Independent Directors

This question is on associates and not independent director, Here's the definition of associate company as per the companies Act.

ASSOCIATE COMPANY
Section 2 Subsection (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. 

Explanation.—For the purposes of this clause, “significant influence” means control of at least  twenty per cent. of total share capital, or of business decisions under an agreement.

Now as you should be getting it by now an associate is not just a company in who’s the concerned company holds more than 20% of share capital but also includes a company which is having influence over the latter’s decision making process under an agreement. 

Thus in your case even if A company holds just 15% of the paid up capital of B ltd it might be also an associate if A ltd is having influence over the latter’s decision making process under an agreement.

 

Even if it doesn't come under associate company, it attracts other sub clause of pecuniary relationship with Company. so the person who is or was promoter of A company cannot become ID of B company.

Hi, thank you for your responses. Had one additional doubt based on what Sudhir said. How is it a case of pecuniary relationship? Isn't pecuniary relationship just a financial relationship? And then does each and every shareholder have a pecuniary relationship with the company?

149(6)(c) states that "who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their PROMOTERS, or directors, during the two immediately preceding financial years
or during the current financial year. In Government companies, the criteria is not required to be
followed.

Please correct me if I am wrong.

thank you

Hi Sudhir, you've correctly stated the clause. However, my question is a little different. In respect of my question, I'm asking whether the promoter of Co A can be an independent direct
director in Co B. However this particular clause talks about whether I have a pecuniary relationship with the promoter of Co B itself.

Hi Sudhir. Thank you for your response to my query. I'm currently preparing for my CA Finals and it would be really helpful if you would just explain the comment that you posted about pecuniary relationship.

Hello Ashwin,

As per your query related to ID, You are a promoter of A company & A company holds 15% of voting power in B company. You (Promoter of A co.) want to be a ID of B company.

Now if you as an ID having pecuniary relationship with A company or their promoter or director of A company or its H/S/A company then you cannot become a ID of B company.

See in above example if you have pecuniary relationship you can't but here in the give case yourself is a Promoter so how you can act as an ID of B company. So you can't.

Now the entire conclusion depends on Associate company definition & promoter.

In your given case it's less than 20% voting power in B company so it doesn't come under associate company.

If B company gets more profit through fraudulent activity then A company will get more DIVIDEND and Market Share Value Will Get Increase. So you as a promoter of A company having Interest to get more income from both companies.

Hi Sudhir,

I am totally in agreement to your reasoning till when you said that the entire conclusion depends upon to check whether the entity is Associate or not. However, what I disagree with you is again to the point that associate is not only a company in which you have 20% or more of share capital but also but also includes a company which is having influence over the latter’s decision making process under an agreement. 

Let me give you some reasons to this, practically even a < 5% stake has a Significant influence factor attached to it

• Haven’t you seen the definition in AS 18 where " Significant influence means participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies".
• In financial statements as per Ind-AS we also have to give details of stakeholders who have more than 5% stake, why do you think it is added there. Take the example of Xiaomi the popular Chinese mobile manufacturer who had taken a less than 5% stake in Kingsoft, The maker of Antutu Benchmark in 2015. News reports suggest that Xiaomi due to its SIGNIFICANT INFLUENCE OVER Antutu had manipulated the benchmark scores to popularise its smartphone sales.

 

Dear Karanbatra,

AS 18 says only about disclose of Related Party Transactions. To qualify as an Independent Director you need comply 149(6) of companies act 2013. Accounting Standards cannot override the law of companies act 2013.

For your reference please section 129(5) of companies act 2013 states about deviations from AS :

If the FS of a company do not comply with the AS then the company shall disclose in its FS the following namely:
a) the deviation from the accounting standards
b) the reasons for such deviations
c) the financial effects of any arising out of such reason.

Thank you

Again Sudhir you are deviating what I want you to understand, Have I in any of my answers said that definition as per Accounting standards shall be only considered, Have I said that ASs shall override what is meant as per companies’ act, Have I only mentioned a reference to only ASs to support my answer. The answer to all such questions is no.

What I was trying to make you understand is the substance behind these definitions and not just the literal interpretation. The lawmaker or the person who has framed these standards or IASB on whose lines all our Institute works all in substance over form want to convey a much wider meaning of persons covered due to SI and not just a % stake can define it.

Still If you think otherwise that’s your wish. And Yes I know ASs can be deviated.