Non-controlling interest (NCI) is a stake in an entity that constitutes less than 50% of the total shares that are controlled by voting rights. In other words, non-controlling investors cannot exercise control over an entity by way of votes, and therefor have very limited or no influence on the decision-making and management of that entity. Normally, non-controlling interest stakes range between 20% and 30%. In the books of an entity, non-controlling interest is projected as part of consolidated profit and loss that comes under ordinary operations after taxation. Under international accounting norms, the non-controlling interest falls under equity.
The major types of non-controlling interest include:
- Active non-controlling interest: that involves active participation by the holders in an entity’s management and decision making. In other words, it refers to a minority stake held by certain shareholders who actively play a role in directing an entity’s management and decision-making process. Active non-controlling shareholders may be assigned a seat on the entity’s board of directors (BOD) or may be involved, to a certain extent, in specific areas or aspects of its activities or operations.
- Passive non-controlling interest: that involves, or arises from, holding of a minority stake by certain shareholders who do not actively take part in an entity’s management and decision-making. Passive or inactive non-controlling shareholders do not have any special arrangement with the entity that may otherwise entail any active role such as a seat on the entity’s board of directors (BOD) or involves in specific areas or aspects of its activities or operations.
- Contingent non-controlling interest: that is contingent upon occurrence or fulfillment of certain criteria. In other words, it constitutes a minority stake that may become a controlling interest if certain pre-conditions are satisfied.
Non-controlling interest may also be categorized as direct and indirect non-controlling interest.
The direct type entails, in the case of acquisition, a proportionate allocation of all recorded equity of a subsidiary, measured as pre and post-acquisition amounts. Indirect non-controlling interest entails that non-controlling shareholders will only get profits corresponding to their respective share of pre and post-acquisition.
