CORPORATE GOVERNANCE REQUIREMENTS WITH RESPECT TO SUBSIDIARY OF LISTED ENTITY

In this post we will discuss, corporate governance requirements with respect to subsidiary of listed entity under the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations, 2015 for the listed entities which got listed its specified securities on Stock Exchanges.

At least one independent director on the board of directors of the listed entity shall be a director on the board of directors of an unlisted material subsidiary, incorporated in India. [Regulation 24(1)]

As discussed earlier here, “Material Subsidiary” shall mean a subsidiary, whose income or net worth exceeds twenty percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year. [Regulation 16(1)(c)]

This is not clear whether such director shall be independent director in the board of unlisted material subsidiary or nominee director.

The audit committee of the listed entity shall also review the financial statements, in particular, the investments made by the unlisted subsidiary. [Regulation 24(2)]

This is duty to review the financial statements of unlisted subsidiary, not beyond that. This sub – regulation does not talk about material subsidiary and include all subsidiaries.

The minutes of the meetings of the board of directors of the unlisted subsidiary shall be placed at the meeting of the board of directors of the listed entity. [Regulation 24(3)]

Though this is regulation made by SEBI, without any express contracts between holding and subsidiary, subsidiary company is not bound to place its minutes of meetings to the board of listed holding company.

The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary. [Regulation 24(4)]

How is an unlisted subsidiary bound to follow direction of SEBI? This sub – regulation is excess of jurisdiction. This requirement may be fulfilled by executing a contract between holding and subsidiary. Directly, unlisted subsidiary, being an independent legal person not bound by this sub – regulation.

Though, this sub – regulation talk about unlisted subsidiary, explanation make it clear that this is about unlisted material subsidiary.

For the purpose of this regulation, the term “significant transaction or arrangement” shall mean any individual transaction or arrangement that exceeds or is likely to exceed ten percent of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the unlisted material subsidiary for the immediately preceding accounting year. [Explanation to Regulation 24(4)]

A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than fifty percent or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal. [Regulation 24(5)]

Selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal. [Regulation 24(6)]

This is not clear under regulation that who shall pass special resolution? Logically, this is requirement for material subsidiary for which these regulations are not directly apply.

Where a listed entity has a listed subsidiary, which is itself a holding company, the provisions of this regulation shall apply to the listed subsidiary in so far as its subsidiaries are concerned. [Regulation 24(7)]

This sub – regulation gives effect that Listed entity (LE) shall comply provisions of regulation 24 in relation to a material subsidiary (MS) of listed subsidiary {LS) of listed entities (LE) also. Compliance of these regulations by listed subsidiary in its individual capacity does not absolve listed entity from compliance of these regulations as listed entity.

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