Companies Act Section 2(6) Associate Company

Understanding Associate Company under Companies Act, 2013

Associate Company Section 2(6)

An "associate company" refers to a company in which another company has a significant influence, but not control, over the financial and operating policies. This influence is generally exerted by holding at least 20% of the equity share capital or by having significant participation in the management of the associate company.

Key Features and Criteria:

1. Significant Influence: 

The defining characteristic of an associate company is the ability of the investing company (referred to as the "holding company" in this context) to exert significant influence over the financial and operating policies of the associate company. 

This influence is typically evidenced by holding at least 20% of the voting power of the associate company.

2. Control vs. Significant Influence:

Control: If a company holds more than 50% of the voting rights in another company, it has control over that company, and the latter is termed a subsidiary.

Significant Influence: When a company holds between 20% to 50% of the voting rights in another company, it generally indicates significant influence, making the latter an associate company.

3. Financial and Operating Policies: 

The holding company's influence is primarily through its representation on the board of directors or through other strategic decisions that affect the associate company's policies and operations.

Reporting and Disclosures:

Financial Statements: Companies are required to disclose their investments in associate companies in their financial statements, along with details of significant influence exercised and any related transactions.  

Equity Method: Under accounting standards, investments in associate companies are typically accounted for using the equity method, where the carrying amount of the investment is adjusted based on the investor's share of the associate's profits or losses.

Importance:

Strategic Relationships: Associate companies often represent strategic partnerships or joint ventures where companies collaborate while maintaining separate legal identities.  

Risk and Returns: Investments in associate companies allow diversification of risk and participation in the associate's profitability without the need for full consolidation.