Associate Company

Associate Company is the new concept as introduced by the Companies Act, 2013. Detailed review of the definition under the Act has been done in the following article.

Definition Under Companies Act, 2013.

Section 2(6) of the Act defines:

“Associate Company” as – 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:

  1. of at least twenty per cent of total share capital, or
  2. of business decisions under an agreement;

From above, it is clear that on fulfilment of any of the mentioned condition the Company would become an associate Company i.e. if a company has control of 20% of total share capital of another Company, then the latter would become the associate Company of the former or the latter could become the associate of the former company even if there is control of business decisions under an agreement (either written or oral).

However, one point to be considered here in condition (i) is that the control should be atleast of 20% of the total share capital but it could not be more than 50% since the definition in itself excludes subsidiary Companies.

If two companies are Joint Venture Companies , then they will also fall under the ambit of the definition under section 2(6) of the Companies Act, 2013.

Now, if we further analyse the definition stated above then the keyword used is “Control” which is again defined under the Act U/s 2 (27) as:

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;

To sum up, we can discuss the definition again through an example:

A is associate of B if:

a) B has significant influence in A [i.e. B has control of at least 20 % of total share capital of A or of business decisions under an agreement] or;

b)Where both are Joint Venture Companies. (Not holding subsidiary)

Note: 1. It has been clarified that the shares held by a company in another Company in a fiduciary capacity shall not be counted for the purpose of determining Associate Company u/s 2(6) of the Companies Act, 2013. (vide General Circular 24/2014 dated 25th June, 2015)

2. Consolidated Financial Statement (CFS) shall also include financials of associate Company.

For Detailed Analysis Please watch my YouTube Video on this topic at :

https://youtu.be/AC-r__MSdGU

 

Disclaimer: The entire content of this document have been prepared as per the information existing at the time of the preparation. The blog is based on author’s personal views and the author does not take any responsibility of the same.

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