COMPLIANCES APPLICABLE TO A MATERIAL SUBSIDIARY OF A LISTED COMPANY

1. Definition of Material Subsidiary (Regulation 16(1)(c) of SEBI LODR)

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.

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2. Key Compliances for a Material Subsidiary

2.1. Corporate Governance Requirements (Regulation 24 of SEBI LODR)

(a) Composition of the Board in a Material Subsidiary

• At least one Independent Director of the listed entity must be appointed as 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/dispose of shares or assets of a material subsidiary if:

  • Such a transaction reduces the listed entity’s shareholding to less than 50%.

  • The subsidiary loses its status as a subsidiary.

• Exception: This restriction is not applicable if the sale/disposal is done under a scheme of arrangement approved by a court/tribunal.

(c) Restriction on Disposal of Assets

• The material subsidiary cannot dispose of its significant assets without prior approval of the holding company’s shareholders via a special resolution.

(d) Secretarial Audit Requirement

• Every material unlisted subsidiary incorporated in India must undertake secretarial audit and include the report in its annual report.

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2.2. Website Disclosure (Regulation 46 of SEBI LODR)

• The policy for determining ‘Material Subsidiary’ must be disclosed on the website of the listed entity.

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2.3. Governance Obligations (Regulation 17 of SEBI LODR)

• The listed company must formulate a policy for determining Material Subsidiaries, which must be approved by its Board.

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2.4. Companies Act, 2013 - Key Provisions

(a) Financial Statements (Section 129)

• The consolidated financial statements of the listed company must include the financials of all subsidiaries, including material subsidiaries.

(b) Audit Committee (Section 177)

• 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)

• The listed company must ensure compliance with limits and disclosures for loans, guarantees, or investmentsmade to/from its material subsidiary.

(d) Board’s Report (Section 134)

• The Board’s Report of the listed entity must include a statement about the performance of material subsidiaries.

(e) Significant Transactions

• If a material subsidiary enters into a significant transaction (exceeding 10% of consolidated income/net worth), it must be reviewed by the Audit Committee.

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2.5. Related Party Transactions (Regulation 23 of SEBI LODR)

• All Related Party Transactions (RPTs) involving the material subsidiary must comply with Regulation 23.

• Material RPTs require shareholder approval by resolution if:

  • The transaction exceeds Rs 1,000 crore or 10% of annual consolidated turnover, whichever is lower.

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2.6. Indian Accounting Standards (Ind AS 110, 112, 24)

• The listed entity must ensure compliance with Ind AS requirements, including:

  • Ind AS 110 (Consolidation of Financial Statements)

  • Ind AS 112 (Disclosure of Interests in Other Entities)

  • Ind AS 24 (Related Party Disclosures)

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2.7. Dividend Distribution Compliance (Section 123 of Companies Act, 2013)

• The material subsidiary must ensure compliance with Section 123 and applicable rules regarding dividend declaration and distribution.

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2.8. Foreign Exchange Management Act (FEMA) Compliance (If Applicable)

• If the material subsidiary is incorporated outside India or engages in foreign currency transactions, it must comply with FEMA regulations related to:

  • Overseas Direct Investment (ODI)

  • Inbound and outbound remittances

  • Foreign exchange transactions

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3. Conclusion

Compliance with the above requirements ensures transparency, accountability, and good governance in material subsidiaries of a listed company. Companies must regularly review policies, financial transactions, and governance structures to ensure adherence to SEBI, Companies Act, and other applicable regulations.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.

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