How to Determine and Report a Material Subsidiary Under SEBI LODR Regulations 2026

Every listed entity in India must assess whether any of its subsidiaries qualifies as a "material subsidiary" under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended. The classification triggers specific governance, disclosure, and audit obligations that carry enforcement consequences if missed. Following the LODR amendments of 2026, which replaced "income" with "turnover" in the materiality test, companies need to revisit their assessment methodologies.

This guide walks through the determination process, the resulting compliance obligations, and common pitfalls that listed entities encounter.

Step 1: Understand the Materiality Test

Under Regulation 16(1)(c) of the LODR Regulations, a subsidiary is "material" if its turnover or net worth exceeds 10% of the consolidated turnover or consolidated net worth, respectively, of the listed entity and all its subsidiaries in the immediately preceding accounting year.

The key change introduced by the SEBI (LODR) (Amendment) Regulations, 2026, is the replacement of "income" with "turnover" as the revenue-side metric. "Turnover" under the Companies Act, 2013 (Section 2(91)) means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both. This is narrower than "income," which could include other income items such as investment returns, foreign exchange gains, and miscellaneous receipts.

In practice, the shift to turnover means that subsidiaries with high "other income" but modest operational revenue may no longer meet the materiality threshold. Conversely, operationally significant subsidiaries that were previously just below the income-based threshold may now cross it if their turnover constitutes more than 10% of the consolidated figure.

Step 2: Gather the Right Financial Data

The assessment uses the immediately preceding accounting year's consolidated financial statements. You need:

• Consolidated turnover of the listed entity and all subsidiaries (from the consolidated Statement of Profit and Loss).

• Consolidated net worth of the listed entity and all subsidiaries (from the consolidated Balance Sheet). Net worth is calculated per Section 2(57) of the Companies Act, 2013: paid-up share capital plus all reserves created out of profits, securities premium, and debit or credit balance of the profit and loss account, minus accumulated losses, deferred expenditure, and miscellaneous expenditure not written off.

• Individual turnover and net worth of each subsidiary, taken from the subsidiary's own audited financial statements for the same period.

In practice, the assessment should be done as soon as the consolidated financials are finalised, ideally before the annual general meeting. Companies with a large number of subsidiaries should maintain a tracking spreadsheet that is updated each quarter with provisional numbers.

Step 3: Apply the Two-Limb Test

The test is disjunctive: a subsidiary is material if either the turnover test or the net worth test is satisfied. You do not need both.

Turnover test: (Subsidiary turnover / Consolidated turnover) x 100. If the result exceeds 10%, the subsidiary is material on this limb.

Net worth test: (Subsidiary net worth / Consolidated net worth) x 100. If the result exceeds 10%, the subsidiary is material on this limb.

A common pitfall arises with negative net worth. In TaxGuru's analysis of the SEBI LODR framework, the question of how to handle subsidiaries with negative net worth was flagged as a recurring compliance concern. The prudent approach, consistent with SEBI's intent of capturing economically significant subsidiaries, is to take the absolute value of net worth for the numerator when the subsidiary's net worth is negative, since a large negative net worth is equally indicative of materiality as a large positive one.

Step 4: Board Approval and Policy Framework

Under Regulation 17, the board of the listed entity must approve a policy for determining material subsidiaries. This policy should specify:

• The methodology for applying the turnover and net worth tests, including treatment of negative net worth scenarios.

• The frequency of assessment (at minimum, annually upon finalisation of consolidated financials).

• The governance steps triggered once a subsidiary is classified as material.

• The procedure for de-classification if a subsidiary falls below the 10% threshold.

The policy must be disclosed on the listed entity's website under Regulation 46. Following the 2026 amendment, companies should update their existing policies to replace references to "income" with "turnover" and ensure the methodology aligns with the revised definition.

Step 5: Comply with Material Subsidiary Obligations

Once a subsidiary is classified as material, the following obligations arise under Regulation 24 of LODR:

• Independent director appointment: At least one independent director of the listed entity must be appointed to the board of the material subsidiary. This creates an oversight bridge between the two boards.

• Audit committee oversight: The audit committee of the listed entity must review the material subsidiary's financial statements, particularly the investments made by the subsidiary.

• Secretarial audit: The material subsidiary must undergo a secretarial audit, and the report must be annexed to the listed entity's board report.

• Asset disposal restrictions: Disposal of shares in the material subsidiary that would reduce the listed entity's shareholding below 50%, or result in the subsidiary ceasing to be a subsidiary, requires a special resolution by shareholders of the listed entity. Similarly, selling, disposing, or leasing assets amounting to more than 20% of the material subsidiary's assets requires shareholder approval by special resolution.

In practice, the independent director appointment is the compliance step most frequently missed, particularly where the subsidiary is incorporated outside India. The Supreme Court in Satyam Computer Services Ltd. v. SFIO, (2020) 14 SCC 1, emphasised the accountability of independent directors in oversight roles, making this appointment a substantive governance requirement rather than a mere formality.

Step 6: Disclosure and Annual Reporting

The listed entity must make the following disclosures in relation to material subsidiaries:

• Website disclosure: The material subsidiary determination policy must be available on the company's website (Regulation 46(2)(h)).

• Annual report: The corporate governance report in the annual report must identify all material subsidiaries, including their jurisdiction of incorporation and the independent directors appointed from the listed entity's board.

• Stock exchange intimation: Any change in the material subsidiary status (new addition or removal) should be disclosed to the stock exchanges under the materiality threshold for events and information under Regulation 30.

Common Pitfalls to Avoid

• Using "income" instead of "turnover" after the 2026 amendment: The two metrics can yield different results. A subsidiary with high interest income but low operational turnover may fall below the threshold under the new test.

• Ignoring negative net worth: Subsidiaries with substantial negative net worth are economically significant and should be treated as material for risk oversight purposes.

• Delayed assessment: The assessment should be completed before filing the annual return. Waiting until the AGM creates a gap period where compliance obligations are not being met.

• Failing to update the website policy: SEBI compliance reviews frequently flag outdated material subsidiary policies on company websites.

Sources and References

• SEBI (LODR) Regulations, 2015, Regulations 16(1)(c), 17, 24, 30, 46

• SEBI (LODR) (Amendment) Regulations, 2026 (replacing "income" with "turnover")

• Companies Act, 2013, Sections 2(57) (net worth) and 2(91) (turnover)

• SEBI FAQs for LODR Regulations, April 2025

• TaxGuru, "Compliances Applicable to a Material Subsidiary of a Listed Company"; Vinod Kothari Consultants, "Material Subsidiary under LODR Regulations"

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.