Under the Companies (Amendment) Act, 2017, an amendment has been introduced in Section 2(6) ‘the definition of Associate Company’. For understanding the meaning and implication of the amendment first we need to understand what was the definition of Associate Company as per Companies Act, 2013 and thereafter we will understand what changes have been made in the new Amendment Act, thereafter a comparative analysis can be interpreted and implication of such amendment can be considered accordingly.
- Definition of Associate Company as per Section 2(6) of 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.
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;
For example:
Company “A” controls 20% or more but up to 50% of total share capital (equity and convertible preference) , or of business decisions under an agreement of Company “B” then the Company “B” will be called Associate Company of Company “A” (other Company).
―where as per Sec 2(27): control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;
- Amended Definition of Associate Company as per Section 2(6) of Companies (Amendment) Act, 2017
“associate”, 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;
For example: Company “A” controls 20% or more but upto 50% of total voting power, or control of or participation in business decisions under an agreement of Company “B” then the Company “B” will be called Associate Company of Company “A” (other Company).
where as per Sec 2(89) ―total voting power‖, in relation to any matter, means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes;
Comparative Analysis of previous and amended definition:
The amendment Act substitutes the explanation of the term significant influence under the definition of an associate company in Section 2(6) to mean control of atleast 20% of the voting power (in place of total share capital) or control or participation in business decision under an agreement.
Impact of Amendment:
The Impact would be –
- Total voting power defined in 2(89) to be referred
- Control through total voting power only & not just by holding capital
- Agreement is essential element to establish control through participation
- Term JV clarified – covers all partner of JV
- Definition crucial in view of consolidation of accounts, RPT, disclosures provisions, etc.
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Author Bio
“control through participation” as explained in your explanation may not be correct. Both are to be seen separately. Participation alone will not be enough to exercise control. But the participation should be through an agreement. Suppose the total strength of BOD in A company is 7 and another Company ( B) being a shareholder, through an agreement possess the right to appoint one Director in A, we can say that there is participation of B in the business decisions of A Company. Then A is an “associate” of B. .