A listed company is rarely a single entity; it is usually the apex of a pyramid of subsidiaries through which the real operating value flows. The danger this creates is structural: public shareholders invest in the listed parent, yet the assets, revenues and risks may be parked in unlisted entities one or more levels below, beyond the reach of the listing agreement's disclosure and governance discipline. The subsidiary-governance architecture of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 exists to close exactly this gap. Through a layered definition of materiality in Regulation 16(1)(c) and Regulation 24, board-level representation, audit-committee review and shareholder-sanctioned exits, the LODR pierces the corporate veil for governance purposes without disturbing the separate legal personality of the subsidiary. This chapter explains who counts as a subsidiary, when it becomes "material," and the precise obligations the framework fastens onto the listed parent.
What counts as a subsidiary
The LODR does not coin its own concept of a subsidiary. Regulation 2(1)(zm) borrows wholesale from company law, providing that "subsidiary" means a subsidiary as defined under sub-section (87) of section 2 of the Companies Act, 2013. Under that definition, a company is a subsidiary of another (the holding company) if the holding company either controls the composition of its board of directors, or exercises or controls more than one-half of its total voting power, whether on its own or together with one or more of its other subsidiaries.
This borrowing matters. It means the trigger for the entire LODR subsidiary code is control, not mere shareholding. A 51% equity stake is the paradigm case, but board-control arrangements and layered holdings can produce subsidiary status even where direct equity is lower. The first limb of section 2(87), control over the composition of the board, captures situations where one company can appoint or remove a majority of directors regardless of its voting share; the second limb, control of more than half the total voting power, captures the classic majority shareholding. The Explanation to section 2(87) further clarifies that a subsidiary of a subsidiary is itself a subsidiary of the ultimate holding company, so the LODR perimeter follows the chain all the way down a multi-tier group.
The Supreme Court's analysis of control and corporate structure in Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613, remains the leading exposition of why the separate legal personality of a subsidiary is respected for substantive purposes even within a tightly held group, and why "lifting the veil" is the exception rather than the rule. The Court there cautioned against treating a holding company and its subsidiary as a single economic entity merely because of common ownership, reaffirming the principle traceable to Salomon v. A. Salomon & Co. Ltd., [1897] AC 22, that incorporation creates a distinct juristic person. The LODR works with this grain: it does not dissolve the subsidiary's separate personality, but layers governance duties on the listed parent in respect of it, an approach that achieves transparency without the doctrinal violence of veil-piercing. The definitional chain is set out in greater detail in Introduction, Scope and Definitions.
Why "material subsidiary" is defined twice
The most examinable feature of this topic is that the LODR defines "material subsidiary" twice, with two different thresholds, for two different purposes. The first is in Regulation 16(1)(c). The second is in the Explanation to Regulation 24. Candidates routinely conflate the two, and that is a costly error.
Regulation 16(1)(c) defines a material subsidiary as 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% threshold drives the obligation to formulate a policy on material subsidiaries and governs disclosure-oriented consequences. Crucially, the threshold was reduced from 20% to 10% by the SEBI (LODR) (Amendment) Regulations, 2018, with effect from May 2018, tightening the net so that more subsidiaries fall within the disclosure perimeter.
The Explanation to Regulation 24, by contrast, retains a higher 20% threshold: for the purposes of Regulation 24, a material subsidiary is one 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. The logic of the split is calibrated intervention: a lower bar for transparency obligations, a higher bar before the more intrusive board-seat and shareholder-approval machinery of Regulation 24 is engaged.
Three drafting choices repay close attention. First, both definitions use the disjunctive "income or net worth," so a subsidiary that is loss-making (and thus contributes little income) can still be material if its net worth crosses the line, and vice versa; the tests are alternative, not cumulative. Second, the comparator is always the consolidated figure of the listed entity and all its subsidiaries, not the standalone parent, which prevents a group from understating materiality by reference to a thin parent balance sheet. Third, materiality is assessed against the immediately preceding accounting year, fixing a clear annual reference point and avoiding mid-year disputes about fluctuating financials. A subsidiary that crosses the 20% line necessarily also crosses the 10% line, so every Regulation 24 material subsidiary is also a Regulation 16(1)(c) material subsidiary, but not the reverse.
The policy obligation under Regulation 16(1)(c)
Beyond defining materiality, Regulation 16(1)(c) imposes a freestanding duty: the listed entity shall formulate a policy for determining "material" subsidiaries. In practice every listed company adopts and publishes a board-approved Policy for Determination of Material Subsidiary, hosted on its website and reviewed periodically.
The policy is not a mere formality. It operationalises the 10% test, fixes the methodology for computing consolidated income and net worth, and identifies which entities cross the line in a given year. Because materiality is measured against the immediately preceding accounting year, a subsidiary's status can change year on year as group financials shift, and the policy must accommodate that dynamism. The disclosure consequences that flow from this classification, and the broader transparency philosophy behind them, are developed in Principles Governing Disclosures and in Common Obligations of Listed Entities.
Independent director on the subsidiary's board: Regulation 24(1)
The keystone of Regulation 24 is sub-regulation (1): 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. The device is deliberately simple. By planting a director who owes fiduciary and independence obligations at the parent level onto the subsidiary's board, the regulation creates a direct line of sight into the entity where the real assets sit.
Two features deserve emphasis. First, the obligation attaches only to unlisted material subsidiaries; a listed subsidiary is presumed to carry its own independent governance under its own listing obligations. Second, the phrase "whether incorporated in India or not" extends the requirement to foreign material subsidiaries, subject to the caveat that where the law of the foreign jurisdiction prohibits or restricts such an appointment, the obligation yields to that local law. The independence criteria the director must satisfy are those discussed in Board of Directors: Composition.
The rationale for substantive, not formal, independence has been underlined by the courts. In Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd., (2021) 9 SCC 449, the Supreme Court examined the dynamics of board control across a holding-subsidiary group and affirmed that directors, including independent and nominee directors, owe their duties to the company on whose board they sit; the parent cannot reduce a subsidiary board seat to a rubber stamp. The Court's broader treatment of oppression and mismanagement under sections 241-242 of the Companies Act underscores that board representation is a substantive safeguard, not a cosmetic one, and that the conduct of group affairs is justiciable when the interests of stakeholders below the apex are prejudiced.
The same instinct animates SEBI's own enforcement reading of independence. As noted in commentary on SEBI's recent guidance, the regulator has rejected narrow, literal constructions of the independence criteria, treating ex-employees and those with material pecuniary relationships to the promoter group as ineligible, so that the director planted on the subsidiary board genuinely answers to the minority rather than to the controlling shareholder. A board seat occupied by a captive nominee would defeat the entire purpose of Regulation 24(1).
Audit committee review of subsidiary investments: Regulation 24(2)
Regulation 24(2) requires 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 a targeted oversight power: the audit committee's mandate is extended beyond the listed entity's own accounts into the subsidiary's, with a specific focus on where the subsidiary deploys its capital.
The focus on investments is not accidental. Inter-corporate diversions, round-tripping of funds, and the parking of cash in opaque downstream entities are classic vectors of value leakage in Indian groups. SEBI's enforcement posture in the Fortis Healthcare and Religare Finvest matters in 2018-2019, where inter-company loans and fund diversions through subsidiaries drew regulatory and adjudicatory scrutiny, illustrates precisely the risk Regulation 24(2) is designed to catch upstream. SEBI's interim order in the Fortis matter (October 2018) and the subsequent proceedings, including the Securities Appellate Tribunal's order of January 2020 remitting the Religare Finvest aspect for fresh consideration, turned substantially on the flow of funds through downstream entities, the very mischief a vigilant parent-level audit committee is meant to detect.
It is worth distinguishing the audit committee's review power here from its broader mandate. Under Regulation 18 and Part C of Schedule II, the committee already reviews the listed entity's own financial statements and related-party transactions; Regulation 24(2) bolts on a specific extension into the unlisted subsidiary's accounts, with the statutory spotlight trained on the subsidiary's investment decisions. The mechanics of audit-committee functioning, quorum and powers are set out in Audit Committee.
Subsidiary minutes before the parent board: Regulation 24(3)
Regulation 24(3) provides 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 converts the subsidiary's deliberations into information that the parent's full board must formally receive and consider.
The provision answers a real governance failure: parent boards that profess ignorance of decisions taken below them. By compelling the tabling of subsidiary minutes, Regulation 24(3) removes the "I was not informed" defence and creates a documentary trail of constructive knowledge at the apex board. It works hand in hand with sub-regulations (2) and (4) to build a continuous flow of subsidiary information upward, rather than a once-a-year reconciliation at consolidation.
Reporting of significant transactions: Regulation 24(4)
Regulation 24(4) requires that a statement of all significant transactions and arrangements entered into by the unlisted subsidiary be periodically placed before the board of directors of the listed entity. The Explanation fixes the threshold: a "significant transaction or arrangement" is one whose value, individually or together with previous transactions during a financial year, exceeds or is likely to exceed ten percent of the total revenues, total expenses, total assets or total liabilities, as the case may be, of the unlisted subsidiary.
Note the breadth of the denominators: revenues, expenses, assets or liabilities. A transaction need cross only one of these 10% lines to become reportable, and the test is cumulative across the year, defeating the tactic of slicing a large dealing into sub-threshold tranches. This sub-regulation, together with the related-party-transaction discipline, forms the analytical backbone of subsidiary-level transparency examined in Specific Listing Obligations: Equity.
Selling down the subsidiary: Regulation 24(5)
Regulation 24(5) is the first of two shareholder-protection brakes on exit. 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 or equal to fifty percent, or cease the exercise of control over the subsidiary, without passing a special resolution in its general meeting. The only carve-out is where such divestment is made under a scheme of arrangement duly approved by a court or tribunal.
The provision recognises that the disposal of a material subsidiary is, in economic substance, the disposal of a material part of the listed entity itself, even though no asset of the listed entity changes hands at the parent level. By demanding a special resolution, a three-fourths supermajority of those voting, SEBI ensures that minority shareholders have a genuine veto over the dismantling of the very business they invested in. The scheme-of-arrangement exception exists because such schemes already pass through a separate regime of shareholder, creditor and tribunal scrutiny under sections 230 to 232 of the Companies Act, 2013, making a duplicate LODR vote redundant.
Note the precise trigger language: the special resolution is required where the disposal reduces the listed entity's shareholding to fifty percent or less, measured on its own or together with other subsidiaries, or where it results in the listed entity ceasing to exercise control. The two limbs are independent. A listed entity may retain more than 50% equity yet surrender control through, say, the relinquishment of board-appointment rights or a shareholders' agreement; that too engages Regulation 24(5). The drafting thus tracks the control-based definition of "subsidiary" itself, ensuring that the substance of an exit, not merely its equity arithmetic, governs whether shareholder sanction is needed.
Selling the subsidiary's assets: Regulation 24(6)
Regulation 24(5) guards against selling the subsidiary's shares; Regulation 24(6) guards against the alternative route of hollowing out the subsidiary by selling its assets. It provides that the selling, disposal 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 prior approval of shareholders by way of special resolution, unless the sale, disposal or lease is made under a scheme of arrangement duly approved by a court or tribunal.
The two sub-regulations are complementary anti-avoidance devices. Without Regulation 24(6), a promoter wishing to extract value while retaining nominal control could leave the parent's shareholding above 50% (escaping 24(5)) yet strip the subsidiary of its operating assets through a slump sale or asset transfer. The 20% aggregate-during-the-year test, mirroring the cumulative logic of sub-regulation (4), closes that escape hatch. Together, sub-regulations (5) and (6) make a material subsidiary effectively non-transferable, in whole or in substantial part, without express minority consent.
The threshold here is measured against the assets of the material subsidiary, not of the listed parent, so even a relatively modest disposal at group level can trigger the requirement if it is large relative to the subsidiary. This deliberately complements section 180(1)(a) of the Companies Act, which requires a special resolution for the sale of the whole or substantially the whole of a company's undertaking, but is measured at the entity whose assets are being sold. The LODR adds a parent-shareholder vote on top, so that the public investors in the listed apex, who may have no vote at the subsidiary level, are not bypassed when the subsidiary's assets are sold out from under them.
Secretarial audit of material subsidiaries: Regulation 24A
Regulation 24A extends the secretarial-audit discipline down the group. Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake a secretarial audit and annex a secretarial audit report, given by a company secretary in practice, with the annual report. Separately, the listed entity must submit a secretarial compliance report to the stock exchanges within sixty days from the end of each financial year.
The distinction between the two documents is examinable. The annual secretarial audit, in Form MR-3, covers compliance with the full range of laws applicable to the listed entity or its material unlisted subsidiary. The annual secretarial compliance report is narrower, confined to compliance with SEBI regulations and the circulars and guidelines issued thereunder. By reaching into material unlisted Indian subsidiaries, Regulation 24A ensures that the secretarial-compliance net is not defeated simply by housing operations in an unlisted vehicle.
Interaction with the Companies Act, 2013
The LODR subsidiary code does not operate in isolation. Because Regulation 2(1)(zm) imports the Companies Act definition, the company-law machinery on holding-subsidiary relationships runs in parallel. Section 129(3) of the Companies Act requires consolidated financial statements; section 186 caps inter-corporate loans, guarantees and investments; section 188 governs related-party transactions, which frequently arise between a parent and its subsidiary; and section 180(1)(a) requires special-resolution approval for the disposal of a substantial undertaking.
Where both regimes apply, the listed entity must satisfy the stricter. For instance, a disposal of subsidiary shares may simultaneously engage Regulation 24(5) and the company-law approvals, and compliance with one does not excuse the other. The LODR is layered on top of the Companies Act, not in substitution for it, a point reinforced by the framework's own non-derogation logic discussed in Introduction, Scope and Definitions.
Enforcement and consequences of breach
Non-compliance with the subsidiary-governance provisions is not cost-free. Stock exchanges levy standardised fines under SEBI's circulars on non-compliance with the LODR, and SEBI itself may proceed under section 11, 11B and 15HB of the SEBI Act, 1992, for adjudicatory penalties, alongside its power to issue directions. The penalty machinery is general to the LODR rather than specific to Regulation 24, but the subsidiary provisions are squarely within its reach.
The Securities Appellate Tribunal and the Supreme Court have repeatedly affirmed the breadth of SEBI's remedial and directive powers in the interest of investor protection, including in matters touching group structures and inter-corporate dealings, as in the line of authority running through Reliance Industries Ltd. v. SEBI on the scope of SEBI's investigative and remedial jurisdiction. For listed groups, the practical consequence is that subsidiary governance can no longer be treated as a private, intra-group matter: it is a public-law compliance obligation enforceable by the regulator.
How this topic is examined
For judiciary and CLAT-PG papers, the high-yield points are mechanical and worth memorising precisely. First, the two thresholds and which regulation they sit in: 10% income or net worth under Regulation 16(1)(c), 20% income or net worth under the Explanation to Regulation 24. Second, the four oversight tools of Regulation 24, the independent-director seat (24(1)), audit-committee review of investments (24(2)), tabling of subsidiary minutes (24(3)), and significant-transaction reporting at the 10% threshold (24(4)). Third, the two special-resolution brakes: 50% shareholding or loss of control under 24(5), and 20% of subsidiary assets under 24(6), each subject to the court or tribunal-approved scheme-of-arrangement carve-out.
Examiners favour the distinction between the 10% and 20% definitions, the unlisted-only scope of the independent-director requirement, and the scheme-of-arrangement exception. A common trap is to assume Regulation 24 applies to listed subsidiaries; it does not. Anchor every answer in the precise sub-regulation number and the exact threshold, and cross-reference the definitional foundation in the LODR hub.
Frequently asked questions
What is the difference between a material subsidiary under Regulation 16(1)(c) and under Regulation 24?
Both use income or net worth measured against consolidated figures of the listed entity and its subsidiaries for the immediately preceding accounting year, but the thresholds differ. Regulation 16(1)(c) sets the bar at ten percent and drives the policy and disclosure consequences. The Explanation to Regulation 24 sets a higher bar of twenty percent, which must be crossed before the more intrusive board-seat and shareholder-approval requirements of Regulation 24 are triggered.
Does the independent director requirement under Regulation 24(1) apply to listed subsidiaries?
No. Regulation 24(1) applies only to unlisted material subsidiaries, whether incorporated in India or not. A listed subsidiary is presumed to carry its own independent-governance obligations under its own listing framework, so SEBI does not duplicate the requirement. Where a foreign jurisdiction's law prohibits such an appointment, the obligation yields to that local law.
When does a listed entity need a special resolution to sell its subsidiary?
Under Regulation 24(5), a special resolution is required before the listed entity disposes of shares in a material subsidiary in a manner that reduces its shareholding to fifty percent or less, or that results in loss of control, unless the divestment is under a court or tribunal-approved scheme of arrangement. Separately, under Regulation 24(6), the sale, disposal or lease of more than twenty percent of the material subsidiary's assets on an aggregate annual basis also needs a special resolution, subject to the same scheme carve-out.
What is a "significant transaction or arrangement" of an unlisted subsidiary?
Under the Explanation to Regulation 24(4), it is any transaction or arrangement whose value, individually or cumulatively during a financial year, exceeds or is likely to exceed ten percent of the total revenues, total expenses, total assets or total liabilities of the unlisted subsidiary. Crossing any one of these denominators makes the transaction reportable to the listed entity's board, and the test is cumulative across the year.
How does Regulation 24A relate to the subsidiary framework?
Regulation 24A requires every listed entity and its material unlisted subsidiaries incorporated in India to undertake a secretarial audit and annex the report (Form MR-3) to the annual report. It also requires the listed entity to file an annual secretarial compliance report with the stock exchanges within sixty days of the financial year-end. The audit covers all applicable laws; the compliance report is narrower, confined to SEBI regulations and circulars.
Does the LODR override the Companies Act, 2013, on subsidiaries?
No. The LODR layers additional obligations on top of company law. Regulation 2(1)(zm) imports the subsidiary definition from section 2(87) of the Companies Act, and provisions such as section 129(3) (consolidation), section 186 (inter-corporate loans and investments), section 188 (related-party transactions) and section 180(1)(a) (disposal of undertaking) continue to apply in parallel. Where both regimes bite, the listed entity must satisfy the stricter requirement.