Is a Subsidiary’s Associate Also Parent’s Associate? Companies Act vs Ind AS

Summary: The article explains whether C Limited can be regarded as an associate company of A Limited where A Limited wholly owns B Limited, and B Limited directly holds 25% of C Limited. Under Section 2(6) of the Companies Act, 2013, an associate company is one over which another company has significant influence, generally through direct holding of at least 20% of the voting power. Since A Limited does not directly hold any shares in C Limited, C Limited is not an associate company of A Limited under the Companies Act, although it is an associate company of B Limited because B Limited directly holds 25% of its shares. The article distinguishes this legal position from the accounting treatment under Ind AS 28 (or AS 23), where A Limited and its wholly owned subsidiary are treated as a single economic group. Accordingly, C Limited is treated as an associate of A Limited only for preparing consolidated financial statements using the equity method.

IS C LIMITED AN “ASSOCIATE COMPANY” OF A LIMITED?
A simple explanation under the Companies Act, 2013 and accounting standards

1. The Situation, In Plain Words

Let us first understand the structure in everyday language, before looking at the law.

• A Limited owns B Limited completely. B Limited is called a “Wholly Owned Subsidiary” (WOS) of A Limited — meaning A Limited holds 100% of B Limited’s shares.
• B Limited, in turn, owns 25% of the shares of C Limited.
• The question is: since A Limited fully owns B Limited, and B Limited owns 25% of C Limited, can we say A Limited “indirectly” owns a piece of C Limited large enough to call C Limited an Associate Company of A Limited?

Think of it like this: if you fully own a company (B), and that company owns a slice of another company (C), does that slice “belong” to you too, for legal purposes? The answer depends on which law book you open — and that is exactly what this note explains.

2. What Does the Companies Act Say?

The Companies Act, 2013 has a specific definition for the term “Associate Company”. It is found in Section 2(6) of the Act.

In simple words, Section 2(6) says: a company becomes an “Associate Company” of another company if that other company has “significant influence” over it — but it is not already a subsidiary.

And what is “significant influence”? The Explanation attached to Section 2(6) tells us: it means holding at least 20% of the voting power (shares) of that company, or having a say in its business decisions through an agreement.

Now here is the important point. The law says the company itself must hold 20% or more. It does not say anywhere in Section 2(6) that we should add up the shares held by a subsidiary company to the shares held by the parent company, for deciding whether something is an “Associate Company”.

Compare this with a different section of the same Act — Section 2(87), which defines “Subsidiary Company”. That section clearly says shares held by the parent “together with its subsidiaries” should be added up. The law-makers used that exact “adding up” language in Section 2(87), but chose NOT to use it in Section 2(6). When a law uses a phrase in one place and leaves it out in another similar place, the safest reading is that it was left out on purpose.

3. Applying This to Our Case

A Limited does not hold a single share of C Limited directly. The 25% shareholding in C Limited is held by B Limited, which is a separate company in the eyes of law — even though A Limited owns all of B Limited’s shares.

Since Section 2(6) looks only at what “that company” (A Limited) itself holds, and A Limited holds 0% directly in C Limited, A Limited does not cross the 20% mark in C Limited.

Therefore, under the strict wording of the Companies Act, 2013:

• C Limited IS an Associate Company of B Limited (because B Limited directly holds 25%, which is above 20%).
• C Limited is NOT an Associate Company of A Limited (because A Limited, on its own books, holds nothing directly in C Limited).

4. Does the Answer Change for Accounting Purposes?

Yes — and this is the twist that often confuses people. While company law looks at A Limited and C Limited as two separate, standalone entities, accounting standards look at the bigger picture.

When A Limited prepares its Consolidated Financial Statements (CFS) — that is, the combined accounts of A Limited along with all the companies it controls — the applicable accounting standard is Ind AS 28 (or AS 23 under the older framework).

Ind AS 28 treats A Limited and its subsidiary B Limited as one single economic unit for consolidation purposes, rather than as two unrelated companies. So the voting power that B Limited holds in C Limited (25%) is treated as if the A Limited group itself holds it.

Since 25% is more than the 20% threshold, the A Limited group is treated as having significant influence over C Limited. As a result, purely for the purpose of preparing consolidated accounts, C Limited is treated as an Associate Company and accounted for using what is called the “equity method”.

5. Why Do the Two Answers Differ?

This is not a contradiction — it is simply because company law and accounting standards are trying to answer two different questions:

• Company law (Companies Act, 2013) asks: “Who legally holds the shares, strictly entity by entity?” It looks at legal form.
• Accounting standards (Ind AS 28) ask: “What does the group, as a whole, actually control or influence?” It looks at economic substance.

Since B Limited is 100% owned and fully controlled by A Limited, accounting standards reason that B Limited has no independent will of its own — it simply acts as an extension of A Limited. So whatever influence B Limited has over C Limited is, in substance, A Limited’s influence too. Company law, however, does not make this leap unless the statute says so in as many words.

6. Quick Summary Table

7. Conclusion

To put it simply: for day-to-day legal compliance under the Companies Act, 2013 (such as Board’s Report disclosures, related party rules, or similar filings), C Limited should NOT be treated as an Associate Company of A Limited — it is an Associate Company of B Limited only.

However, when A Limited sits down to prepare its consolidated financial statements, the accounting standards require it to look through the group structure. At that stage, C Limited DOES get treated as an Associate Company of A Limited, and its results are brought into A Limited’s consolidated accounts using the equity method.

In short: same facts, two different lenses. Company law says “no” because it looks at A Limited alone. Accounting standards say “yes” because they look at the entire A Limited group together.

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).