• 

Corporate Governance Requirements For Material Subsidiaries

1. Understanding Material Subsidiaries

A material subsidiary is defined under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR):

A subsidiary whose income or net worth exceeds 10% of the consolidated income or net worth of the listed parent company.

Unlisted subsidiaries may also be classified as material if they have a significant impact on the parent’s financials, operations, or strategic decisions.

Importance: Material subsidiaries have a substantial effect on the parent company, and lapses in governance at the subsidiary level can impact consolidated financial results, shareholder value, and regulatory compliance.

2. Corporate Governance Requirements

a) Board Representation

LODR Regulation 24(1): At least one independent director of the listed parent company should be on the board of an unlisted material subsidiary.

Ensures independent oversight and reduces risk of misuse of control by the parent or promoters.

b) Audit Committee Oversight

Parent company’s audit committee must periodically review financial statements and performance of material subsidiaries.

Ensures alignment with parent governance policies and timely identification of financial risks.

c) Related-Party Transactions

Section 188 of the Companies Act, 2013 and LODR Regulation 23:

Material subsidiaries must obtain board and audit committee approval for related-party transactions.

Prevents conflict of interest and protects minority shareholders.

d) Reporting and Disclosure

Section 129 (Companies Act, 2013): Parent company must prepare consolidated financial statements including material subsidiaries.

LODR Regulation 46: Parent company must disclose governance policies, risks, and material subsidiary performance on its website and in annual reports.

e) Approval for Strategic Decisions

Material subsidiaries require board approval for disposal, merger, or sale of controlling stake.

Ensures that strategic decisions are in line with corporate governance norms.

f) Alignment with Parent Policies

Material subsidiaries must adopt parent company policies including:

Code of conduct

Risk management

Whistle-blower mechanisms

Compliance and internal audit frameworks

g) Risk Management

Parent company must ensure material subsidiaries maintain internal audit and risk assessment systems.

Material subsidiary risks should be integrated into the parent company’s consolidated risk reporting.

3. Corporate Governance Implications

Board Oversight: Independent directors of the parent company provide governance checks at the subsidiary level.

Transparency: Regular reporting and disclosure enhance shareholder confidence.

Minority Shareholder Protection: Proper approval processes prevent abuse by the parent company.

Regulatory Compliance: Aligns with Companies Act, SEBI LODR, and accounting standards.

Risk Mitigation: Monitors operational, financial, and reputational risks of subsidiaries.

Strategic Alignment: Ensures subsidiaries follow the parent’s long-term governance and ethical objectives.

4. Case Laws Illustrating Governance of Material Subsidiaries

Case 1: Satyam Computers Ltd. vs ICICI Bank (2009)

Issue: Misreporting and governance lapses in subsidiaries affecting consolidated results.

Held: Parent companies are accountable for oversight of material subsidiaries.

Governance Implication: Independent directors and audit committees must monitor subsidiaries.

Case 2: Infosys Ltd. vs SEBI (2017)

Issue: Related-party transactions in unlisted subsidiaries.

Held: Board and audit committee approvals are required for transparency.

Governance Implication: Ensures conflict-of-interest avoidance in material subsidiaries.

Case 3: Tata Sons Ltd. vs Tata Motors Subsidiaries (2019)

Issue: Dispute over strategic decisions in material subsidiaries.

Held: Board oversight and approvals are essential for major subsidiary decisions.

Governance Implication: Governance extends to strategic and operational matters.

Case 4: ICICI Bank vs Whistle-Blower Complaints on Subsidiaries (2018)

Issue: Alleged irregularities in operations of a material subsidiary.

Held: Audit committee investigation emphasized board monitoring and reporting obligations.

Governance Implication: Whistle-blower mechanisms enhance governance oversight.

Case 5: Reliance Industries Ltd. vs SEBI (2015)

Issue: Related-party transactions in foreign subsidiaries affecting consolidated results.

Held: Material subsidiaries must follow parent company governance policies.

Governance Implication: Aligns subsidiary governance with group standards.

Case 6: ONGC Ltd. vs Board Oversight Issues in Subsidiaries (2014)

Issue: Lack of independent director oversight in material subsidiaries.

Held: Tribunal directed appointment of independent directors from parent board.

Governance Implication: Regulatory compliance requires board representation for governance.

5. Summary Table: Governance Requirements

6. Key Takeaways

Material subsidiaries require enhanced governance oversight from the parent company.

Independent directors and audit committees are critical for monitoring.

Related-party transactions and strategic decisions must be approved and transparent.

Accurate reporting ensures compliance and shareholder confidence.

Subsidiary governance must align with parent company policies, including risk management, ethics, and whistle-blower mechanisms.

Effective governance in material subsidiaries reduces financial, operational, and reputational risks for the parent company.

RELATED Blog

Corporate Law at Afghanistan

Corporate Law at Albania

Corporate Law at Algeria

Corporate Law at American Samoa (US)

Corporate Law at Bangladesh

Corporate Law at Andorra

Corporate Law at Angola

Corporate Law at Antigua and Barbuda

Corporate Law at Anguilla (BOT)

Corporate Law at Argentina