An associated company, also known as an associate company, refers to a business entity in which another company holds a significant portion of ownership, usually between 20% and 50%. This level of ownership is substantial enough to give the investing company influence over the associated company’s operations, but not total control.
Associated companies are typically recognized in financial accounting under the equity method, where the investing company records its investment as an asset and its share of the associated company’s profits or losses as income or expense, respectively. This method reflects the investing company’s proportional ownership interest in the associated company.
The relationship between the investing company and its associated company is crucial as it enables both entities to benefit from each other’s resources, expertise, and market presence. However, it’s essential to note that despite the significant ownership stake, the associated company operates as a separate legal entity, maintaining its own management and decision-making processes.
Overall, an associated company represents a strategic partnership or investment that allows businesses to expand their reach, diversify their portfolio, and leverage synergies while maintaining a degree of autonomy and independence.
Defination of Associated Company as per Company Act
Section 2(6)
Associate company‖, in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company having such
influence and includes a joint venture company.
Source – Company Act, 2013
Explanation
An “associate company” denotes a business entity in which another company holds significant influence (typically 20-50% ownership), without complete control like a subsidiary. This influence allows participation in decision-making but maintains the associate’s autonomy. The term also encompasses joint ventures where companies collaborate on specific projects while retaining shared control. Associate companies offer a middle ground between full ownership and passive investment, facilitating strategic partnerships for mutual benefit while respecting the independence of the associate entity.
Example
Central 1947 Holdings Pte. Ltd.
Ganhan Capital Consultants LLP
Radarss Angel Investors LLP
Artemis Advisors Private Limited
Kora Construction s Pvt. Ltd.
Features of Associated Company
Shared Control: Associated Companies involve shared control between entities, characterized by significant influence rather than outright ownership, enabling collaborative decision-making and strategic direction.
Equity Investment: Entities invest in each other’s equity, holding substantial stakes to align interests and foster joint decision-making, crucial for strategic alignment and long-term growth.
Financial Reporting: Rigorous financial reporting is essential, utilizing the equity method to accurately reflect investments and ensure transparency and compliance with accounting standards.
Strategic Alliances: Associated Companies form strategic alliances, leveraging combined resources, expertise, and market presence to capitalize on synergies and exploit growth opportunities effectively.
Separate Legal Entities: Maintaining distinct legal identities, Associated Companies ensure autonomy while facilitating collaboration and risk management, allowing for efficient operations and strategic maneuvering in the business landscape.
Advantages of Associated Company
Risk Sharing: Joint ownership mitigates financial risk by distributing it between entities, safeguarding against potential losses and enhancing stability for both parties.
Resource Access: Collaboration grants access to diverse resources like technology and expertise, empowering entities to leverage each other’s strengths and capabilities for mutual benefit and improved operational efficiency.
Market Expansion: Partnership facilitates entry into new markets, broadening the customer base and revenue streams for both entities, thereby fostering business growth and market diversification.
Cost Efficiency: Shared expenses on core activities such as research and development, marketing, and infrastructure result in cost savings, enhancing profitability and financial performance for associated companies.
Synergy Creation: Collaboration fosters synergy, where combined efforts yield greater outcomes than individual endeavors, enhancing competitiveness, innovation, and overall business success through shared knowledge, resources, and strategic alignment.
