A company under which another company holds 20% or more of share capital then they shall be known as an Associate Company. In case a company is formed by two separate companies and each such company holds 20% of the shareholding then the new company shall be known as Associate Company or Joint Venture Company. The companies Act 2013 for the first time introduced the concept of the Associate Company or Joint Venture Company in India through section 2(6). A company must have a direct shareholding of more than 20 % and not an indirect one, for example, A holds 22% in B, and B holds 30% in C. In this case, C company is an associate of B but not of A.
Though 20% of the shareholding is to mean a significant influence in another company. The stake can be in the paid-up capital of the company or by controlling the business decision by controlling the board of directors through its composition in such a manner. The control can also be in the form of a negative covenant in the agreement which is also known as Veto Power. These negative covenants/veto power can be exercised through an agreement or by way of a specific clause in the articles of association of the company.
The meaning of the significant influence is provided under the definition of the term associate in the companies act 2013, as defined under section 2(27). Therefore there may be a Joint Venture agreement or shareholders agreement between the parties wherein certain transactions can not be done without the consent of the other party, this kind of control is known as a negative control.