stakes held by two companies in each other; this is often done to help strengthen long-term business relationships, and is particularly prevalent in Relationship Model countries such as Germany and Japan.”
Video – Problems posed by cross holding investments
This video looks at a situation in which two companies own each others’ shares, and one of them is the other’s holding company.