ASSOCIATE COMPANIES – SCOPE AND ISSUES
Relevant
Definitions.
Definitions.
Associate
Companies: means a company in which another company
has a significant influence and
Companies: means a company in which another company
has a significant influence and
a.
Includes a joint venture
company; but
Includes a joint venture
company; but
b.
Does not include subsidiary.
Does not include subsidiary.
Significant
influence means control of at least 20% of the total share capital or control of business decisions under an
agreement.
influence means control of at least 20% of the total share capital or control of business decisions under an
agreement.
Control
includes:
includes:
a.
Right to appoint majority of
directors; or
Right to appoint majority of
directors; or
b.
Control the management or
policy decisions exercised by person(s);
Control the management or
policy decisions exercised by person(s);
c.
a. or b. may be directly or indirectly;
or
a. or b. may be directly or indirectly;
or
by virtue of
shareholding or management rights; or by way of an agreement; or in any other
manner.
shareholding or management rights; or by way of an agreement; or in any other
manner.
Provision
mapping:
mapping:
|
Provision
|
Section
|
Particulars
|
Details of
provisions |
|
Associate
Companies |
2 (76) (viii) (a)
|
Definition of Related Party
|
Associate company of a company is deemed to be
related party |
|
92 (1)
|
Annual Return
|
Particulars of associate companies to be provided in
the annual return up to the end of financial year to which the annual return relates. |
|
|
Expln to second proviso of Section 129 (3)
|
Financial statements
|
Consolidated financial statements shall be made for
all associate companies and shall be laid before the annual general meeting. |
|
|
141 (3)(d)(i), (ii), (iii), (e) and (i)
|
Eligibility, qualification and disqualification of
auditors |
A person (or his partner or relative):
a. holds security or interest in an associate company (in case of
relative, more than Rs. 1000 value);
b. indebted to an associate company;
c. given guarantee or security for any person to an associate
company;
d. business relation with an associate company;
e. person whose associate company provides consultancy services.
Cannot be appointed as an auditor.
|
|
|
144 Explanation (ii)
|
Auditor not
to render
certain
services
|
An Auditor cannot provide certain services to the
company as mentioned in this section. Such services cannot be provided directly or indirectly. Provision of such services by an associate company of the auditor would be deemed as indirect provision of services by the auditor. |
|
|
149 (6), (b), (c), (d)
|
Company to have Board of Directors
|
An independent director of a company should not be a
person who is:
a. a promoter of an associate company;
b. related to a promoter or director of an associate company;
c. have pecuniary relation in last two financial years and current
financial year with an associate company;
d. no relatives should have pecuniary relation or transactions with
an associate company more than 2% of two per cent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
e. held position of a KMP in an associate company;
f.
in employment of CA, CS, law firm etc. of an associate company;
g. a CEO or a director of non-profit organization associated with an
associate company and receives grants etc or exercises voting power in such associate company; |
|
|
167 (1) (h)
|
Vacation of director’s office
|
If a director was appointed by virtue of he being in
office or employment of an associate company, ceases to be in such office or employment. |
|
|
170 (1)
|
Register of directors and
Key managerial
personnel and
their shareholding.
|
Director’s shareholding in associate company to be
included. |
|
|
188 (1) (f)
|
Related Party Transaction
|
RP’s appointment to an office or place of profit in
an associate company |
|
|
192(1)(a)
|
Restrictions on non-cash transactions
|
Director of an associate company not to receive any
consideration other than cash. |
|
|
194
|
|
Prohibition on forward dealing in shares of an
associate company by director of an associate company |
|
|
proviso to 232 (3) (b), 233 (10)
|
Provisions to be made by the Tribunal in its order
sanctioning a scheme of merger/amalgamation |
A transferee company cannot hold shares to be
allotted pursuant to the compromise or arrangement, in its name or in trust whether on behalf of the associate company. |
Notes:
1.
Applicable to all types of
companies;
Applicable to all types of
companies;
2.
“Joint venture company” has not
been defined. In general, a joint venture may be formed in any manner other
than actual equity participation, viz., joint development agreements,
collaboration agreements, co-bidding arrangements. Many such associations have
been interpreted by courts and tax authorities as association of persons or
partnerships or joint ventures. Therefore, if such associations also fall under
the definition of associate companies, it will be extremely difficult for
companies to comply with the provisions highlighted above related to associate
companies;
“Joint venture company” has not
been defined. In general, a joint venture may be formed in any manner other
than actual equity participation, viz., joint development agreements,
collaboration agreements, co-bidding arrangements. Many such associations have
been interpreted by courts and tax authorities as association of persons or
partnerships or joint ventures. Therefore, if such associations also fall under
the definition of associate companies, it will be extremely difficult for
companies to comply with the provisions highlighted above related to associate
companies;
3.
A joint venture company may
also amount to a subsidiary company by virtue of shareholding, control or
otherwise. In such a scenario, whether such joint venture companies will be
included within the definition of associate companies is not clear as a subsidiary
has been specifically excluded.
A joint venture company may
also amount to a subsidiary company by virtue of shareholding, control or
otherwise. In such a scenario, whether such joint venture companies will be
included within the definition of associate companies is not clear as a subsidiary
has been specifically excluded.
4.
The definition of “significant
influence” is very wide, in the light of the inclusive definition of the term
‘Control’. In case of agreements where certain consent rights have been given
to another company, thereby having control over business decisions, it will
create an unusual situation whereby two companies may be interpreted as
associate companies, although the only association that they have is that
agreement. For example, in case of long term lease of properties between two
completely un-associated companies, it is very normal to have provisions
whereby the lessee cannot take certain management decisions (ex. M&A,
insolvency, business, asset or stake sale, management change) or approve
transfer of substantial shareholding without the consent of the lessor. This is
done to ensure that the original lessee does not transfer the lease by
transferring management or shareholding in the company. It is also very normal
to see such provisions in other type of agreements such as procurement
contracts, project documents, IP licenses etc. In such a scenario, if the two
parties become associate companies due to such control rights, it will entail a
number of issues which may either discourage companies to enter into such
agreements or involve non-compliance of provisions related to associate
companies.
The definition of “significant
influence” is very wide, in the light of the inclusive definition of the term
‘Control’. In case of agreements where certain consent rights have been given
to another company, thereby having control over business decisions, it will
create an unusual situation whereby two companies may be interpreted as
associate companies, although the only association that they have is that
agreement. For example, in case of long term lease of properties between two
completely un-associated companies, it is very normal to have provisions
whereby the lessee cannot take certain management decisions (ex. M&A,
insolvency, business, asset or stake sale, management change) or approve
transfer of substantial shareholding without the consent of the lessor. This is
done to ensure that the original lessee does not transfer the lease by
transferring management or shareholding in the company. It is also very normal
to see such provisions in other type of agreements such as procurement
contracts, project documents, IP licenses etc. In such a scenario, if the two
parties become associate companies due to such control rights, it will entail a
number of issues which may either discourage companies to enter into such
agreements or involve non-compliance of provisions related to associate
companies.
5.
An associate company is deemed
to be a RP. Therefore, in case where a company becomes an associate company by
virtue of entering into an agreement with certain control rights, it would
automatically amount to a RP and any further agreement or arrangement with such
RP will entail compliances related to RP’s.
An associate company is deemed
to be a RP. Therefore, in case where a company becomes an associate company by
virtue of entering into an agreement with certain control rights, it would
automatically amount to a RP and any further agreement or arrangement with such
RP will entail compliances related to RP’s.
6.
In the light of the above
analysis and the broad spectrum of the definition of associate companies, it is
difficult to imagine as to how provisions related to annual return,
consolidated financial statement, eligibility of auditors and independent
directors will be complied with by the companies.
In the light of the above
analysis and the broad spectrum of the definition of associate companies, it is
difficult to imagine as to how provisions related to annual return,
consolidated financial statement, eligibility of auditors and independent
directors will be complied with by the companies.
