This article has been by Ms. Sheereen Iqbal, a student of South Calcutta College of Law, Calcutta.
WHAT IS AN ASSOCIATE COMPANY
INTRODUCTION
According to section 2(6) of Companies Act,2013, company that has significant influence over another company but is not a subsidiary of that company is referred to as a “associate company.” This term also encompasses joint venture companies.For the purposes of this clause, the terms “significant influence” and “joint venture” refer to joint arrangements in which the parties with joint control of the arrangement have rights to the arrangement’s net assets, or in which the parties have control of at least twenty percent of the total voting power or participation in business decisions under an agreement. Thus, In the broadest sense, an associate company is a business in which the parent firm owns stock. As opposed to a subsidiary firm, in which the parent company often owns a majority stake, an associate company typically has a minority ownership by the parent company. Even if a firm does not directly own shares in another company but does have control over twenty percent of that company’s entire share capital, it will still be considered an associate company for that other company if it does so.
OTHER KINDS OF COMPANY
Depending on size and number of members in a company, the companies are of three types, Private Company, which according to section 2(68) of companies act is a company which having a minimum paid-up share capital as prescribed and which obstructs the right to transfer its share .By section 2(68) (ii) this also limits the total members of the company to two hundred .Public company is defined under section 2(71) of companies act. The shares under public company is freely transferable and there are not limit or restriction on the maximum number of members of a public company though it must have a minimum of seven members. Another is one person company, according to section 2(62) of companies act, One person company is a company which has only one person as a member of a company, in this type of company only one person makes the entire company.
Further two another types of companies are identified based on control:Holding companies either directly or indirectly, through another company, possess more than 50% of another firm’s equity share capital or have control over the make-up of another company’s board of directors. Another is Subsidiary Company, a subsidiary company is a business that conducts its operations under the supervision of another (holding) corporation. Tata Sons Limited’s wholly-owned subsidiary Tata Capital is one example.
On the basis of ownership it is divided into three, Government Companies, Non-Government Companies and Associate company. According to section 2(45) of companies act, Government Company means any company where not less than fifty one percent of the paid up share capital is held by the Central government or State Government or both or even sometimes partly central government or partly one or more state government like NTPC, BHEL. All the other companies where no paid-up share capital is held by any government i.e it does not contain any of the above features of government companies are known as non-government company.
And the last one is Associate company on which our article revolves and which is explained in brief above .When a company under which other company holds either 20 percent or more of share capital , then it is known as Associate Company.
PROVISIONS REGARDING ASSOCIATE COMPANY UNDER COMPANIES ACT
Two terms which we have discussed while explaining the term associate company were “significant influence” and “joint venture”. In general, any foreign company can establish a joint venture in India; however, certain companies may be subject to restrictions as outlined in the FDI Policy and FEMA with regard to particular areas where foreign investment is still restricted and there are other requirements for involvement. But now that the Bankruptcy Code has been passed, along with the Delhi High Court’s recent decisions in Cruz City 1 Mauritius Holdings v. Unitech Limited and NTT Docomo Inc. v. Tata Sons Limited, it is clear that disputes brought up by foreign investors have received favourable treatment. As it has been agreed upon, the claims of the foreign investors with respect to any assured return on exit of the foreign party in lieu of the damages suffered, would be enforceable in India and would not be treated as a violation of the FDI Policy and other related laws, subject to compliance with the terms of the joint venture agreement. A company is said to have significant influence over the other if the company controls at least 20 percent voting power of the other company or the company controls and participates in the business decisions of the other company. According to section 2(27) ‘control’ includes right to appoint majority of directors and to control management or business and policy decisions of the company.
Section 2(76) of companies act, explains ‘related party’, reference to a company where in clause (viii), it specifies that related party includes a holding, subsidiary or an associate company of such company. Thus according to this section an associate company can be treated as a related party for a company.Section 188 of companies act,2013 deals with Related Party Transactions. Section 188(1) specifies that except with the approval of the Board of Directors given by a resolution at a meeting of the board, no company should enter into a contract with related party in respect to-sale or purchase of any goods, selling or buying property of any kind ,leasing of property ,availing of any services, designation of any agent for acquisition or sale of goods or property, appointment of such a connected person to any office or position of profit within the corporation, its subsidiary corporation, or associate corporation and managing the subscription of any company securities, including their derivatives. However, Section 2(76)(viii) does not apply to private companies when it comes to Section 188, and it also does not apply to an unlisted public company that has been granted a licence to operate from the International Financial Services Centre in a multi-services SEZ that has been approved under the SEZ Act. In the annual report, associate company information should be included. According to the Companies Act of 2013, each business must include information about its affiliated companies in its annual report, which must be written in accordance with Section 92’s specifications.
According to section 129(2), during every annual general meeting, the Board of Directors of the company should put forward the financial statement of the financial year. Further section 129(3) specifies that when a company is having one or more subsidiaries, then along with preparing financial statement as per given by sub-section (2), it must also prepare a consolidated financial statement of the company and of all the subsidiaries in the same form.
If a director was nominated due to his involvement in an associate company in any capacity, his position will be vacant. According to this clause, a director’s position becomes vacant if the person no longer holds the office or other occupation that qualified them for their appointment as a director of the company because they no longer work for the holding, subsidiary, or associate company. A Company’s director or other key management personnel are not permitted to forward trade in the securities of its Associate Company under Section 194.
CONCLUSION
The idea of a “Associate Company” has gained more significance and relevance in recent years in order to ensure that the companies’ promoters and/or directors run them honestly and do not roll over and use the funds acquired by one company in its associate Companies. The statutory authorities are given a clear picture of the transactions carried out by a Company and are able to spot any financial misappropriation thanks to the consolidation of financial statements of a Company along with its Associate and Subsidiary Company.
SOURCES
1. https://blog.ipleaders.in/company-law-associate-company/
2. https://blog.ipleaders.in/kinds-of-company/
3. https://www.investopedia.com/terms/a/associate-company.asp
4. https://www.lexology.com/library/detail.aspx?g=2baad873-02c7-41b6-a585-a1121954144b
5. Companies Act,2013
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