This article has been written by Ms.Shruti Garg, student of Indian Institute of Legal Studies

INTRODUCTION

A company incorporated as per the companies Act, 2013 is regarded as a registered company. Companies are of different types and this segregation is made depending on the basis of incorporation, members, liability, share capital, guarantee and control. Companies on the basis of control means company which controls the composition of the Board of Directors and a company which holds majority of shares in another company. On the basis of control, the company may include holding company, subsidiary company and an associate company. This company gives an elaborate view of an associate company and how it is different from holding and subsidiary company.

ASSOCIATE COMPANY

Section 2(6) of the Companies Act, 2013 defines associate company as, in relation to any other 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.”  

As per Section 2(27) of the Companies Act, 2013, control shall include the right to appoint the majority of the directors or to control the management or policy decisions exercised by a person or persons acting individually or in concert, directly or indirectly by virtue of their shareholding or management rights or shareholders agreements or voting agreements in any other manner. In a broader sense, an associate company is a company on which the parent company has a significant influence i.e., right to participate in the business decisions, participate in the financial and operating policy activities.

ESSENTIAL ELEMENTS OF ASSOCIATE COMPANY

The following are the key elements which must be taken into consideration while considering a company as an associate company:

1. Significant influence- The associate company must have atleast 20% of total voting power or control of or participation in the business decisions of the company under the agreement. For example, Pidilite Industries Ltd which has Vinyl Chemicals (India) Ltd as its associate company as the proportion of ownership interest/ voting rights held by Pidilite Industries in Vinyl Chemicals (India) is 40. 64%.
2. Joint venture – There must be a joint arrangement whereby the parties that have joint control of the arrangement have right to the net assets of the arrangement. For example, Maruti Suzuki India Ltd which is a famous example of joint venture in the automobile industry in India.

PROVISIONS RELATED TO ASSOCIATE COMPANY

Section 149(6) of the Act provides conditions as to who cannot become an independent director. Any person cannot become an independent director who –

1. Is a promoter or related to promoters of an associate company
2. Who has/ has or any of his relatives has/ had pecuniary relationship with associate company
3. Who neither himself nor any of his relatives have held the position of key managerial personnel or has been an employee of an associate company.

Section 129(3) provides that a company which has any associate company or companies is required to prepare a consolidated financial statement of the company and all its subsidiary and associate companies in the same form and manner as it prepares its own financial statement. The company is also required to attach with its financial statement a separate statement containing the salient features of its associate company.

Section 188 states related party transaction with respect to an associate company. It provides that the consent of the Board of Directors of the company is required to pass a resolution at the meeting before the company enters into any contract or arrangement with related party with respect to such related party’s appointment to any place of profit in the company, its subsidiary company or associate company. Therefore, before any related party is appointed to any office or place or profit even in associate company, the company would be required to get the approval of the Board for the same.

Section 92 of the Act provides every company to file an annual return including the associate company. It states that every company shall file an annual return with all the details including the particulars of holding, subsidiary and associate companies, its shares, debentures and other securities and shareholding pattern, remuneration of directors and key managerial personnel, penalties that should be imposed in case of non-compliance of duties. Every company shall file with the Registrar a copy of the annual return within 60 days from the date of annual general meeting.  

ASSOCIATE COMPANY AS PER ACCOUNTING STANDARDS

As per Indian Accounting Standard 28, an associate company is an entity over which the investors have a significant influence. It also says that if an entity holds directly or indirectly 20 per cent or more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly stated not to be the case. Conversely if the entity holds directly or indirectly less than 20 per cent of the voting power of the investee, it is presumed that the entity does not have significant influence. Also, a substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.  

The existence of the significant influence over a company is determined by the following ways-

1. Representation on the Board of Directors or equivalent governing body of the investee
2. Participation in policy-making processes including participation in decision about dividends or other distributions
3. Material transactions between the investor and the investee
4. Interchange of managerial personnel
5. Provision of essential technical information.

DIFFERENCE BETWEEN ASSOCIATE COMPANY AND SUBSIDIARY COMPANY

1. Associate company is a company which has a significant influence over other company whereas a subsidiary company is a company over which parent company has a significant influence.
2. The percentage of ownership in case of associate company is 20-50% and in case of subsidiary company is 50%.
3. The parent and associate company may have certain board members in common who take the management decisions whereas the decisions of the subsidiary company are taken by the parent company.
4. Investment in an associate company is done to hold significant ownership for a longer period while in subsidiary company, investments are made to expand the business by forming a new company or by acquiring the business of an existing company.
5. The parent company may or may not get involved in the day-to-day business of the associate company but it controls all the decisions of the subsidiary company.

CONCLUSION

Associate company is a company which has a significant control over other company but is different from a subsidiary company. The main advantage of an associate company is that it contributes to the profitability of its parent company and also helps in creating value for such company. Sometimes it is feasible for a company to acquire a controlling stake in another company, especially as a competitor, in such circumstances it can invest in an associate company.

REFERENCES

• The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
• AVTAR SINGH, COMPANY LAW 594, 595 (Eastern Book Company 2018).
• Indian Accounting Standard 28, https://www.mca.gov.in/Ministry/pdf/Ind_AS28.pdf
• MINISTRY OF CORPORATE AFFAIRS, https://www.mca.gov.in/Ministry/actsbills/rules/CIoSCR.pdf.
• Consolidation of Holding, Subsidiary and Associate Accounts, https://www.icsi.edu/media/portals/32/ICSI%20Pune%20chapter%20-%20Presentation%20for%2022%20March%202014%20-%20Sushrut%20Chitale.pdf

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