Meaning and definition of Associate Company as per the Companies Act, 2013

Section 2(6) of the Companies Act, 2013 as amended by the Companies (Amendment) Act, 2017 define an Associate Company as under:
“An 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 purpose of this clause,—

  1. the expression “significant influence” means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement;
  2. the expression “joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement”.

From the above definition, we understand that,

  • It is the relation between 2 companies but not as a holding-subsidiary
  • Where one company has significant influence over another company
  • Joint venture companies also come within the ambit of associate companies

What is meant by significant influence?

It means control of at least twenty per cent of total voting power, or control of or participation in business decisions under an agreement.

What is meant by Total voting power?

Definition**:** As per Section 2(89) of the Companies Act, 2013, “total voting power”, in relation to any matter, means the total number of votes which may be cast in regard to that matter on a poll at the meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes;

Analysis: It is very important to understand the difference between paid-up share capital held by a member and total voting power of the member. The ownership of the company is determined by the equity shareholders of the company. Paid-up share capital of the company may consist of equity + preference shares or equity shares with differential rights if the company has issued any.

There are two methods of conducting votes at a meeting 1. By a show of hands and 2. By poll. Under the show of hands, one vote each member is considered. But when a poll is demanded, one share one vote principle is applied.

When we say total voting power, it means a total number of votes which may be cast if the poll is demanded on any matter at a meeting of a company, where all the members thereof or their proxies having the right to vote on that matter are present at the meeting and cast their votes.

Therefore, determining paid-up capital with voting rights and paid-up capital non-voting rights is important.

Meaning, the investor company has a control of minimum of 20% but less than 50% of the total voting power, in the investee company, under an agreement or otherwise, and has control or participation in the business decisions of the investee company.

What is meant by “Control”?

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 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.

From the above definition, it is clear that control may be established by a company by virtue of a shareholding agreement or voting agreement or rights given to the shareholders or management rights or in any other manner.

Therefore in the broadest sense, an associate company means 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 etc.

Associate company live example

Mahindra and Mahindra Limited has Tech Mahindra Ltd. as its Associate Company with 26.04% holding (as per Annual Report 2019-20).

Like Mahindra and Mahindra Limited there are many such examples to quote. So, the parent acts as a minority active investor, whose ownership in the associate company is 20% or more but less than 50%. Such investments are done to hold the ownership for a longer period, which permits to have significant influence but may not have control over the investee’s day to day business.

Difference between associate and subsidiary

So basically, investment in an associate company is done when a company wants to enter into a new business or new markets. So acquiring a controlling stake in an associate company makes the process easier and strong in the markets.

Investment by a parent company in an associate company brings in the benefits of improved production capabilities, technological and research advancement and financial support, which eventually contributes to the increase in profitability of the associate company, and thereby increasing profits to the parent company.

Is consolidation mandatory for associate companies?

The parent company shall prepare a consolidated financial statement of the company and all of its associates and subsidiaries. The said consolidated financial statements shall be laid before the annual general meeting.[Section 129(3) of the Companies Act, 2013]

The parent company is also required to attach a separate statement in Form AOC-1, containing the salient features of the financial statement of its subsidiary or subsidiaries and associate company or companies.

Yes, the Associate company is considered as a related party [Section 2(76)(viii) of the Companies Act, 2013] and for entering into related party transactions, the company shall take prior approval of Board and/or members as the case may be [Section 188 of the Companies Act, 2013]

Can a parent company give a loan or guarantee or provide security for any loan taken by an associate company and vice versa?

As amended by the Companies (Amendment) Act, 2017, Section 185 (2) of the Companies Act, 2013, allows companies to give loan or guarantee or provide security in connection with loan subject to the terms and conditions as stipulated as under:

Approval of members is obtained by passing a Special Resolution at a general meeting.
the loans are utilised by the borrowing company for its principal business activities.

As per Section 186 (2) of the Companies Act, 2013, No company shall

a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding 60% (sixty per cent) of its paid-up share capital, free reserves and securities premium account or 100% (one hundred per cent) of its free reserves and securities premium account, whichever is more.

Does the loan given by the parent company to the associate company and vice a versa amount to deposit?

As per Rule 2(1)(c)(vi) of the Companies (Acceptance of Deposits) Rules, 2014, any amount received by a company from any other company is considered under exempt category deposits.

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