What are the provisions for Governance of Group Entities and Subsidiaries?

Group companies create a complex organizational structure resulting in a complicated governance environment. Boards have a fiduciary duty to work in the best interests of the company. The holding company often nominates its director or officers as directors on the subsidiary company. It is difficult for the board of the subsidiary to act in its own interest alone. Subsidiaries may be categorized in terms of level of investment, strategic importance and risk to the group and appropriate governance mechanism established. To protect the interests of shareholders of holding company and minority shareholders of subsidiary certain provisions have been put in place both by the Companies Act, 2013 and SEBI (LODR). Board: At least one independent director on the board of directors of the listed company shall be a director on the board of directors of any unlisted material subsidiaries including foreign companies. 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 company. The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary. "Significant transaction or arrangement" 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 unlisted material subsidiary for the immediately preceding accounting year. (Regulation 24). Consolidated Financial Statements: If a company has one or more subsidiaries, associate companies or Joint Ventures, it shall prepare a consolidated financial statement of the company and of all the subsidiaries, associate companies and joint venture in the same form and manner as that of its own. In addition to the standalone financial statements of the holding company, a consolidated financial Statement of holding company is to be published to disclose details about subsidiary, associate Companies and Joint ventures. (Sec 129) The Balance sheet of holding company shall specifically disclose investments in the subsidiaries. The Profit and Loss account of Holding company shall disclose (a) Dividends from subsidiary Companies and (b) Provisions for losses of subsidiary Companies. (Schedule III) The holding Company is required to: Place separate audited accounts in respect of each of its subsidiary on its website and Provide a copy of separate audited financial statements in respect of each of its subsidiary, to any shareholder of the Company who asks for it. (Section 136) On the other hand, the balance sheet of subsidiary company should disclose shares held by its holding company or its ultimate holding Company, or subsidiaries and associates of the holding company and the ultimate holding Company. (Schedule III) Audit and Audit Committee: The statutory auditor of a listed entity shall undertake a limited review of the audit of all the entities/ companies whose accounts are to be consolidated with the listed entity. Besides audited annual consolidated statements, at least eighty percent of the quarterly consolidated financial results, of each of the consolidated revenue, assets and profits, respectively, shall have been audited or subjected to limited review. (Regulation 33) The audit committee of the listed company shall also review the financial statements, of subsidiaries in particular, the investments made by the unlisted subsidiary. (Regulation 24) The board of a holding company can authorize anyone to Inspection of books of account of any subsidiary company. (Section 128) Material Subsidiary: The listed 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. Exception has been granted for divestment under a scheme of arrangement duly approved by a court/ tribunal (Regulation 24). 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 (Regulation 24). Every listed entity's material unlisted subsidiary incorporated in India shall undertake secretarial audit and shall annex the report with its annual report. (Regulation 24A). This will help improve compliance of group as a whole. The policy on material subsidiary shall be disclosed in the company's web site and in the annual report of the company or a web link provided in the annual report. These regulations ensure that shareholders of the holding company can monitor subsidiaries whose performance affects the performance of their company even if they are unlisted.