Corporate Governance Requirements (Regulation 24)

A listed company is governed by a web of board, audit-committee and disclosure obligations — but a determined promoter can still warehouse risky bets, related-party leakage and value-destroying asset sales one layer down, inside an unlisted subsidiary that no public shareholder ever sees. Regulation 24 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 closes that gap. It pushes the listed entity's governance discipline down into its material subsidiaries: an independent director must sit on the subsidiary board, the audit committee must review the subsidiary's accounts and investments, the subsidiary's board minutes must travel up to the listed parent, and large disposals of subsidiary assets or shareholding require a special resolution of the listed company's own shareholders. This chapter unpacks every sub-regulation of Regulation 24, the linked secretarial-audit obligation in Regulation 24A, the materiality thresholds, and the governance jurisprudence that animates them.

Why Regulation 24 exists: the subsidiary blind spot

The structural problem Regulation 24 addresses is simple. A listed entity's accountability architecture — the board, the audit committee, the disclosure machinery in Chapter IV — attaches to the listed company itself. But conglomerates do not operate as single legal persons; they operate through pyramids of subsidiaries, joint ventures and step-down entities, many of them unlisted and therefore invisible to the public shareholder. If governance stopped at the listed entity's own walls, a promoter could route fund diversion, undisclosed related-party dealings, speculative investments and the quiet sale of the group's crown-jewel assets through an unlisted subsidiary, entirely outside the gaze of independent directors and minority investors.

Regulation 24, titled "Corporate governance requirements with respect to subsidiary of listed entity", is SEBI's answer. It extends the listed entity's governance reach downward by four distinct mechanisms: board representation (an independent director on the material subsidiary's board), audit oversight (the listed entity's audit committee reviewing the subsidiary's financials and investments), information flow (subsidiary board minutes and significant transactions surfacing at the listed parent's board), and shareholder control over major value shifts (special resolutions for large disposals of subsidiary shareholding or assets). The provision should be read alongside the common obligations in Chapter III and the equity-specific obligations in Chapter IV, because Regulation 24 sits within the corporate-governance code (Regulations 16 to 27) that applies to the equity-listed entity.

The materiality puzzle: 10% versus 20%

The single most examinable point in this chapter is that Regulation 24 uses two different materiality thresholds, and confusing them is the classic trap. The general definition of "material subsidiary" lives in Regulation 16(1)(c): 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. This 10% definition was tightened down from the earlier 20% on the Kotak Committee's recommendation, and it governs most of Regulation 24's machinery — audit-committee review, the placing of minutes, the disclosure of significant transactions, and the special resolutions for share and asset disposals.

The exception is the independent-director obligation in the explanation to Regulation 24(1). For the limited purpose of deciding on whose subsidiary board an independent director must sit, "material subsidiary" carries a higher 20% threshold — a subsidiary whose income or net worth exceeds twenty percent of the consolidated income or net worth of the listed entity and its subsidiaries in the immediately preceding accounting year. SEBI deliberately kept the board-seat trigger higher than the general 10% materiality definition so that the obligation to place a (scarce) independent director attaches only to genuinely large subsidiaries, while the cheaper oversight tools (audit-committee review, minutes, disclosures) reach the wider 10% pool. Aspirants should commit this asymmetry to memory: 16(1)(c) materiality is 10%; the 24(1) board-seat materiality is 20%. The materiality concept itself, and the related disclosure philosophy, connects back to the principles governing disclosures.

Regulation 24(1): independent director on the subsidiary board

Regulation 24(1) provides that 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, whether incorporated in India or not. Three elements deserve emphasis. First, the subsidiary must be unlisted — a listed subsidiary already has its own governance code, so the cross-pollination is unnecessary. Second, the subsidiary must be material at the 20% threshold discussed above. Third, and importantly, the obligation extends to subsidiaries "whether incorporated in India or not" — covering offshore material subsidiaries as well.

This extra-territorial reach is itself a product of the Kotak Committee on Corporate Governance, constituted by SEBI in June 2017 under Mr. Uday Kotak, which submitted its report with some eighty recommendations in October 2017. Before the Kotak amendments, the independent-director requirement was confined to Indian subsidiaries; the Committee recommended extending it to offshore material subsidiaries, reasoning that group value and group risk increasingly sat in overseas operating companies that domestic independent directors never saw. SEBI accepted the recommendation, and the present text reflects it. The rationale is the same logic the Supreme Court endorsed in Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd., (2021) 9 SCC 449 — that the architecture of the board, and not the personal preferences of a promoter, is where corporate stewardship must reside. The composition and independence of the directors who carry this obligation is governed by board of directors composition requirements in Regulation 17.

Regulation 24(2): audit-committee review of subsidiary financials

Regulation 24(2) directs that the audit committee of the listed entity shall also review the financial statements, in particular the investments made by the unlisted subsidiary. This is the analytical heart of the provision. Fund diversion and value destruction in group structures almost always show up first as investments — inter-corporate loans, investments in promoter-affiliated entities, advances dressed up as business deposits. By statutorily directing the listed entity's audit committee to interrogate the investments of the unlisted subsidiary, Regulation 24(2) converts a blind spot into a standing agenda item.

Note the drafting precision: Regulation 24(2) speaks of an "unlisted subsidiary" without confining itself to a material one in the same breath as the rest of the clause, so the audit committee's review function is read expansively against the 10% materiality baseline in Regulation 16(1)(c) rather than the 20% board-seat threshold. The function dovetails with the audit committee's mandatory terms of reference under Part C of Schedule II read with Regulation 18, which separately require scrutiny of inter-corporate loans and investments and of the utilisation of funds. For the constitution and powers of that committee, see the dedicated chapter on the audit committee.

Regulation 24(3): subsidiary board minutes travel up

Regulation 24(3) requires that 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. This is the information-flow plumbing of the regulation. Board minutes are the single richest contemporaneous record of what a company's directors actually decided and why; by mandating that the unlisted subsidiary's minutes be tabled before the listed parent's board, Regulation 24(3) ensures that the parent's directors — including its independent directors — cannot plead ignorance of decisions taken one layer down.

The obligation is procedural but consequential. It means the listed entity's board cannot treat the subsidiary as an opaque box whose results merely consolidate into the group accounts at year-end; instead, the subsidiary's decision-making must be visible in close to real time, meeting by meeting. Combined with Regulation 24(2)'s investment review and Regulation 24(4)'s significant-transaction disclosure, the three sub-regulations create a layered surveillance regime: minutes show what was decided, the investment review shows where the money went, and the significant-transaction statement flags the large items individually.

Regulation 24(4): the significant-transaction statement

Regulation 24(4) provides that 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. The explanation defines a "significant transaction or arrangement" as 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 subsidiary for the immediately preceding financial year.

This sub-regulation is the granular complement to Regulation 24(3). Where minutes give the parent board a narrative of subsidiary decisions, the Regulation 24(4) statement isolates the financially significant items by a hard quantitative test — the 10% of revenues, expenses, assets or liabilities trigger. The four-limb test is deliberately wide so that a transaction that is small relative to revenue but enormous relative to, say, total liabilities still surfaces. The provision operates as an early-warning mechanism: a single large related-party advance, an outsized capital commitment, or a contingent guarantee that crosses any one of the four thresholds must be reported up, allowing the parent board and its audit committee to intervene before the item matures into a loss.

Regulation 24(5): special resolution for disposing subsidiary shareholding

Regulation 24(5) is one of the two shareholder-protection levers in the provision. It provides that a listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding (whether direct or indirect) to less than or equal to fifty percent, or cease the exercise of control over the subsidiary, except with the passing of a special resolution in its general meeting. The carve-out is for cases where such divestment is made under a scheme of arrangement duly approved by a court or tribunal, or under a resolution plan duly approved under Section 31 of the Insolvency and Bankruptcy Code, 2016, and disclosed to the recognised stock exchanges within one day of the resolution plan being approved.

The logic is that the loss of a material subsidiary — by selling down below the 50% control line or by relinquishing control altogether — is effectively a sale of a significant part of the public shareholders' enterprise, and so it must clear the high bar of a special resolution (a three-fourths majority of votes cast), not merely a board decision. The scheme-of-arrangement and IBC carve-outs exist because those routes already carry their own judicial or tribunal-supervised scrutiny and creditor/shareholder protections, so layering a separate special resolution would be redundant. The provision should be read together with the related-party and material-transaction safeguards in specific listing obligations for equity.

Regulation 24(6): special resolution for selling subsidiary assets

Regulation 24(6) closes the obvious workaround to Regulation 24(5). A promoter who could not sell the subsidiary's shares without a special resolution might instead strip the subsidiary's assets. Regulation 24(6) therefore provides that selling, disposing of or 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 the prior approval of shareholders by way of a special resolution.

The same two carve-outs apply: the special resolution is not required where the sale, disposal or lease is made under a scheme of arrangement duly approved by a court or tribunal, or under a resolution plan duly approved under Section 31 of the Insolvency Code and disclosed to the stock exchanges within one day. A further, narrower exemption is that the sub-regulation does not apply where the sale, disposal or lease of assets is between two wholly-owned subsidiaries of the listed entity — because such an intra-group transfer does not move value outside the public shareholders' ring-fence. Note the asymmetry of triggers across the provision: the board-seat materiality is 20% (Reg 24(1)), audit review and significant-transaction disclosure key off 10%, the share-disposal control line is 50% (Reg 24(5)), and the asset-disposal trigger is 20% aggregate in a financial year (Reg 24(6)). Keeping these four numbers straight is essential exam discipline.

Regulation 24A: secretarial audit and secretarial compliance report

Regulation 24A, inserted on the Kotak Committee's recommendation, is the natural companion to Regulation 24 and is frequently examined alongside it. It provides that every listed entity and its material unlisted subsidiaries incorporated in India shall undertake a secretarial audit and shall annex a secretarial audit report, given by a company secretary in practice, to the annual report. Following the SEBI (LODR) (Third Amendment) Regulations, 2024, the audit must be conducted by a peer-reviewed "Secretarial Auditor", with defined tenure limits — broadly, an individual may be appointed for one term of five consecutive years and a firm for two terms of five consecutive years — mirroring the auditor-independence architecture used for statutory financial auditors.

Distinct from the secretarial audit, Regulation 24A also requires the listed entity to submit a secretarial compliance report to the stock exchanges within sixty days from the end of each financial year. The two are not the same: the secretarial audit covers compliance with the full universe of laws, rules and regulations applicable to the listed entity and its material unlisted subsidiaries, whereas the secretarial compliance report is narrower, focusing specifically on compliance with the SEBI Act and the regulations, circulars and guidelines issued under it. Together they convert Regulation 24's substantive subsidiary-governance norms into an annually verified, professionally certified compliance record.

Board primacy and the limits of intervention: TCS v. Cyrus Investments

The leading governance authority that frames the spirit of Regulation 24 is Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd., (2021) 9 SCC 449, decided on 26 March 2021 by a three-judge Bench of the Supreme Court comprising Chief Justice S. A. Bobde and Justices A. S. Bopanna and V. Ramasubramanian. The dispute arose from the removal of Mr. Cyrus Mistry as Executive Chairman of Tata Sons and the consequent oppression-and-mismanagement petition under Sections 241 and 242 of the Companies Act, 2013. The National Company Law Appellate Tribunal had reinstated Mr. Mistry; the Supreme Court set that order aside.

The Court's reasoning matters for subsidiary governance. It held that a board's decision to remove its chairman, grounded in a legitimate loss of confidence, falls squarely within the domain of the board of directors, and that a tribunal exercising oppression-and-mismanagement jurisdiction cannot substitute its own commercial judgment for the board's absent a clear finding of oppression. The NCLAT had also overreached in directing reinstatement across Tata group companies that were not even parties before it. The decision underscores the premise on which Regulation 24 rests: governance discipline is achieved by getting the board architecture right — independent directors in the right seats, information flowing to the board, decisions taken in the board's domain — rather than by post-hoc judicial micro-management. Regulation 24's insistence on an independent director on the material subsidiary board, and on subsidiary minutes reaching the parent board, is precisely the kind of structural safeguard that makes board primacy trustworthy.

Interaction with the Companies Act, 2013

Regulation 24 does not operate in a vacuum; it overlays the subsidiary-governance scheme of the Companies Act, 2013. Section 2(87) of the Companies Act defines "subsidiary company" by reference to control of the composition of the board or control of more than one-half of the total voting power, and that definition feeds SEBI's materiality calculations. Section 129(3) and the consolidation rules require the listed parent to prepare consolidated financial statements that fold in subsidiary results — the very accounts Regulation 24(2) directs the audit committee to scrutinise at the investment level.

There is also a deliberate parallel between Regulation 24(5)–(6) and Section 180(1)(a) of the Companies Act, which requires a special resolution before a company sells, leases or otherwise disposes of the whole or substantially the whole of an undertaking. SEBI's provision is more targeted — it fixes hard percentage triggers (50% shareholding, 20% of subsidiary assets) rather than the open-textured "substantially the whole" test — and it reaches down to the subsidiary level, capturing value shifts that Section 180, focused on the company itself, might miss. The two regimes are cumulative: a transaction may need clearance under both, and a compliance officer must satisfy each independently. The over-arching board duties under Section 166 (duties of directors) supply the fiduciary backdrop against which Regulation 24's structural requirements are enforced.

Enforcement and consequences of non-compliance

Breach of Regulation 24 is enforced through the standard LODR machinery. Regulation 98 makes the consequences of non-compliance — including the liability to fines, suspension of trading, freezing of promoter holding and other actions — applicable to any contravention, and the stock exchanges operate a Standard Operating Procedure for levying fines and, in persistent cases, for moving suspension of the scrip. SEBI itself retains its plenary powers under Sections 11 and 11B of the SEBI Act, 1992 to issue directions and impose monetary penalties under Section 15HB for contraventions for which no specific penalty is otherwise provided.

For Regulation 24 specifically, the high-consequence failures are: failing to place an independent director on a material subsidiary's board (Reg 24(1)); failing to route subsidiary minutes and significant-transaction statements to the parent board (Regs 24(3)–(4)); and — most seriously — disposing of material subsidiary shareholding below the 50% control line or selling more than 20% of subsidiary assets without the requisite special resolution (Regs 24(5)–(6)). The last category is grave because it directly transfers value away from public shareholders without their sanction, and such transactions can be unwound or visited with disgorgement and penalty. The annual secretarial audit and secretarial compliance report under Regulation 24A function as the verification layer that exposes these breaches to the stock exchanges and to investors.

Practical compliance map for the listed entity

Operationally, a compliant listed entity runs Regulation 24 through a yearly cycle. First, at the start of each financial year it re-determines its material subsidiaries by applying both the 10% (Reg 16(1)(c)) and 20% (Reg 24(1) explanation) thresholds against the immediately preceding year's consolidated income and net worth, and it maintains a board-approved policy for determining material subsidiaries on its website as required by Regulation 16. Second, it ensures at least one of its independent directors is appointed to the board of each unlisted material subsidiary crossing the 20% line, including offshore ones.

Third, it builds the information pipes: subsidiary board minutes are placed at the parent board's meetings (Reg 24(3)), a periodic significant-transaction statement (10% four-limb test) is tabled (Reg 24(4)), and the audit committee reviews subsidiary financials and investments (Reg 24(2)). Fourth, before any disposal of subsidiary shares crossing the 50% control line, or any disposal/lease of more than 20% of subsidiary assets in a year, it obtains a special resolution — unless the scheme-of-arrangement, IBC resolution-plan, or wholly-owned-subsidiary carve-outs apply. Finally, it commissions the secretarial audit of itself and its Indian material unlisted subsidiaries and files the secretarial compliance report within sixty days of year-end (Reg 24A). This cycle ties back to the framework set out in the SEBI LODR hub and the foundational concepts covered in introduction, scope and definitions.