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.
Authorised capital is mentioned in the Memorandum of Association (MOA) of the company. This sets a limit on the capacity of the company to raise its equity capital. The government fee of company registration also depends on the authorized capital of the company.
The promoters then subscribe to the capital of the company by signing on the last page of the MOA, that is known as “Subscribed Capital”. It is a promise undertaken by the shareholders to pay to the capital of the company. The subscribed capital can be lesser than the authorised capital. The subscribed capital became paid-up capital when the company received the amount of money from the shareholder. As per new provisions of the companies act,2013, a newly incorporated company can not commence its business operations unless the subscribed amount is received from all the subscribers of the MOA. After the receipt of the subscription money, the company has to file Form INC-20A to the ROC.
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.