A Guide to Non-Controlling Interest (With Examples)

By Indeed Editorial Team

Updated 28 November 2022

Published 27 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Investing in an organisation can take a lot of time and research, and one way you can invest in an organisation is with common stock or shares. When you do so, you may gain a non-controlling interest (NCI) in an organisation. If you're considering a career in finance or investing, learning what this type of interest is and how it benefits you, can help you make better financial decisions, invest in profitable organisations and develop your skills as a financial investor.

In this article, we discuss what an NCI is, explain the different types and provide examples to help you understand this financial term.

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What's non-controlling interest?

Non-controlling interest (NCI) is when a shareholder has no control over the decision-making process within an organisation and owns less than 50% of the outstanding shares the organisation has. Another name for NCI is a minority interest. In most cases, an NCI is determined by the value of an organisation's net assets. You can also compare a shareholder's voting rights in proportion to what they own in the organisation. Though, do note that the amount of equity a shareholder has doesn't give them any leverage over the decisions an organisation makes.

In modern public organisations, the vast majority of shareholders have NCIs because they only own a maximum of 5% to 10% of shares for a single organisation, which is considered a large share. A shareholder can start lobbying a board of directors and upper management to make certain decisions once they reach this threshold. Sometimes they may even push for a position within the board of directors to gain more power within an organisation. An investor who starts lobbying for any changes is an activist investor.

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What does an activist investor do?

Activist investors have a wide range of actions they may take within an organisation. Some may lobby for changes to improve the position, efficiency and profit of an organisation. Others might enact social policies to bring in more diverse professionals or support different demographics within an organisation. Some might push an organisation to commit to becoming an environmentally friendly organisation. Regardless of what changes they make, activist investors always want to change an organisation.

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What are shareholder rights?

When an organisation's investor becomes a shareholder, the organisation often grants them a set of rights. Some organisations might have different tiers of rights based on the type of shareholder you are, how many shares you own in the organisation and other factors such as your ability to vote on organisation matters. The most common right a shareholder receives is the promise of a cash dividend if the organisation earns enough money and declares a dividend. Other rights you may receive as a shareholder include a vote on major organisational decisions, such as selling the organisation or merging with another.

Sometimes, organisations create different classes of common stock, each with its own set of rights you earn by purchasing it. If you're interested in purchasing an organisation's stock, it may be a good idea to look through the rights you receive. This is especially true if you're looking to earn a profit from the organisation. It can also be important to look at the organisations' history of declaring dividends and how they treat their shareholders. This can help you maximise an investment in an organisation and understand any responsibilities you may have as a shareholder to the organisation.

Related: Stakeholder vs. Shareholder: Definitions and Key Differences

What's the difference between an NCI and a controlling interest?

In public organisations today, a controlling interest in an organisation would be if a shareholder owns enough of the public shares in the organisation and could vote on the actions the organisation makes. For example, if a shareholder of an organisation owns 55% of the organisation's public shares and also sits on its board of directors, they have considerable power over the direction an organisation goes. It's in the best interest of these board members to see the organisation succeed, so they make decisions that let the organisation progress and generate profit.

The difference between a controlling interest and an NCI ultimately comes down to whether a particular shareholder has voting rights and owns enough of an organisation's public shares to influence decisions within the organisation.

Related: What Is a Financial Controller? And How to Be One

What are the types of NCIs?

There are two types of NCIs an organisation may experience. The first is direct non-controlling interest (DNCI). The second type is indirect non-controlling interest (INCI). Both forms of NCI are regarding acquisitions of subsidiaries by an organisation as assets. In most common cases, assets are subsidiary organisations that the first one purchases or merges with. Below are descriptions of both kinds of NCI:

Direct non-controlling interest (DNCI)

A shareholder with DNCI owns a small proportion of an organisation's publicly available shares. They also receive a proportional amount of a subsidiary organisation's total recorded equity. This includes both pre-acquisition and post-acquisition amounts. Where pre-acquisition is the organisation's equity before gaining a new asset, and post-acquisition is the organisation's after gaining the new asset.

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Indirect non-controlling interest (INCI)

A shareholder who owns an INCI also owns a small proportion of an organisation's publicly available shares. They receive an amount of a subsidiary organisation's total recorded equity, like a DNCI. The difference is, they only gain their proportion of a subsidiary's post-acquisition equity and none of the pre-acquisition equity. This means they gain less monetary value from their allocated proportion of equity, but still earn some value.

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How do organisations calculate shares of equity?

When organisations are preparing to find NCI, they use consolidated equity instead of recorded equity for the calculation. This means they make adjustments to the values they report, eliminating an unrealised value they don't own yet. This helps them ensure they have the funds they promise to their shareholders as dividends, which can increase public confidence that the organisation creates profits and pays dividends correctly.

When an organisation works on its NCI, it's important for you to make sure they're transparent about their processes because it can help you understand how NCI affects the organisation's profits, cash flows and any risk you may incur as an investor. Understanding this part of an organisation's profits and dividends can help you make informed decisions for your investments and your clients' investments if you work in a financial advisor role. For subsidiary and parent organisations, it can be important for you to see their consolidated financial statements.

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What are consolidated financial statements?

Consolidated financial statements, or consolidation for short, are a combined set of financial records from several organisations organised into one set of information. As an investor, these records may come from a parent organisation, a subsidiary organisation and an NCI organisation. These documents are useful because they let you look at a set of organisations as if they were all one organisation. It brings important information such as the amount of controlling and non-controlling interests the combined organisations have.

These documents also eliminate any transactions made between the three organisations before it completes them, helping you see a more accurate reflection of the equity you stand to gain as an investor. This information also helps you understand whether the organisations are stable enough for your investments and the amount of risk you may experience as an investor. Finally, the documents can help you predict the amount of money you may earn if you do choose to invest in those organisations because they often contain recent profits and expenditures.

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What are examples of NCI?

While there are many permutations of how non-controlling equity works, they yield the same results for you as an investor. Below are two examples of NCI shareholders have in an organisation:

Example 1

Here's an example of a minority interest in the tech industry:

Electronics Corporation has accumulated $600,000 of revenue as of the 28th of March 2020. You purchased 10% of the organisation's publicly available shares, becoming a DNCI in the organisation on the 1st of January 2020. When it's time for the Electronics Corporation to pay its dividends to shareholders at the end of the year, it calculates its net income as $600,000. 85% of the revenue goes to controlling interests in the organisation, while the other 15% goes to NCIs. $90,000 remains, which the organisation divides to you and its other NCI shareholders.

On the 30th of December 2020, Electronics Corporation becomes a subsidiary of World Electricity. In the following year, when both organisations report their total equity, you gain a substantial sum because of his direct shareholder status in the smaller organisation, Electronic Corporation.

Example 2

Here's an example of how an investing professional might invest in an electricity supplier:

On the 15th of January 2022, Sinar Cahaya's Lightbulbs gains Suria's Lighting as a subsidiary organisation. You purchase 5% shares for Suria's Lights, becoming an indirect shareholder of the subsidiary. This means you receive a proportion of the organisation's post-acquisition equity and none of its pre-acquisition equity. Regardless, both organisations are doing well, and you're looking forward to receiving your proportional equity at the end of the year.

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The models shown are for illustration purposes only, and may require additional formatting to meet accepted standards. Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

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