Control, De Facto Power and Joint Arrangements in One Group
Prakash Ltd, a listed infrastructure group, holds the following interests at 31 March 20X5. (a) 8% of the units of Sunrise Capital Fund, a closed-end fund it set up as seed investor, and it acts as investment manager for a 1.5% of NAV fee plus a 20% performance fee above an 8% hurdle. The other 92% is held by about 200 unrelated investors, none holding more than 4%. The manager can be removed without cause by a simple majority of unitholders; Prakash has no obligation to fund losses and its maximum exposure is its 8% plus accrued fees. (b) 45% of Sunrise Developers Ltd (SDL). The remaining 55% is held by one private equity investor, Everest. Under a shareholders' agreement Prakash appoints four of seven directors, and its board majority controls budgets, project approvals, procurement and financing. Everest's consent is needed only to amend the constitution, for related-party transactions above ₹50 crore and for winding up. (c) 50% of a transmission joint venture, with a state utility holding the other 50%; all decisions on relevant activities need unanimous consent of both, and the arrangement gives the parties rights to the net assets of the entity.
1. Is Prakash required to consolidate Sunrise Capital Fund?
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Step 1 - relevant activities. The activities that significantly affect the fund's returns are investment selection, asset allocation and leverage decisions. Prakash makes those decisions as manager, so it appears to have power.
Step 2 - variable returns. Prakash has 8% of the units, a market-rate management fee and a 20% performance fee. The performance fee is a return that varies with the fund's performance.
Step 3 - agent or principal? This is the decisive test (Ind AS 110 paras B58–B72):
- Removal rights: unitholders holding a simple majority can remove Prakash without cause. Because the 92% is widely dispersed, a removal is practicable - this is a substantive right that limits Prakash's ability to direct the fund for its own benefit.
- Remuneration: the fee is at market rates and is commensurate with the services provided; it does not create exposure that is so large that Prakash is acting for its own account.
- Other interests: 8% seed capital is a small exposure relative to total returns, and Prakash has no obligation to fund losses and no guarantee.
- Decision-making authority: investment mandates and restrictions are set in the fund's constitution.
Conclusion. Prakash is acting as an agent and does not control the fund. It does not consolidate; it accounts for its 8% units at FVTPL under Ind AS 109, recognises fee income gross as services are rendered, and discloses the fund under Ind AS 112 as an unconsolidated structured entity with the nature of its interests and maximum exposure to loss.
2. Does Prakash control SDL despite holding only 45%? How should SDL be presented?
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Power. Relevant activities - budgets, project approvals, procurement and financing - are directed by the board. Prakash appoints four of seven directors, a majority that can pass ordinary board resolutions without Everest. Power need not come from a majority of voting equity; it can arise from contractual or board rights (Ind AS 110 para B15).
Are Everest's rights substantive or protective? Approving changes to the constitution, large related-party transactions and winding up are protective rights - they protect Everest's investment but do not give it the ability to direct the activities that generate returns. Everest's 55% equity gives it a majority at a general meeting, but general meetings do not decide the relevant activities under the shareholders' agreement; economics alone is not control.
Returns. Prakash is exposed to variable returns through its 45% share of dividends, capital appreciation and any management or supervisory fee.
Conclusion. Prakash controls SDL and consolidates it, even though it holds a minority of the equity. The 55% held by Everest is presented as non-controlling interest in the consolidated statement of financial position and in the profit or loss and OCI allocation. Intragroup balances and transactions are eliminated in full. Disclosure of the judgements and of the significant NCI is required by Ind AS 112.
3. How should the transmission arrangement be accounted for, and how would it appear in Prakash's separate financial statements?
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Joint control. No decision on a relevant activity can be taken without the unanimous consent of Prakash and the state utility; the arrangement is contractually structured so that both parties must agree. Joint control therefore exists.
Joint operation or joint venture? This turns on the parties' rights and obligations, not on the legal form alone. The arrangement is a separate legal entity in which the parties have rights to the net assets - they do not have direct rights to the transmission assets or direct obligations for the liabilities. It is therefore a joint venture under Ind AS 111, not a joint operation. A joint operation would arise only if the contractual terms gave the parties rights to the individual assets and obligations for the liabilities (for example, a jointly controlled, unincorporated line where the parties take shares of the capacity and costs).
Accounting. Equity method under Ind AS 28: recognise the investment at cost, adjust for Prakash's share of profit or loss, OCI and other comprehensive items, reduce for dividends received, and test the net investment for impairment as a single asset under Ind AS 36 (no separate goodwill impairment test). Profits on downstream transactions with the joint venture are recognised only to the extent of the other parties' interests.
Separate financial statements. Ind AS 27 requires the investment to be carried at cost or in accordance with Ind AS 109, with the chosen policy applied consistently by class; equity method is not permitted in separate financial statements. Cost includes directly attributable transaction costs, and the investment is tested for impairment whenever there is an indicator of the same.