Can a section 8 company be treated as ‘Material Subsidiary’ under LODR regulations

“Explore the intricacies of categorizing a Section 8 company as a ‘Material Subsidiary’ under SEBI (LODR) Regulations, 2015. Uncover the criteria and considerations for this classification.”

Can a section 8 company be treated as ‘Material Subsidiary’ as per the Regulation 16 (1) (c) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Meaning of Material subsidiary: As per the provisions of the Regulation 16 (1) (c) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, “Material subsidiary” shall mean a subsidiary, whose income or net worth exceeds Ten percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

Meaning of Section 8 Company: Section 8 Company, as defined in the Act, 2013 are companies that are formed with an object of promoting commerce, art, science, sports, education, research, social welfare, charity, religion, and protection of environment or any other object of the kind.

Section 8 companies are under obligation to apply their profit, if any made during the year or other income, in promoting their objects only and are strictly prohibited from payment of any dividend to the members.

However, the threshold for satisfying the definition of ‘material subsidiary’ is contribution towards consolidated income or net worth of the holding company. If the financials of the Listed holding company will be consolidated with the financials of the Section 8 Company, it will not depict a correct picture of the wealth of the holding company. Because the holding company can never claim or ask any right over the profits of a Section 8 Company, as the profits of Listed Company shall be used for promoting their own objects only. Therefore, the financials of section 8 with that the financials of holding company shall not be done.

So, the income of a section 8 company cannot be consolidated with that of the listed company for the consideration of Material Subsidiary as per the provisions of Regulation 16 (1) (c) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, or can say that since the performance of a section 8 company has no role to play on the overall performance of the listed company.

So, a section 8 company cannot be considered and treated as a ‘material subsidiary’ of the Listed Entity.