In the broadest sense, an associate company is a business in which the parent firm owns stock. As opposed to a subsidiary firm, in which the parent company often owns a majority stake, an associate company typically has minority ownership by the parent company. The notion of the associate business is utilized in economics, accounting, taxation, securities, and other areas. Therefore the exact definition differs significantly from jurisdiction to jurisdiction and across different industries.
Due to numerous business schemes for creating intercompany partnerships, the term “Associate” has been the subject of much debate for a long time. The Act currently aims to fix all issues with associate companies and offer a more logical and impartial structure for associate relationships. This article aims to broaden the scope and applicability of the “Associate Company”-related Sections of the 2013 Companies Act and the rules and requirements enacted thereunder.
What is an Associate Company?
An associate company, also known as an affiliate company, is a business where a parent firm owns a sizable percentage of the shares. The percentage often ranges from 20% to 50%. Legally, a stockholder must own more than 50% of the company to transform it into a subsidiary of the parent company.
The parent company does not have complete control over the policies and business decision-making features of the associate company since the minority investment (less than 50%) does not include the right to control the board decisions of the affiliate company.
Definition of an Associate Company
The following is the definition of an Associate Company under Section 2(6) of the 2013 Companies Act:
“Associate Company,” in relation to another Company, means a company in which another company has a significant influence but which is not a subsidiary company of the company having such influence and includes a joint venture company.
Following is an explanation provided for Section 2(6) of the Companies Act of 2013:
- Significant influence is defined as having at least 20% of the entire voting power or having control over or involvement in business decisions made pursuant to an Agreement.
- The term “joint venture” refers to a joint Agreement that grants the parties who jointly govern the arrangement rights to the arrangement’s net assets.
As a result, a company must either have a large amount of influence over another company or be a joint venture company in order to be deemed an associate company of another company.
When do Associate Companies Form?
In a joint venture, where one company purchases a sizable part of another company in order to build a larger organization with synergies, associate firms are often formed. They can also be created when a large firm invests in a smaller business without turning it into a subsidiary (by buying between 20% and 50% of the stock) in an effort to diversify and/or develop.
The financial statements of the associate company do not have to be consolidated with those of its parent or parent businesses, unlike those of a subsidiary.
How Do Associate Companies Operate?
A company is referred to as an associate company if a larger one invests in a smaller one and gains a non-controlling interest or a minority investment in it. A different company or group of companies may possess a portion of an affiliate company. As opposed to a subsidiary, the parent firm or companies typically do not consolidate the financial accounts of an associate company (where the parent company usually consolidates the financial statements). The parent business often lists the value of the associate company as an asset on its balance sheet.
Consolidated financial statements are a parent company’s and its associated or subsidiary companies’ combined financial statements. While the operations of an associate company are typically not required to be consolidated, there are generally tax regulations that must be taken into account when compiling financial statements and tax filings.
Advantages
- Larger businesses can grow their operations or enter new markets by investing in affiliate companies.
- For businesses seeking to acquire controlling ownership in another company, especially a rival, the alliance may represent a wise financial option.
- Improved manufacturing capacity, consistent financial support, and advancements in research and technology benefit both the parent and subsidiary enterprises.
- The profitability and total worth of the parent firm are increased by an affiliate company.
How Much of a Company Can Be an Associate Company?
A parent firm must own a stake in the business—typically between 20 and 50 percent—for it to qualify as an associate company. When this threshold is crossed, the business is regarded as a subsidiary.
What Function Does an Associate Company Serve?
According to the legislation, an associate company designates that a parent firm, which normally owns between 20% and 50% of the associate company, has a significant amount of influence over it. There may be several benefits from this. More financial support and assistance from the parent could be provided to the associate company as a result. The parent corporation may give exposure to technology innovation and advancement in this case. The affiliated business may also contribute to the parent’s total profitability rising.
Why Do Businesses Invest in Associate Companies?
A parent company may have an associate company for a variety of reasons, including boosting profitability and expanding one’s potential for growth and diversification while also obtaining access to new markets and business sectors. When a parent business is unable to buy the majority of a company, an associate company often provides a workable substitute.
Investors’ worries
Investors and regulators frequently criticize associate companies’ excessive complexity, particularly when it comes to the organizations’ actual financial health. Through investments or loans to the associate firm, the parent company may occasionally be able to divert money or use it as a means of money laundering due to the multi-layered corporate structure.
In order to obtain tax advantages and reduce their tax liabilities, parent firms may also buy an interest in overseas affiliates. In other instances, the parent misrepresents the financial health of the entire group by failing to give a fair and true picture of the associate’s financial situation.
Is consolidation for associate companies required?
A consolidated financial statement for the parent firm, all of its affiliates, and all of its subsidiaries must be prepared. The aforementioned consolidated financial accounts must be presented to the general assembly’s annual meeting. [The 2013 Companies Act, Section 129(3)]
A supplemental statement in Form AOC-1, comprising the key elements of the financial statements of the parent company’s subsidiary or subsidiaries and associated firms or companies, must also be attached by the parent company.