Material Subsidiary/Reg 16(1)(c) & Reg 24A/LODR

Following are the provisions applicable to a Material Subsidiary of Listed entity

1. Meaning of a Material Subsidiary

In Regulation 16 (1)(c) of LODR, a Material Subsidiary is defined as

• A Subsidiary whose income exceeds 10 percent of consolidated income of its listed holding entity in the immediately preceding accounting year or
• A Subsidiary whose net worth exceeds 10 percent of a consolidated net worth of its listed holding entity in the immediately preceding accounting year.

In the absence of a proper definition of Income in the LODR, a sum of operating profit as well as non-operating income may be taken while ascertaining the status of the Subsidiary. However, the definition of Net Worth is given in Regulation 2(1)(s) which is the same as the definition given in Section 2(57) of the Companies Act, 2013.

2. Policy determining material subsidiary

It is mandatory for Listed Entities to formulate a policy for determining a Material Subsidiary.

3. Regulation 24 compliance for material subsidiary

Regulation 24 of the LODR prescribes the following compliance applicable to the Material Subsidiary of a Listed Entity:

i. A Material Subsidiary shall appoint at least one Director who is an Independent Director on the Board its Holding Listed Entity.

For the purpose of compliance relating to an appointment of Director, a Material Subsidiary means

• A Subsidiary whose income exceeds 10 percent of consolidated income of its listed holding entity in the immediately preceding accounting year or
• A Subsidiary whose net worth exceeds 10 percent of a consolidated net worth of its listed holding entity in the immediately preceding accounting year.

ii. The listed entity shall not dispose of its holding in the Material Subsidiary resulting in the reduction of its holding to less than or equal to 50% or cease the exercise of control over the subsidiary. Further, the listed entity can do so by a Special Resolution in its General Meeting.

• The Material Subsidiary shall not sell, dispose or lease out its assets amounting to more than 20 percent of its total assets on an aggregate basis during any financial year. Further, a Material Subsidiary can do so by a Special Resolution passed in the General Meeting.

However, the above condition of passing Special Resolution in the General shall apply to the transaction taken place pursuant to a Resolution plan duly approved under section 31 of the IBC, and disclosure of such event shall be given to the Stock Exchange within 1 day of approval of the Resolution plan.

4. Secretarial Audit of a Material Subsidiary

Regulation 24A of the LODR provides for a Secretarial Audit of the Material Subsidiary of a listed entity. It may be noted that even if the material subsidiary does not qualify for a Secretarial Audit under the Companies Act, 2013 it has to mandatorily undertake Secretarial Audit as stipulated in Regulation 24A of the LODR.

5. Secretarial Audit Report in the Annual Report of Listed Entity

The Secretarial Audit Report of a Material Subsidiary shall be disclosed in the Annual Report of the Listed holding entity.

6. Policy to be uploaded on the website of the listed entity

The policy formulated by the listed entity for determining Material Subsidiary shall be disclosed on the Website of the listed entity.