ASSOCIATE COMPANY

COMPANIES ACT, 2013: The provisions of sub-section 6 of Section 2 of the Companies

Act, 2013 and the Rule 2 of Companies (Specification of definitions details) Rules, 2014
made there under defines “Associate Company” as 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: Significant Influence:

Following two conditions need to be fulfilled:

1. Control of at least 20% of total share capital but less than 50% of share capital by another
company;

2. Control of business decisions under an agreement.

Explanation to Condition No. 2: This phrase has created enormous conundrum amongst
corporates and practicing professionals “Control of business decisions under an agreement”.
It is essential to note here, that if this condition is satisfied then a company will be an
‘associate company’, even if there is no control of even 20% of total share capital. The clause
is applicable even when the control of business decision is under an oral agreement or a
written agreement.

A practical example which will help us to understand the applicability of the clause: Suppose
Mr. A Ltd has more than 20% holding in Mr. B Ltd then from the above definition we
conclude that Mr. A Ltd has to consolidate its Financial Statements in Books of Accounts as
per AS-21. Share capital includes preference shares as well as equity shares. Agreement
could be oral or in writing Thus Holding-Subsidiary relationship is excluded Joint Venture
included irrespective of ‘significant influence’.

Section 129: Consolidated Financial Statement (CFS) shall include associate Company
financial also.

Section 149(6): Persons who cannot become an Independent director

• Who is a promoter or related to promoters or directors of an Associate Company.

• Who has/had or any of his relatives has or had pecuniary relationship with Associate
Company.

• Who neither himself nor any of his relative held the position of key managerial personnel or
has been employee of an Associate Company.

Section 2(76): It will be considered as Related Party. So Section 188(Related Party

Transaction) as per the Companies Act, 2013 will be applicable.
Section 192: If directors of an Associate Company want to do any Non-Cash Transactions
from company, then need to pass Ordinary Resolution. This section provides for the manner
in respect of regulation of arrangements with respect to acquisition of assets for consideration
other than cash. Such arrangements shall require prior approval by a resolution in general
meeting and if the director or connected person is a director of its holding company, approval
is required to be obtained by passing special resolution in general meeting of the holding
company.

Section 194: No Director or Key Managerial Person shall do Forward Dealings in securities
of Associate Company.

SCENARIO TILL 2014 -15: For Financial year 2014 – 15, Consolidation of accounts is not
required in respect of associate and joint venture companies.

CURRENT SITUATION 2015-16:

All subsidiaries, associates and joint ventures (both Indian or foreign) will be covered under
Consolidated Financial Statements (CFS) from Financial year 2015 – 16. CFS is prepared
when the company has an associate or joint venture, even though it does not have any
subsidiary. Through a notification issued on 16 January, 2015, the MCA has provided
Transitional relief to companies that have one or more subsidiaries incorporated outside India
from preparation of CFS for the purpose of reporting for the financial year under the Act.
According to the notification, the requirement of preparing CFS in Rule 6 of the Companies
(Accounts) Rules will not apply to those companies that have subsidiary and subsidiaries
incorporated outside India only for financial year commencing on or after 1st April, 2014.
The transition period will provide additional preparation time for the companies with
operation abroad to help align the accounting framework requirement in India with the
requirement of other countries in which such subsidiaries would have operation.
SUBSIDIARY COMPANY

Section 2(87). “subsidiary company” or “subsidiary”, in relation to any other company (that
is to say the holding company), means a company in which the holding company—
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one-half of the total share capital either at its
own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed.
Explanation.—For the purposes of this clause,—
a. a company shall be deemed to be a subsidiary company of the holding company
even if the control referred to in sub-clause (i) or sub-clause (ii) is of another
subsidiary company of the holding company;
b. the composition of a company’s Board of Directors shall be deemed to be
controlled by another company if that other company by exercise of some power
exercisable by it at its discretion can appoint or remove all or a majority of the
directors;
c. the expression “company” includes any body corporate;
d. “layer” in relation to a holding company means its subsidiary or subsidiaries;

As per Section 4(1), (b) (ii) of the Companies Act 1956, if a company holds more than half of
the nominal value of equity share capital of another company, then such another company is a
subsidiary of the first mentioned company.

In the case of Oriental Industrial Investment Corporation of India vs. Union of

India (1981)51 Com Cases 487(Del), the effect of Section 4 and Sections 255, 256 and 257
came up for consideration.

In this case, the High Court observed, inter alia, that the contention of the counsel for the
Union of India that “the control of Oriental over the composition of the Board of Poonam
Hotels which they exercise by virtue of their agreement dated August 1975 is in
contravention of the provisions of Sections 255,256 and 257 of the Act which overlooks the
important fact that Section 255 excludes from its purview cases which have been otherwise
expressly provided in the Act. The words “save as otherwise expressly provided in this Act”
used in Section 255(1) (b) are of commanding significance. Section 4(2) is an express
provision for the appointment of the directors on the Board of Subsidiary. This provision is
not hit by Section 255 because it is expressly excluded.”
The High Court also observed that “there is no denying the fact that the right of the members
of a public company to appoint directors of their choice at a general meeting is greatly
abridged when there comes into being a relationship of a Holding and Subsidiary Company.
But this restriction is inherent in the definition of the Holding Company. It is firmly
embedded in Section 4 of the Act. The ability to control the conduct of the Subsidiary is the
hallmark of the Holding Company. The Holding Company is the controlling company. The
controlled company is called a Subsidiary.”