Introduction
In the intricate web of corporate structures governed by the Companies Act, the term “associate company” holds significant weight. Recognized and regulated under section 2(6) of the Companies Act, 2013, associate companies are a vital concept that influences corporate relationships, decision-making processes, and financial transactions within the business landscape.
Definition of Associate Company as per Companies Act, 2013
Under section 2(6) of the Companies Act, 2013, “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. 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.
Significant influence in respect of associate companies means the following:
- Control of at least twenty percent of total voting power but less than fifty percent of Share Capital by another company, or
- Control of or participation in business decisions under an agreement
As per Section 2(27) of Companies Act, 2013 “Control” means the following:
- Right to appoint majority directors; or
- Right to control the management; or
The person taking the policy decisions is acting under influence of others either individually or in concert, directly or indirectly.
Example of associate company: Pidilite Industries Ltd has Vinyl Chemicals (India) Ltd as its associate company as the proportion of ownership interest/ voting rights held is 40.64%.
Restrictions and Compliances in relation to an Associate Company
- Related Party Transaction: Associate companies are considered as related party and any transaction with it shall be done as per Section 188 of Companies Act, 2013.
- Consolidated Financial Statements: The financial statements of Associate Company must be included in the Consolidated Financial Statements. [Ref: Section 129 of Companies Act, 2013]
- Restriction on appointment of Independent Director: A person cannot be appointed as an independent director if:
- A promoter or related to promoters or Director of an Associate Company; or
- Such person has/had or any of his relatives has or had pecuniary relationship with Associate Company; or
- Such person is holding or any of his relative(s) held the position of key managerial personnel or has been employee of an Associate Company. [Ref: Section 149(6) of Companies Act, 2013]
- Non-Cash Transactions: If the directors of an associate company wish to conduct any Non- Cash transactions with the company, then they must pass an Ordinary resolution. Such arrangements must be approved in advance by a resolution in general meeting, and if the director or linked person is also a director of the holding company, approval must be acquired through a resolution in general meeting of the holding company. [Ref: Section 192 of Companies Act, 2013]
Advantages of having Associate Companies
Following are the advantages of having an associate company:
- By investing in associate company, a larger company can expand its operations or enter into new markets.
- The associate companies can take advantage of better financial support, technology, machinery etc. from each other.
- An associate company may also help in increasing the overall value and profitability of the parent company.
Difference between Associate Company and Subsidiary Company
The difference between an associate company and subsidiary company are illustrated in the table below:
Sl No. | Particulars | Associate Company | Subsidiary Company |
1 | Stake | The parent company holds a minimum of 20% but less than 50% of the total voting power. | Parent company holds more than 50% of the total voting power. |
2 | Control | The parent company wields tremendous authority, i.e. the ability to participate in the financial and operational decisions of the Associate company. | The parent company has complete control over the subsidiary company’s financial and operational decisions. |
3 | Composition of business | Certain number of common promoters/directors may be present. | The management of the subsidiary company is controlled by the parent company. |
Conclusion
Therefore, we can conclude that, associate companies play an important role in the corporate environment, developing strategic relationships and boosting business growth. These entities are more than just investments; they represent mutually advantageous connections that enable businesses to capitalize on one other’s skills and resources. Associate companies provide various benefits, including revenue diversification, access to new markets, and shared knowledge and skills. They also provide options for risk-sharing and cost-cutting through shared expenses and collaborative ventures.
