Minority Interests vs. Minority Investors: Understanding the Differences

Minority Interests vs. Minority Investors: Understanding the Differences

If you have ever looked at the Balance sheet of large companies, you would often find this line item Minority Interest on the liabilities section.

They look something like below:

Ever wondered what are these?

Well these are equity-equivalent liabilities of a company.

But they are NOT really the shareholders/owners of the entire company.

Caution, they are not same as minority investors who typically hold a small % of share of the company.

Let us understand Minority Interests through an example.

Take a hypothetical company ABC Ltd.

This company has a joint venture/partnership with another firm say PQR Ltd.

The joint venture firm is called ABCPQR Ltd.

The ownership structure of ABCPQR Ltd is 80:20.

That is 80% of the joint venture is owned by ABC Ltd.

And 20% is owned by PQR Ltd.

Now, the total equity investment made by the two partners is $100 mn.

So ABC has contributed $80mn in line with 80% of its share.

And PQR has contributed $20mn in line with 20% of its share.

This 20% contribution or $20 mn is the minority interest in the company.

This is what is reflected in the balance sheet of the company above.

So Minority interest refer to the share of capital provided by a JV partner in JV or a Partnership with the company.

 

You may wonder, why does it appear at all in ABC Ltd Balance sheet?

This is because of Accounting rules and regulations.

If a Firm has more than 50% stake in a JV/Partnership, it will need to be “consolidated” on the balance sheet of that Firm.

In this case, all the assets and liabilities of the JV ABCPQR Ltd will be recorded in ABC Ltd Balance sheet.

So, ABC Ltd. records the entire assets of the JV ABCPQR Ltd of $100 mn in its books.

However, ABC’s own contribution is only $80 mn which is already reflected in its shareholder capital.

The remaining $20 mn is the contribution by PQR Ltd. in the JV.

Hence, this $20 mn gets recorded as a minority interest in the liabilities section.

 

How does the balance of Minority Interest change over time?

Well, any profit that the JV/Partnership makes gets attributed between the 2 partners in 80:20 ratio.

So, if the JV makes a profit of USD 10 mn, then the share of profit of Minority Interest partner is just USD 2mn.

The Minority interest balance will increase by this share of profit i.e USD 2 mn of the minority partner every year.

Also, if there is more investment in the JV firm, the contribution of the minority partner will also get added.

Finally, if the minority partner gets dividend or is paid back the capital contribution it has made, it will reduce the balance of minority partner.

So in essence, Minority Interests behave like smaller Partners in a Joint Venture with the larger Partner.

Remember, minority interests in not the same as minority investors!

Fun fact: Minority Interests are also sometimes called Non-Controlling Interests!

 

So then, who are Minority Investors?

Minority Investors are simply the smaller owners of an entire company i.e. ABC Ltd in this case.

If there are some individuals who hold a very small % of total shares of ABC Ltd, they would be classified as Minority Investors.

Minority investors still have ownership on the entire company although a very small portion of it.

In most cases, retail individual investors are classified as minority investors.

 

Does this help clear the confusion? Let us know what you think!

*The Learning Hour is a weekly knowledge sharing initiative of SKILLFIN LEARNING. To subscribe to this initiative, kindly mail us at [email protected]. We will add you to the distribution list.

 

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