Material subsidiary

A listed company's shareholders are exposed not only to what the company does itself, but to what its subsidiaries do. A large subsidiary can move money, sell assets or take on risk that shows up in the group accounts only after the fact.

SEBI's listing regulations handle this by singling out the subsidiaries that are big enough to matter — material subsidiaries — and attaching governance requirements to them.

The test is arithmetic: compare the subsidiary's income or net worth with the consolidated figure of the listed entity and all its subsidiaries for the previous year. Cross 10 percent on either measure, and the subsidiary is material.

Definition. The SEBI (LODR) Regulations define a material subsidiary as a subsidiary whose income or net worth exceeds 10 percent of the consolidated income or net worth respectively of the listed entity and its subsidiaries in the immediately preceding accounting year.

What follows (Regulation 24 and related provisions).

Exceptions to the special-resolution requirements: divestment under a scheme of arrangement approved by a Court or Tribunal, or under a resolution plan approved under the Insolvency Code, with the event disclosed to the stock exchanges (for the divestment case, within 1 day of the resolution plan being approved).

The old listing agreement already required the company to oversee the operations of its unlisted subsidiaries; the LODR Regulations make it specific.

Illustrative figures. A listed group's consolidated figures for the preceding year: income Rs 8,400 crore, net worth Rs 3,000 crore.

One measure is enough; B is material despite its income being under 10 percent.

Consequences for A:

• One of the listed company's independent directors must sit on A's board.
• The listed company holds 74 percent of A and wants to sell 25 percent to a strategic buyer:

74% − 25% = 49%  → at or below 50%  → special resolution in general meeting required

• A proposes to sell a factory worth 22 percent of its total assets this year — above the 20 percent line — so that too needs a special resolution of the listed company's shareholders.

Neither is needed if the sale happens under a tribunal-approved scheme of arrangement or an insolvency resolution plan, disclosed to the exchanges.

Chapter 14.4 (SEBI (LODR) Regulations, 2015) defines a material subsidiary (in the footnote to the Kotak Committee reforms) and sets out the Regulation 24 requirements in the table of common obligations; Chapter 14.3 records the listing agreement's oversight of unlisted subsidiaries. Expect the 10 percent definition and the 50 percent / 20 percent special-resolution thresholds.

• Income OR net worth — either crossing 10 percent is enough.
• "Exceeds" 10 percent — exactly 10 percent is not material.
• Measured against consolidated figures of the preceding accounting year, not the current year and not the listed entity's standalone figures.
• Reducing holding to 50 percent or less needs a special resolution — 50 percent exactly is caught.
• The asset-sale threshold is more than 20 percent of the subsidiary's assets in a financial year, on an aggregate basis — several smaller sales add up.
• The independent-director rule applies to unlisted material subsidiaries, including those incorporated outside India.