Module: | Specialized Audits, Tech & ESG Disclosures
Q77: Consider the following statements regarding the definition and compliance of a "Material Subsidiary" under SEBI LODR Regulations in 2025-2026:
1. A subsidiary is considered material if its income or net worth exceeds 10 percent of the consolidated income or net worth of the listed entity in the immediately preceding accounting year.
2. At least one independent director on the board of the listed entity must be a director on the board of an unlisted material subsidiary, but this applies strictly only if the subsidiary is incorporated in India.
3. The listed entity cannot dispose of shares in its material subsidiary resulting in a reduction of its shareholding to less than 50 percent without passing a special resolution in its General Meeting.
Which of the above statements is/are incorrect?
2. At least one independent director on the board of the listed entity must be a director on the board of an unlisted material subsidiary, but this applies strictly only if the subsidiary is incorporated in India.
3. The listed entity cannot dispose of shares in its material subsidiary resulting in a reduction of its shareholding to less than 50 percent without passing a special resolution in its General Meeting.
Which of the above statements is/are incorrect?
✅ Correct Answer: B
🎯 Quick Answer:
B. Only 2 is incorrect.Structural Breakdown: Statement 1 is correct; SEBI lowered the threshold from 20% to 10% to capture more subsidiaries under the governance net.
Statement 2 is incorrect; the LODR explicitly states that the requirement for an independent director to sit on the unlisted material subsidiary's board applies whether the subsidiary is incorporated in India or abroad.
Statement 3 is correct; dropping below 50% means losing control of a core asset, which legally requires a special resolution from the shareholders.
Historical/Related Context: Regulators noticed a trend where listed companies parked all their valuable assets and revenue-generating operations in unlisted subsidiaries (often in foreign tax havens) to escape the stringent corporate governance rules applicable to the listed parent.
Causal Reasoning: By forcing the listed company's independent director onto the board of a foreign material subsidiary, SEBI ensures that Indian retail investors have a verified watchdog monitoring the offshore entity where the actual wealth of the company resides.