Associate Company

The Companies Amendment Act, 2017 proposed to amend the definition of Associate Company with effect from the date of notification of section 2(i) of the Amendment Act.

UPDATE: Notification S.O. 1833(E) dated 7th May notified this amendment with effect from 7th May 2018

The original definition of Associate Company

The original definition which was effective from 12^th September 2013 till notification of amendment that 6th May 2018 is 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 percent of total share capital, or of business decisions under an agreement.

The definition also had a clarification in the form of a General Circular 24/2014 dated 25^th June 2014 issued by the Ministry of Corporate Affairs:

The Shares held by a company in another company in a ‘fiduciary capacity’ shall not be counted for the purpose of determining the relationship of ‘associate company’ under Section 2(6) of the Companies Act, 2013.

Key challenges for original definition were:

1. The inclusion of preference share capital without voting power, which might not practically influence business decisions;
2. Control of business decision may exclude cases where control might be lesser but participation in the business decision may be significantly influential; and
3. There was no definition of Joint Venture

Amended definition of Associate Company

The original amended definition which is effective from the date of its notification that is 7th May 2018, is 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 purpose of this clause,—

(a) the expression “significant influence” means control of at least twenty percent 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.

In this definition, it is clarified that key factor for deciding ‘significant influence’ is not total share capital but total voting power. The total voting power shall be calculated on the relevant date on which question of significant influence is to be decided. Along with control of business decisions, participation in business decisions under an agreement is also an indicator of significant influence.

An agreement under the (Indian) Contract Act, 1872 may be an oral agreement. Such agreement may either be for control of business decisions or participation in the business decision. Control arise from sale, supply, purchase, services may give rise to control on business decisions. There may be different degrees or verities of control. In one case, a company may control all board decision of another company. In another case, a manufacturing company may have control on its distributor companies in relation to sale or territory. A brand owner may have control over a brand user.

Participation in decision making may be a critical issue. Now “participation in the business decision” is a critical issue. There may be special invitees representing another company on the board, appointment of nominee directors, business advisory companies which significantly participation in business.

One key point is still a 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?

Definition of the joint venture is introduced the first time for this purpose. Now, “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.

The term, “Arrangement” is not defined under the Companies Act, 2013 and not in the General Clauses Act, 1897. An 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 a unilateral act of the company, its management or any other person; or by order of the court to settle some dispute or claim; or agreements between parties affecting a company.

Use of term, “arrangement” gives a wide interpretation to term “joint ventures” and it is not restricted to a joint venture company.

Signification of Associate Company

An associate company has significance in the Companies Act, 2013 and has mentioned in following provisions:

1. Change in the Financial year [Section 2(41)];
2. Related party [Section 2(76)];
3. Consolidation of accounts [Section 129(3)];
4. Eligibility to be a director [Section 141(3)];
5. Independent director [Section 149(6)];
6. Vacation of office of director [Section 167(1)];
7. Related Party Transactions [Section 188];
8. Restriction on non- cash transactions involving Directors [Section 192(1)]
9. Prohibition in forward dealing [194(1)]; and
10. Merger and amalgamation [Section 233(10);