An associate company is a business entity in which another company holds a significant stake, typically between 20% and 50% of the voting shares, without exercising full control. This relationship allows the investing company to influence the associate's financial and operational decisions without consolidating its financial statements fully. Understanding the nuances of associate companies is crucial for compliance with the Companies Act, 2013, and for strategic business planning.
Definition of an Associate Company?
As defined by Section 2(6) of the Companies Act, 2013, an associate company would be one in which another company has significant influence but is not subsidiary. Significant influence for this purpose means control or significant influence, like control over at least 20% of the total share capital carrying voting rights or control or a significant influence over matters pertaining to the conduct of the business or finances, whether by way of their participation in the policy decisions or otherwise.
Other companies that come under the definition would include joint venture companies whose two or more parties have control over the arrangement.
Distinction Between Associate and Subsidiary Companies
Subsidiary Company: A subsidiary is where one company has control over the other by holding more than 50% of that company's voting rights or can control their board composition.
Associate Company: Associate company, on the other hand, is where the influence is significant and is without majority control, which usually ranges from 20 to 50% in shareholding.
Also, Learn about Kinds of Shares in Company Law
Implications Under the Companies Act, 2013
Consolidated Financial Statements: There is a provision of preparation of consolidated financial statements of associate companies to give a comprehensive view of financial positions.
Related Party Transactions: The transactions with associate companies are related party transactions, and hence, transactions ought to be in accordance with Section 188 of the Act.
Get to Know What is an Article of Association
Examples of Associate Companies
Example 1: Company A holds a 30% stake in Company B. While Company A does not control Company B, it has significant influence over its financial and operational decisions, making Company B an associate company of Company A.
Example 2: Two companies, X and Y, enter into a joint venture, each holding 50% of the voting rights. This arrangement classifies the joint venture as an associate company for both X and Y.
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Case Law
ArcelorMittal India Private Limited v. Satish Kumar Gupta & Ors. (2019): The Supreme Court of India examined the definition of 'control' and 'significant influence' in the context of associate companies, emphasizing the importance of these definitions in corporate insolvency proceedings.
Recent Amendment
Companies (Amendment) Act, 2017 Recent amendments have defined an associate company and clarified that 'significant influence' relates to control over 20% or more of the voting power as opposed to total share capital. It is in line with International Accounting Standards and it has cleared the definition of deciding the significant influence under the same.
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In a nutshell,
An associate company is a business entity in which another company holds a significant but non-controlling stake, typically between 20% and 50% of the voting shares. This ownership allows the investing company to exert substantial influence over the associate's financial and operational decisions without full control. Understanding the distinction between associate companies and subsidiaries is crucial for accurate financial reporting and strategic business planning.
While subsidiaries are majority-owned and fully controlled, associate companies maintain a degree of independence, necessitating different accounting treatments and governance considerations. Recognizing these differences ensures compliance with corporate regulations and facilitates informed decision-making in corporate structures.
Frequently Asked Questions (FAQs) related to Associate Companies
Q1. What is an associate company?
An associate company is one in which influence exists but without control, generally between 20% and 50% of voting power.
Q2. How does it differ from a subsidiary?
A subsidiary is such that another company has control over it as more than 50% of its voting rights are with such other company, while in an associate company the influence exists without majority control.
Q3. Are transactions with associate companies considered related party transactions?
Yes, an Associate company is treated as related party transactions and, therefore, should comply with the provisions of section 188 of the Companies Act, 2013.
Q4. Are associate companies to be included in consolidated financial statements?
Yes, include associate companies with consolidated financial statements when disclosed. They must present a fair view of their financial conditions.
Q5. What have been the current developments in scope with associate company definition?
The Companies (Amendment) Act 2017 removed any ambiguity over meaning of significant influence in a wide sense as there indeed is a control over voting power of at least 20%, and this is at par with other countries.
