Thursday, 1 May 2014

Thread bearing the Companies Act, 2013. v.1



ASSOCIATE COMPANIES - SCOPE AND ISSUES

Relevant Definitions.

Associate Companies: means a company in which another company has a significant influence and

a.       Includes a joint venture company; but
b.      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.


Control includes:

a.       Right to appoint majority of directors; or
b.      Control the management or policy decisions exercised by person(s);
c.       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.


Provision 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;

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;

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.

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.

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.

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.

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