Parent HoldCo Capitalization Structure
Ownership Framework & Annual Share Allocation Mechanics
Version 4.0
1. Executive Summary
This document establishes the capitalization structure of the Parent HoldCo.
Core Principles
Owner-Operator Owned
No promoter/founder equity
Annual Allocation
Based on profit contribution
Bottom 10% Rule
Underperformers face merger/sale
Transparent Expenses
Collective approval above thresholds
2. Ownership Philosophy
2.1 Why 100% OO-Owned?
Owner-Operators ARE the group
Without their businesses, Parent has no value
No free riders
Everyone who owns equity contributes profits
Pure meritocracy
Ownership reflects ongoing value creation
Leadership as service providers
Group CEO/CFO are compensated, not equity holders
2.2 Group Leadership Compensation
The Group CEO and CFO do not receive equity. They are compensated from the pooled funds:
| Role | Compensation | Cap (Until IPO) |
|---|---|---|
| Group CEO | 1% of total pooled money | ₹1 Crore/year |
| Group CFO | 1% of total pooled money | ₹1 Crore/year |
"Pooled money" = Total dividends remitted by all subsidiaries to Parent in that year
Pre-IPO Examples:
Post-IPO: Board decides compensation by consensus. The 1% formula and ₹1 Crore cap no longer apply.
4. Initial Allocation (At Formation)
4.1 When Group Forms
When multiple Operating Companies come together, initial shares are allocated based on first year's profit contribution.
Initial Allocation Formula
OO's Initial Stake = 95% × (Subsidiary PAT ÷ Total Group PAT)4.2 Example: Initial Formation
3 Subsidiaries form the group:
| Subsidiary | Year 1 PAT | % of Group PAT | OO's Initial Stake |
|---|---|---|---|
| Sub A | ₹60 Lakhs | 50% | 47.5% (50% × 95%) |
| Sub B | ₹36 Lakhs | 30% | 28.5% (30% × 95%) |
| Sub C | ₹24 Lakhs | 20% | 19% (20% × 95%) |
| Total | ₹1.2 Cr | 100% | 95% |
Shareholding at Formation:
| Shareholder | Shares | % Holding |
|---|---|---|
| OO-A | 47,50,000 | 47.5% |
| OO-B | 28,50,000 | 28.5% |
| OO-C | 19,00,000 | 19% |
| Reserve | 5,00,000 | 5% |
| Total | 1,00,00,000 | 100% |
5. Annual Share Allocation Mechanism
5.1 Core Concept
Each year, new shares are issued to Owner-Operators based on their profit contribution relative to others.
Key Rules:
- Calculate each OO's profit contribution percentage
- The OO with the lowest contribution % becomes the baseline
- Baseline OO receives 0 new shares
- Other OOs receive shares proportional to their excess above baseline
5.2 Annual Allocation Formula
Calculate Profit Contribution %
OO's Contribution % = Subsidiary PAT ÷ Total Group PATIdentify Baseline
Baseline % = Lowest OO's Contribution %Calculate Excess Contribution
OO's Excess % = OO's Contribution % - Baseline %Determine Share Pool
Annual share pool = 10% of existing issued capital (Board may adjust 5-15%)
Allocate Shares
OO's New Shares = Annual Pool × (OO's Excess % ÷ Sum of All Excess %)5.3 Worked Example
Year 2 Profits:
| Subsidiary | PAT | Contribution % |
|---|---|---|
| Sub A | ₹80 Lakhs | 40% |
| Sub B | ₹60 Lakhs | 30% |
| Sub C | ₹60 Lakhs | 30% |
| Total | ₹2 Cr | 100% |
Baseline: 30% (B and C tied for lowest)
Excess Calculation:
| OO | Contribution % | Baseline | Excess % |
|---|---|---|---|
| OO-A | 40% | 30% | 10% |
| OO-B | 30% | 30% | 0% |
| OO-C | 30% | 30% | 0% |
5.4 Equal Contribution = No New Shares
If all OOs have the same contribution percentage:
- Everyone is at baseline
- Everyone's excess = 0%
- No new shares are issued that year
6. Bottom 10% Accountability Rule
6.1 The Rule
If a subsidiary is consistently in the bottom 10% of the group for two consecutive years, the Parent reserves the right to:
- Merge it into another subsidiary, OR
- Sell it to the highest bidder (Parent or outside buyer)
6.2 How Bottom 10% is Determined
Groups with 10+ subsidiaries
Bottom 10% = Lowest performing 10% by profit contribution
Example: 12 subsidiaries → bottom 1-2 subsidiaries
Groups with fewer than 10
Bottom 10% = The single lowest contributor
Trigger only if >50% below next lowest
6.3 Measurement Period
| Year | Status |
|---|---|
| Year 1 | Bottom 10% - Warning issued |
| Year 2 (still bottom) | Bottom 10% again - Trigger activated |
| Year 2 (improved) | NOT in bottom 10% - Counter resets |
Two consecutive years required. One good year resets the clock.
6.4 Process When Triggered
Notice
Parent issues formal notice to OO. 30 days to respond with improvement plan or exit preference.
Valuation
Independent valuation of subsidiary. Fair Market Value determined.
Options
Highest bid wins - If outside buyer offers more than Parent, outside buyer gets it.
OO Treatment
- OO receives FMV for subsidiary stake (49%)
- Parent shares: Retained if Good Leaver
- Non-compete: 1 year (treated as Good Leaver unless Cause exists)
6.5 Protections for OO
Not a fire sale
OO can source outside buyers
Can dispute calculation with evidence
If entire sector is down, Board may waive
7. Group Expense Management
7.1 Pooled Funds
All subsidiaries remit dividends to Parent. This creates a pool used for:
- Group CEO/CFO compensation (1% + 1%)
- Group-level expenses (legal, audit, compliance, software)
- Strategic initiatives
- Remaining distributed to OOs as Parent dividends
7.2 Expense Approval Thresholds
Expenses above certain thresholds require group approval:
| Expense Category | Threshold | Approval Required |
|---|---|---|
| Single expense | >₹1 Lakh | Group approval |
| Monthly recurring | >₹50,000/month | Group approval |
| Annual commitment | >₹5 Lakhs | Group approval |
| Capital expenditure | >₹2 Lakhs | Group approval |
Below threshold: Group CEO can approve independently.
7.3 Approval Process (Software-Managed)
All expense approvals are managed through group management software:
Voting Details:
- OOs vote weighted by shareholding
- Majority (>50% by shareholding) required
- 48 hours for routine expenses
- 7 days for major expenses (>₹10 Lakhs)
- Emergency override: 2 largest OOs can approve jointly
7.4 Transparency
All OOs have real-time visibility into:
8. Group Leadership
Group CEO
Role:
- Coordination across subsidiaries
- Investor relations and IPO preparation
- Dispute resolution facilitation
- Group strategy and new OO onboarding
Compensation:
Pre-IPO: 1% of pooled money, capped at ₹1 Crore/year
Post-IPO: Decided by Board consensus
Governance:
- Elected by OOs (majority by shareholding)
- Term: 3 years, renewable
- Removal: 75% vote by shareholding
Group CFO
Role:
- Financial consolidation and reporting
- Audit coordination
- Compliance and regulatory filings
- Expense management oversight
Compensation:
Pre-IPO: 1% of pooled money, capped at ₹1 Crore/year
Post-IPO: Decided by Board consensus
Governance:
- Recommended by CEO, approved by OO majority
- Term: 3 years, renewable
- Removal: 75% vote by shareholding
No Equity for Leadership
Group CEO and CFO:
- Do NOT receive Parent shares
- Do NOT have Board voting rights (unless they are also an OO)
- Are service providers, not owners
If an OO becomes Group CEO, they retain their OO shares but receive no additional equity for the CEO role.
9. Governance Rights
9.1 Voting Rights
All shares carry equal voting rights: 1 share = 1 vote
9.2 Board Composition
| Parent Stake | Board Seats |
|---|---|
| >30% | 2 seats |
| 15-30% | 1 seat |
| 5-15% | 1 seat (may rotate) |
| <5% | Observer rights |
Minimum: 3 directors + 1 Independent Director. Group CEO attends as invitee (no vote unless also an OO).
9.3 Reserved Matters (75% Approval)
10. Share Transfer & Exit
10.1 Lock-In
| Shareholder | Lock-In |
|---|---|
| All OOs | 3 years from each allotment |
10.2 Right of First Refusal
After lock-in:
- Offer to other OOs (proportionally)
- Offer to Parent (buyback)
- Third party (with Board approval)
10.3 Exit Treatment
| Exit Type | Subsidiary Shares | Parent Shares |
|---|---|---|
| Good Leaver | FMV | Retained or sold via ROFR |
| Bad Leaver | Book Value | Book Value |
| Bottom 10% Exit | FMV | FMV (treated as Good Leaver) |
11. New Operating Company Joining
11.1 Entry Process
- Due diligence and approval (75% OO vote)
- First year: Participates in annual allocation based on profit
- May receive initial shares from Strategic Reserve
11.2 Reserve Allocation
New OOs may receive shares from the 5% Strategic Reserve to establish initial presence, with remaining earned through annual allocation.
Summary: Key Principles
No promoter/founder equity
Annual shares reflect contribution
2 consecutive years triggers merger/sale
CEO/CFO get 1% each, no equity
Software-based approval above thresholds
Real-time visibility into all finances