PROPOSED AMENDMENT: ASSOCIATE COMPANY

Government recently introduced the Companies (Amendment) Bill, 2016 to the Companies Act, 2013 proposes thirteen amendments in Section 2 related to definitions. Definition clauses always need contextual reading. Now, we will discuss these amendments in definitions.

Associate Company

Presently Section 2(6) of the Companies Act, 2013 defines associate company as under:

“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 purposes of this clause, “significant influence” means control of at least twenty per cent of total share capital, or of business decisions under an agreement.”

Now, explanation clause is proposed to be substituted:

“Explanation.—For the purpose of this clause—

(a) 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;

(b) 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;”

Definition of significant influence is being changed to take effect of “total voting power“, in place of total share capital. Presently, Equity share capital with or without differential voting rights and all classes of preference share capital is included for calculating significant influence. Now, actual voting power from share capital is proposed to be considered.

Earlier, control of business decision under an agreement was considered as significant influence but now participation is also proposed to be considered. As joint venture (agreement/arrangement) is separately defined, control or participation from all other agreement is proposed to be considered. Participation in decision making may be a critical issue. Control arise from sale, supply, purchase, services may arise to control on business decisions. Now most critical element, “participation in business decision is proposed to be inserted. Should it be interpreted liberally to include special invitees to the board, Key Managerial personal, second tier management, or be strictly interpreted to include only whole time management?

One key point is still mystery – business decision. What are business decisions? Which decision of a company is not a business decision? Is a company authorized to take any non – business decision outside its objects which are meant to business?

One significant inclusion is definition of “joint venture”. This definition talks about arrangement not agreement. Without any direct or indirect agreement, there may be some kind of arrangement, directly or indirectly.

The term, “Arrangement” is not defined under the Companies Act, 2013 and not in the General Clauses Act, 1897. Arrangement is the action, process or result of arranging or being arranged. Arrangements include agreements. It may also be a plan or preparation for future development. An arrangement may also be a settlement of a dispute or claim. In legal form arrangement may arise due to unilateral act of company, its management or any other person; or by order of court to settle some dispute or claim; or agreements between parties affecting company.

Use of term, “arrangement” gives wide interpretation to term “joint ventures”. While defining, the draftsmen do not restrict it to company form of organizations. However, while talking about associate company, they rightly mentioned “joint venture company”.

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