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UNDERSTANDING & IMPLEMENTING LAW OF

SUBSIDIARY COMPANIES UNDER REVISED clause - 49 of listing agreement 

BACKGROUND

In view of Clause 49 of the Listing Agreement regarding good corporate governance, it becomes very critical for companies whose shares are listed on the stock exchanges to deal with the matters of their subsidiaries as per legal parameters. These involve identification of material or non material listed or non listed Indian or foreign subsidiaries by holding companies and complying with disclosure/other requirements regarding such subsidiaries. These would also involve regulating the disinvestment of their shares of such subsidiaries by the holding companies as well as selling/ disposing/ leasing of assets of the subsidiaries.

Briefly in terms of the Companies Act 2013,  subsidiary in relation to a holding company means a company in which   the holding   company:-

(i) controls the composition of the Board,  or

(ii) exercises   or control  more  than  half  of the  total  share  capital  either  at its own or together  with one or more  of its subsidiary companies. {Section 2 [87]}  

LISTING AGREEMENT

The first step is to have an overview of Clause 49 of the Listing Agreement and for that it is necessary to know important definitions of various types of subsidiaries and linked compliances.

1. DEFINITION OF MATERIAL SUBSIDIARY:

A subsidiary shall be considered as Material:-

a. if the investment of the company in the subsidiary exceeds twenty per cent {20%} of its consolidated net worth as per the audited balance sheet of the previous financial year, or

b. if the subsidiary has generated twenty per cent {20%} of the consolidated income of the company during the previous financial year.

Compliances regarding disposal of shares of Material Subsidiary by the holding company:   

A company shall not dispose of shares in its material subsidiary which would reduce its shareholding (either on its own or together with other subsidiaries) to less than 50% or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting.

The exception has been granted for divestment under a scheme of arrangement duly approved by a court/ tribunal.

Compliances regarding disposal of its assets by Material Subsidiary:

Selling, disposing and leasing of assets amounting to more than twenty percent {20%}  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.

2. DEFINITION OF MATERIAL NON LISTED INDIAN SUBSIDIARY:

In addition to the definition of Material Subsidiary the term “material non listed Indian subsidiary” has also been defined.

This term shall mean an unlisted subsidiary, incorporated in India, whose income or net worth (i.e. paid up capital and free reserves) exceeds twenty percent { 20% } of the consolidated income or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year

Compliances regarding Material non listed Indian subsidiary;

At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of a material non-listed Indian subsidiary company.

3. UNLISTED SUBSIDIARY COMPANY:-

There is another term used i.e. unlisted subsidiary company which has not been defined but which shall include unlisted material/ non material Indian / foreign subsidiary.     

Compliances regarding un listed subsidiary company;

1. The Audit Committee of the listed holding company shall review the financial statements, in particular, the investments made by the unlisted subsidiary company.

2. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company.

3. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.

Definition of significant transaction or arrangement of un listed subsidiary

The term “significant transaction or arrangement” used in relation compliance regarding unlisted subsidiary company, as above, shall mean any individual transaction or arrangement that exceeds or is likely to exceed  ten percent {10%} of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary for the immediately preceding accounting year. 

Use of the words “Material unlisted subsidiary” seems to indicate that the aforesaid compliance of bringing to the attention of Board of listed holding company the statement of significant transactions & arrangements is only for material unlisted Indian or foreign subsidiary and not for non-material subsidiary.

4. COMPLIANCE BY STEP DOWN SUBSIDIARIES

Where a listed holding company has a listed subsidiary which is itself a holding company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are concerned.

IMPLEMENTATION OF CLAUSE 49

First step of identification

Material Subsidiary” of the Company would need to be identified, which would include, if any:
- Material listed  Indian subsidiary/ies, 
- Material listed foreign subsidiary/ies,
- Material non listed Indian subsidiary/ies,
- Material non listed foreign subsidiary/ies.

as one time exercise and such exercise shall need to be done for each financial year hereafter and the conclusion placed before the Audit Committee and the Board of the company

“Unlisted Subsidiary Company” of the Company would need to be identified, which would include, if any:-

- Material /Non material Unlisted Indian subsidiary/ies,
- Material /Non material Unlisted foreign subsidiary/ies. 

as one time exercise and such exercise shall need to be done for each financial year hereafter and the conclusion placed before the Audit Committee and the Board of the Company

Step Down Subsidiary, listed or unlisted,  Indian or foreign, would be required to be identified, if any,  as one time exercise and such exercise shall need to be done for each financial year hereafter  and the conclusion placed before the Audit Committee and the Board of the company

Second step of Transactions

In case of Material Subsidiary

{1} Restriction on disposal of shares held by the company, whether Equity or preference,  of the Material Subsidiary and {2} restriction on selling/ disposing/ leasing of assets of the Material Subsidiary by itself, would be required to be complied  keeping in view the following:-      

Valuation of the shares / assets of Material Subsidiary  would have to be done by Registered Valuer in terms of the Companies Act 2013/its Rules and in absence of related notification of these provisions, by an independent merchant banker registered with SEBI, or by an independent chartered accountant in practice with minimum specified number of years experience { senior CA}  or by such valuer as may be permitted by the Central Government.

The proposal shall have to be considered by the Audit Committee and the Board of the holding company and the relevant subsidiary and decision taken in terms of the provisions of the clause 49 of the Listing agreement and Companies Act 2013 and its Rule/s, as applicable.

Where the disposal of the shares of Material Subsidiary   or selling/ disposing/ leasing  of  assets of  Material Subsidiary are triggering the limits explained aforesaid, the proposal after being approved by the Audit Committee and the Board of respective companies as applicable, shall also have to be placed before the shareholders of the holding company or the relevant subsidiary, in a general meeting or through postal ballot in terms of  the Listing agreement and/or Companies Act 2013 and its Rule/s seeking approval/s of such shareholders by way of passing special resolution/s, as applicable.

Only on receipt of the necessary approvals, herein, that the disposal of the shares or selling/ disposing/ leasing of assets of the Material Subsidiary would be done.

Necessary reporting would be done in Audit Committee and Board meetings of all the concerned companies.

Stock Exchanges would be duly intimated.

Other compliances

In case of Material Non listed Indian subsidiary

At least one independent director of the holding company shall be a director on the Board of Directors of such subsidiary.

In case of Unlisted Subsidiary Company

a. The Audit Committee of the listed holding company shall review the financial statements, in particular, the investments made by    such unlisted subsidiary, at least once every financial year.

b. The minutes of the Board meetings of such unlisted subsidiary shall be placed before the Audit Committee and Board meetings of the listed holding company at least once every financial year.

c. The Audit Committee and the Board of the listed holding company shall consider a statement of all significant transactions and arrangements {as defined earlier} entered into by such unlisted subsidiary which is not a material subsidiary, at least once every financial year.

Compliance in similar lines in respect of Step down subsidiaries would need to be done.

Making Policy & Disclosure

A Policy is required to be made by the listed holding company, approved by its Audit Committee and the Board of Directors which shall be disclosed in the company’s web site and in the Annual Report of such company and a web link provided in the Annual Report.

CONCLUSION

On minutely examining the law of subsidiaries as laid down in Clause 49, it appears that unnecessarily it has been made cumbersome for understanding and leaves a lot to interpretations. This law which is more compliance oriented could have been made simple and straight forward.    

AMITAV GANGULY

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