Summary: A material subsidiary of a listed company is one whose turnover or net worth exceeds 10% of the consolidated turnover or net worth of the parent company. Key compliance obligations include having at least one independent director from the listed entity on the material subsidiary’s board (Regulation 24). The sale or disposal of assets that could affect the subsidiary’s status requires a special resolution, as does the disposal of significant assets. Material subsidiaries must undergo secretarial audits and disclose policies related to their status on the listed company’s website (Regulation 46). The listed company’s board must approve a policy to determine material subsidiaries (Regulation 17). In line with the Companies Act, 2013, consolidated financial statements must include all subsidiaries’ financials, and the Audit Committee must review significant transactions and related party dealings. Material subsidiaries must also comply with limits for loans, guarantees, and investments (Section 186). Additionally, related party transactions exceeding thresholds need shareholder approval (Regulation 23). Compliance with Indian Accounting Standards (Ind AS 110, 112, and 24), dividend distribution (Section 123), and the Foreign Exchange Management Act (FEMA) are required for material subsidiaries with international ties.
Definition of Material Subsidiary (Regulation 16(1) (c)
A subsidiary is considered material if:
- Its Turnover or net worth exceeds 10% of the consolidated Turnover or net worth of the listed entity and its subsidiaries during the immediately preceding accounting year.
KEY COMPLIANCES:
1. Regulation 24 (SEBI LODR): Corporate Governance Requirements
a. Composition of Board in Material Subsidiary
i. At least one Independent Director of the listed entity must be a director on the board of the unlisted material subsidiary.
b. Approval of Special Resolution for Sale/Disposal of Assets
- The listed company cannot sell or dispose of shares or assets of a material subsidiary:
- If such a transaction reduces the listed entity’s shareholding to less than 50%, or
- Results in the subsidiary losing its status as a subsidiary,
Without a special resolution in its general meeting.
c. Restriction on Disposal of Assets
i. The material subsidiary cannot dispose of its significant assets without prior approval of its holding company’s shareholders by way of a special resolution.
d. Secretarial Audit
i. Every material unlisted subsidiary incorporated in India is required to undertake secretarial audit and include the report in its annual report.
2. Regulation 46 (Website Disclosure)
- Details of the policy for determining ‘Material Subsidiary’ must be disclosed on the website of the listed entity.
3. Regulation 17: Governance Obligations
> The listed company must formulate a policy for determining Material Subsidiaries, approved by its Board.
4. Companies Act, 2013 (Relevant Provisions)
a. Financial Statements (Section 129)
i. Consolidated financial statements of the listed company must include financials of all subsidiaries (including material subsidiaries).
b. Audit Committee (Section 177)
i. The Audit Committee of the listed company must review the financial statements, audit reports, and related party transactions of the material subsidiary.
c. Restriction on Loans/Guarantees/Investments (Section 186)
i. The listed company must ensure compliance with limits and disclosures for loans, guarantees, or investments to/from its material subsidiary.
d. Board’s Report (Section 134)
i. The listed entity’s Board Report must include a statement about the performance of material subsidiaries.
e. Significant Transactions
i. If the material subsidiary enters into significant transactions (exceeding 10% of consolidated income/net worth), it requires review by the Audit Committee.
5. Related Party Transactions
- All related party transactions (RPTs) involving the material subsidiary must comply with Regulation 23 of SEBI LODR:
- Material RPTs require shareholder approval by resolution (threshold: transactions exceeding Rs. 1,000 crore or 10% of annual consolidated turnover, whichever is lower).
6. Indian Accounting Standards (Ind AS 110, 112, 24)
- Disclosures and consolidation requirements under applicable Indian Accounting Standards must be adhered to for financial reporting.
7. Dividend Distribution
- Ensure compliance with Section 123 of the Companies Act, 2013, and rules applicable to the declaration of dividends by the material subsidiary.
8. Foreign Exchange Management Act (FEMA), if applicable
- If the material subsidiary is incorporated outside India or deals with foreign currency transactions, ensure compliance with FEMA regulations.
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