• Invest
    Investment Suite
    Stocks
    Mutual Funds
    Future and Options
    IPO
    Exchange Traded Funds
    Commodity
    Stockcase (Stock Baskets)
    Currency
    Non Convertible Debentures
    Sovereign Gold Bond
    Exclusive
    NRI Account
    Private Client Group
    Features
    SipIt
    MTF
    Investment Suite
    Exclusive
    Features
  • Platform
    Product Suite
    Kotak Neo App & Web
    Nest Trading Terminal
    NEO Trade APIs
    Features and Tools
    MTF
    Securities Accepted as Collateral
    Margin Requirements
    Payoff Analyzer
    Calculators
    SIP Calculator
    Lumpsum Calculator
    Brokerage Calculator
    Margin Calculator
    MTF Calculator
    All Calculators
    Product Suite
    Features and Tools
    Calculators
  • Pricing
  • Research
    Research Calls
    Long Term calls
    Short Term calls
    Intraday calls
    Derivatives calls
    Pick of the week
    Top Monthly Picks
    Research Reports
    Fundamental Research Report
    Technical Research Report
    Derivative Research Report
    Research Calls
    Research Reports
  • Market
    Stocks
    Market Movers
    Large Cap
    Mid Cap
    Small Cap
    Indices
    Nifty 50
    Bank Nifty
    FinNifty
    Nifty Midcap India
    VIX
    All Indian Indices
    Mutual Funds
    SBI Mutual Funds
    HDFC Mutual Funds
    Axis Mutual Funds
    ICICI Prudential Mutual Funds
    Nippon India Mutual Funds
    All AMC's
    IPO
    Upcoming IPO
    Current IPO
    Closed IPO
    Recently Listed IPO
    Stocks
    Indices
    Mutual Funds
    IPO
  • Learn
    Resource
    Market Ready
    Kotak Insights
    Infographic
    Podcast
    Webinars
    Youtube Channel
    Quarterly Results
    Investing Guide
    Demat Account
    Trading Account
    Share Market
    Intraday Trading
    IPO
    Mutual Funds
    Commodities
    Currency
    Futures & Options
    Derivatives
    Margin Trading
    Events
    Budget 2024
    Muhurat Trading
    Share Market Holiday
    Market Outlook 2024
    Resource
    Investing Guide
    Events
  • Partner
    Business Associates
    Fund Expert
    Kotak Connect Plus
    Startup connect
  • Support
    FAQs
    Circulars
    Bulletins
    Contact Us
    Forms Download
    Get your Statement
​

What is Non Controlling Interest?

  •  5 min read
  • 0•
  • 06 Dec 2023
What is Non Controlling Interest?

Key Highlights

  • Non controlling interest shareholders lack independent control over corporate decisions or the ability to cast votes individually.

  • In the case of a direct non-controlling interest, the shareholder is entitled to a proportional share of all recorded equity of a subsidiary, covering both pre- and post-acquisition amounts.

  • An indirect non-controlling interest only receives a proportionate allocation of a subsidiary's post-acquisition amounts.

  • A controlling interest grants a shareholder voting rights to influence corporate decisions.

Suppose a parent corporation acquires 80% of XYZ company, with a non-controlling interest entity acquiring the remaining 20% of the newly acquired subsidiary, XYZ. The assets and liabilities of the subsidiary reflected on the balance sheet undergo adjustments to fair market value, and these adjusted values are utilised in preparing the consolidated financial statements. In instances where both the parent and non-controlling interest pay an amount exceeding the fair value of the net assets, the surplus is recorded in a goodwill account within the consolidated financial statements.

Goodwill represents an additional cost incurred when acquiring a company at a price surpassing its fair market value. This goodwill is subject to amortisation over time, following an impairment test, and is allocated to an expense account.

Non-controlling interest commonly arises when a company possesses more than 50% but less than 100% ownership of another entity. The dominant voting power of the first company grants it effective control over the second company. However, it's important to note that the ownership threshold of 50% is a general guideline. In some instances, a company might consolidate the finances of another entity even with ownership below 50%. This situation may arise when the consolidating company exerts influence over the subsidiary's board of directors, enabling it to guide the subsidiary's business decisions.

Assessing the worth of a company involves examining its financial statements to predict forthcoming trends related to earnings and cash flows more accurately. Nevertheless, when dealing with companies that have non-controlling interests, they typically present consolidated financial statements and often provide insufficient details for a thorough valuation of the non-controlling interest.

1. Constant Growth

The continuous expansion approach is rarely employed due to the presumption that there is minimal fluctuation in the subsidiary company's performance, either in terms of decline or growth.

2. Historical Growth

In the approach of historical growth, an examination of past financial data is conducted to identify prevailing patterns. The model anticipates the expansion of a subsidiary by projecting a growth rate derived from historical trends. This technique is not suitable for companies undergoing rapid growth or significant decline.

3. Modelling Subsidiaries Individually

Analysing each subsidiary independently is the approach taken in this modelling technique. It assesses each subsidiary individually and aggregates their respective interests to derive a consolidated value. While this method offers increased flexibility and theoretically more precise results, its execution is challenging, primarily due to insufficient disclosures from the parent company. Furthermore, the complexity of valuing numerous subsidiaries may render the process time-consuming and impractical.

Consolidation refers to the amalgamation of financial statements that integrate the accounting records of multiple entities into a unified set of financials. These entities typically comprise a parent company, acting as the primary shareholder, a subsidiary or an acquired firm, and a company with a non-controlling interest. Through consolidated financials, investors, creditors, and company managers can examine the three distinct entities as if they constitute a single company.

The process of consolidation also assumes that both the parent and the non-controlling interest company jointly acquired the equity of a subsidiary company. Any transactions occurring between the parent and the subsidiary, or between the parent and the non-controlling interest entity are excluded before the creation of the consolidated financial statements.

Conclusion

Ownership alone does not empower a shareholder to influence the decision-making within a company. Given the existence of various share classes in companies, an investment might involve a non-controlling interest devoid of voting rights or the capacity to impact the company. Therefore, understanding the complexities of non-controlling interests is essential, as they can significantly influence shareholders' investments. This is particularly relevant for shareholders who are not actively engaged in the company and hold less than a 5% 10% stake, as they may find themselves dealing with issues related to non-controlling interests.

FAQs on Non Controlling Interest

Forecasting non-controlling interest involves assessing the expected share of profits or losses attributable to minority shareholders in a subsidiary.

No, noncontrolling interest cannot be negative as it represents the ownership stake in a subsidiary, and ownership shares cannot be less than zero.

Yes, non-controlling interest is added to net income in the consolidated financial statements to reflect the share of profits or losses attributable to minority shareholders in a subsidiary.

No, dividends do not directly reduce non-controlling interest (NCI).

Non controlling interest is typically shown in the equity section of a company's consolidated balance sheet.

Did you enjoy this article?

0 people liked this article.

What could we have done to make this article better?

Enjoy Free Demat Account Opening
+91 -

personImage
Enjoy Free Demat Account Opening
+91 -