Non-controlling interest is the earnings of a company that are attributed to a part of another company that they don’t own
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When a company owns a subsidiary (another company), but doesn’t own 100% of its shares, the portion of ownership that doesn’t belong to the parent company is called non-controlling interest (NCI), also known as minority interest.
In this article, we’re going to understand why this NCI exists, how it is calculated, and why this is important to your investment decisions in any company.
Why does non-controlling interest exist?
There are several reasons why non-controlling interest might exist on the income statement of a large public (or private) company:
- Public ownership creates NCI: Many companies, especially large ones, choose to go public by issuing shares on stock exchanges. This allows the public to invest in the company, resulting in NCI.
- Strategic investments in other companies: A parent company might intentionally hold less than 100% ownership of a subsidiary for strategic reasons. This could be to maintain a presence in a specific market or comply with regulations that limit foreign ownership. The rest of the subsidiary that the company doesn’t own automatically becomes minority interest by definition.
- Partial acquisitions are also a major contributor to the existence of NCI: Sometimes, a company might acquire a majority stake in another company but leave some shares outstanding for future acquisition or other reasons, creating NCI.
Why is this important?
Consolidated financial statements combine the financial results of a parent company and its subsidiaries to present a complete picture of the group’s financial health. For instance, if Company A owns 51% of Company B, Company A’s financial statements will reflect 100% of the earnings of B even though A doesn’t own 100% of those earnings.
The NCI, in this case, will reflect the portion of the subsidiary’s profits or losses not attributable to the parent company.
Types of NCI
Here are two basic types of non-controlling interest in a company:
Direct Non-Controlling Interest (DNCI): This is the most common type of NCI, where minority shareholders directly own shares of the subsidiary company’s common stock. These shareholders have some voting rights and receive a proportional share of the subsidiary’s dividends.
Indirect Non-Controlling Interest (INCI): This arises when the parent company doesn’t directly own shares in the minority shareholders. The minority ownership occurs through another subsidiary or a series of subsidiaries within the corporate structure. INCI can be more complex to analyse as information about the underlying subsidiary and its minority shareholders might be less readily available.
Calculating NCI
The calculation of NCI in India follows the guidelines set forth by the Indian Accounting Standards (Ind AS), which are converged with International Financial Reporting Standards (IFRS). Here’s a simplified breakdown:
- Identify the subsidiary’s net assets: This refers to the total assets of the subsidiary minus its total liabilities.
- Multiply by the NCI percentage: This percentage represents the portion of the subsidiary not owned by the parent company (usually 100% minus the parent’s ownership percentage).
Understanding this calculation with an example
A parent company owns 70% of a subsidiary’s shares. The subsidiary’s net assets are worth ₹100 crore.
NCI = (₹100 crore) * (100% – 70%) = ₹30 crore
Accounting for NCI can involve more complex calculations depending on the specific circumstances, such as the presence of preferred stock or revaluation of assets too. In case you’re doing these calculations by yourself, make sure that you ask for the input of a qualified finance professional for posterity.
Frequently Asked Questions
A subsidiary’s strong performance can increase its net assets, potentially boosting NCI. This, in turn, might lead to a higher consolidated profit for the parent company, which could positively impact its stock price.
Not necessarily. High NCI can indicate a diversified ownership structure, which can be a positive sign. However, if the NCI is significant and the subsidiary’s performance is volatile, it can add uncertainty to the parent company’s earnings forecasts.
NCI is typically disclosed in the consolidated financial statements of a company, often found in the notes to the accounts. Look for sections on “investments in subsidiaries” or “non-controlling interest.”
Not always. Complex NCI structures can sometimes indicate a high number of subsidiaries or joint ventures. While it might require more research, these structures can also represent a diversified business model with growth potential.
When comparing companies with subsidiaries, consider the NCI percentage and the financial performance of the subsidiaries. This can provide insights into the overall risk profile and potential for future earnings growth of the parent companies.
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