INTRODUCTION :
The term “Associate” has been widely under discussion for a long time now, due to various corporate scams for establishment of inter-corporate relationships. The Act now proposes to curb all the shortcomings relating to associate company and provide a more rational and objective framework of associate relationship.
In this Article, an attempt has been made to amplify the scope and applicability of Sections as per the Companies Act, 2013 and rules and provisions made there under relating to “Associate Company.”
DEFINITION:
COMPANIES ACT, 1956:
In the Companies Act, 1956 there is no prescribed definition relating to term ‘Associate’. The relationship between the companies till date is established either by way of holding or subsidiary.
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.1:
Rule 2 of Companies (Specification of definitions details) Rules, 2014 and Subsection (27) of Section 2 of Companies Act, 2013 defines ‘control’. It includes:
• Appoint majority of Directors;
• Right to control the management;
• Policy decisions need to be exercisable by a person;
• Person acting individually or in concert, directly or indirectly, including virtue of shareholding or voting agreements in any other manner.
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.
Joint Venture Company:
A business undertaking by two or more persons engaged in a single defined project. The necessary elements are: An express or implied agreement; A common purpose that the group intends to carry out; Shared profits and losses; Each member's equal voice in controlling the project; It is a symbiotic business alliance between two or more companies whereby the complimentary resources of the partners are mutually shared and put to use.
IMPACT OF ANALYSIS OF DEFINITION:
A Ltd. is an associate company of B Ltd. If:
(i) B Ltd. has significant influence in A Ltd; and B Ltd. Is not a holding company of A Ltd. Or
(ii) A Ltd and B Ltd. are joint venture companies.
A practical example which 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’.
CORRESPONDENCE WITH OTHER SECTIONS OF COMPANIES ACT,2013:
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. The companies should gear up their process in preparation of CFS as they would need to provide comparative information for the Financial Year 2014-15 in the CFS of the financial year 2015-16.
ACCOUNTING PROVISIONS: AS 23: Accounting for Investments in Associates in Consolidated Financial Statement: The objective of this Standard is to set out principles and procedures for recognizing, in the consolidated financial statements, the effects of the investments in associates on the financial position and operating results of a group.
Methods:
Accounting for Investments – Equity Method: In Consolidated Financial Statements, investment is recorded at cost. Any surplus or deficit in cost and net asset to be recorded as either Goodwill or Capital Reserve.
Distribution received from an investee will reduce the carrying amount of the Investment. Any subsequent changes in share in net asset will be adjusted in cost of investment and Goodwill/Capital Reserve. An investment in an associate should be accounted for in consolidated financial statements under the equity method except when: (a) Investment is acquired and held exclusively with a view to its subsequent disposal in the near future; or (b) Associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. Discontinuance of use of equity method An investor should discontinue the use of the equity method from the date that: (a) it ceases to have significant influence in an associate, either in whole or in part, its investment; or (b) The use of the equity method is no longer appropriate because the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. Investments in such associates should be accounted for in accordance with Accounting Standard (AS) 13 Accounting for Investments. The reasons for not applying the equity method in accounting for investments in an associate should be disclosed in the consolidated financial statements.
ACCOUNTING AS PER INTERNATIONAL STANDARDS:
INTERNATIONAL FINANCIAL REPORTING STANDARD – 9:
As per International Financial Reporting Standard – 9 ‘Associates and Joint Ventures’ sets out the definition and accounting treatments for associates and joint ventures, two types of interests that a reporting entity may have in other entities. Treatment in Consolidated Financial Statements:
• Investors should include its associates in its Consolidated Financial Statement using equity method.
• In the Consolidated Statements of total recognized gains and losses the investors share of total recognized gains and losses of its associates should be included shown separately under each heading, if material.
• The cash flow statement should also include the cash flows between investors and associates.
• Goodwill arising on the investor’s acquisition of its associates, less any amortization or write down, should be included in the carrying amount for the associates but should disclosed separately. In the profit and loss account the amortization or write down of such goodwill should be disclosed as part of the investor’s share of its associate’s results.
CONCLUSION:
With an intention to curb the shortcomings and provide a more rational and objective framework of associate relationship it felt the need to introduce the definition of Associate Company in the Companies Act, 2013. Associate Company has to follow not only the various laws but also the Accounting Standards relating to it. A company having an Associate Company then the company needs to prepare consolidated financial statement and follow Accounting Standard 23 in order to abide with the Accounting Standards. If anyone searching in the Companies Act for Joint Ventures then they have look into Section 2(6) relating to Associate Company since the definition includes joint venture.
Therefore, one has to look at Associate Company exhaustively taking into consideration all the enabling provisions, acts and rules relating to it.
BIBLIOGRAPHY:
http://www.icsi.edu/portals/32/Interpretation%20of%20Definitions.pdf
https://www.google.co.in/search?q=Associate+company
https://www.icsi.edu/WebModules/LinksOfWeeks/ICSI%20Dec2014.pdf
http://dipp.nic.in/English/Investor/Ease_DoingBusiness/PHD-2_31August2015.pdf
http://supremecourtofindia.nic.in/scr/2011_v13_pii.pdf
http://nrsadvisors.com/new-concepts-introduced-in-companies-act-2013/
http://frc.org.uk/Our-Work/Publications/ASB/FRS-9-Associates-and-Joint-Ventures-File.pdf
Books referred:
1. Corporate law referencer
2. Companies Act, 2013
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