Companies Act

What is Associate Company?

Before we address the above question, let us analyse the definition of Associate Company given in Section 2(6) of Companies Act, 2013:

“Associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

Explanation. – For the purposes of this clause, ―”significant influence” means control of at least twenty per cent. of total share capital, or of business decisions under an agreement.

Before going further we should first understand the meaning of term “control” used in the above explanation provided under the Act.

As per section 2(27) of Companies Act, 2013 the term control means and shall include:

“Control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

After understanding the term control and reading the definition and explanation provided in Companies Act, 2013 it may be concluded that following conditions must be fulfilled by a Company for becoming Associate Company of another Company:

1. The Company controls twenty percent of total share capital of another Company: If any company controls twenty percent of total share capital of another company by any mean, even if the company directly not holding shareholding in another company but having a control over twenty percent shareholding of another company will be an associate company for another company.

Example: Let us assume 2 companies A Private Limited & B Private Limited. Below are assumptive list of shareholders of both the Companies.

 List of Shareholders of A Private Limited:

 

S.No.	Name of Shareholder	% of Share Held
1	B Private Limited	21
2	C Private Limted	18
3	D Private Limted	17

List of Shareholders of B Private Limited:

 

S.No.	Name of Shareholder	% of Share Held
1	Mr. S	21
2	Mr. Y	18
3	Mr. Z	17

 

By analysing the above list of shareholders of both the companies, the questions arises that which company is an associate company for another company?

The answer is obviously A Private Limited is an Associate Company for B Private Limited as B Private Limited is holding 21% Shares of A Private Limited.

2. The Company has a joint venture with another company or both the companies are joint venture companies: International Accounting Standard 28 (IAS 28) defines a joint venture as “A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.”

A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

3. The company controls business decisions of another company under an agreement: when a company have control over business decisions of another company by an oral or written agreement in such a situation that company is an associate company for the company controlling business decisions of another company.

 

What additional compliances/restrictions are applicable if my Company has an Associate Company?

Below is a section wise analysis of compliances/restrictions are applicable if a Company has an Associate Company:

S.No.	Corresponding Section of Companies Act,2013	Subject	Impact
1.	129	Consolidated Financial Statement	Consolidated Financial Statement shall also include financial statements of Associate Company.
2.	149(6)	Restrictions on appointment as an independent director	Following persons cannot be appointed as independent director in a company if they are: 1. A promoter or related to promoters or Director of an Associate Company. 2. Has/had or any of his relatives has or had pecuniary relationship with Associate Company. 3. Neither himself nor any of his relative held the position of key managerial personnel or has been employee of an Associate Company.
3.	2(76)	Related Party	It will be considered as Related Party. So Section 188(Related Party Transaction) as per the Companies Act, 2013 will be applicable.
4.	192	Ordinary Resolution for non-cash transaction with the associate company	If directors of an Associate Company want to do any Non-Cash Transactions from company, then need to pass Ordinary Resolution. This section provides for the manner in respect of regulation of arrangements with respect to acquisition of assets for consideration other than cash. Such arrangements shall require prior approval by a resolution in general meeting and if the director or connected person is a director of its holding company, approval is required to be obtained by passing special resolution in general meeting of the holding company.