Decoding “large number” in case of Group Governance Policy under LODR

By CS Megha Saraf (


The Securities Exchange Board of India (“SEBI”) formulated a Corporate Governance Committee (“CG Committee/ Committee”) under the Chairmanship of Shri Uday Kotak to amend/insert new provisions in the existing SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”). With a vision to enhance the standards of corporate governance of listed entities, several recommendations were made by the CG Committee in its Report dated October 2017 which were kept open for public comments/ suggestions. Out of the several recommendations made by the Committee, many of them were accepted with or without modifications and necessary amendments were brought in the Listing Regulations vide SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 dated 9th May, 2018 enforcing them in tranches.

However, certain recommendations though accepted, were left with SEBI for implementation by way of circulars from time to time. In view of this, SEBI Circular SEBI/HO/CFD/CMD/CIR/P/2018/79 dated 10th May, 2018 (“Circular”) was issued requiring the listed entities having subsidiaries to adopt a Group Governance Policy in order to enhance the standards of corporate governance at a group level. Group Governance Policy is required when there is a “large number” of subsidiaries in a group.

This article seeks to lay down rules/guidance as to how to decipher the meaning of the “large number” in context of a group. In essence, whether there may be numerical number, which may, in absolute terms, be regarded as large, or whether the determination of large number is relative, and will depend on various factors. If so, what are those factors? In short, this article gets into the unclear question of how to determine whether a particular group has a large number of subsidiaries.

Applicability of requirement: Mandatory or Recommendatory

There might be a question with respect to the applicability of the Circular as to whether the same is recommendatory or mandatory for a listed entity to follow. In this regard, it is to be understood that certain recommendations though accepted by the SEBI were not immediately brought under the Listing Regulations through amendment notification but were left for implementation by the SEBI through subsequent Circulars. Immediately after the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 dated 9th May, 2018, the Circular was brought in on 10th May, 2018 making it applicable on all listed entities having their equity shares listed on recognized Stock Exchange. Relevant text of the Circular is reproduced hereunder:

“2. Accordingly, the following provisions shall apply to entities whose equity shares are listed on a recognized stock exchange:


  1. Group Governance Unit:

Where the listed entity has a large number of unlisted subsidiaries:

  1. The listed entity may monitor their governance through a dedicated group governance unit or Governance Committee comprising the members of its board of directors.
  2. A strong and effective group governance policy may be established by the entity.

iii. The decision of setting up of such a unit/committee or having such a policy shall lie with the board of directors of the listed entity.”

The Circular provides the applicability of the Circular on kind of listed entities i.e. such listed entities having their equity shares listed. The reference has been made to equity shares and not specified securities. The Circular further provides recommendations to the equity listed entities to have Group Governance Unit in case it has large number of unlisted subsidiaries. Therefore, the requirement of the Circular is recommendatory as the compliance/ applicability will depend on the presence of large number of unlisted subsidiaries. Such a decision shall be taken by the board of directors of the listed entity. The intent is to have a central framework for governance which is then implemented across the group irrespective of the nature and jurisdiction of subsidiary.

However, where the Board comes to a determination point that the group has a large number of unlisted subsidiaries, the approach taken by the board for ensuring group-level effective corporate governance is left to the discretion of the board. But the board does not have the discretion of turning a Nelson’s eye to the need for group level governance. That is, the approach may be discretionary, but group level effective governance itself is mandatory.

Determination of ‘Large number’ of unlisted subsidiaries

While the Circular indicates the criteria for having Group Governance Unit, the discretion is ultimately left on the Board of the listed entity to set up the same and have a policy in this regard.

Therefore, it is pertinent to understand the meaning of “large number”. Whether it is simply based on the number of subsidiaries or even the nature of subsidiaries? Whether the criteria for determination should be only quantitative or even qualitative?

In this regard, one needs to understand that quantifying the number of subsidiaries cannot be the sole ground to determine the meaning of “large number” of unlisted subsidiaries. Following parameters may also be considered by the board while determining the same:

  • Nature of subsidiary: Regulated v/s unregulated;
  • Layer of subsidiary: Direct subsidiary or step down subsidiary;
  • Status of subsidiary: Listed or unlisted subsidiary, Domestic or overseas;
  • Nature of Investment: Associate or Subsidiary;
  • Contribution to income or networth by subsidiary: Material or immaterial subsidiary.
  • Nature of business: Related to the holding company or unrelated.

Parameters for determining ‘large number’ of unlisted subsidiaries

Some of the parameters useful for determination of the meaning of “large number” are:

Regulated or unregulated subsidiary

A company may have regulated or unregulated subsidiary both wherein a regulated subsidiary would mean such subsidiary which is under the governance of a statutory authority such as SEBI (by being listed) or RBI (in case the subsidiary is a Non-Banking Financial Company). Such subsidiary can be said to be more governed by virtue of being regulated and being periodically subject to inspection.

However, an unregulated subsidiary being unregulated is only governed by the Ministry of Corporate Affairs (“MCA”) can be said to be less governed by corporate governance norms. The less regulated the entity is, the more is the need for ensuring effective governance by the board of the holding company.

Direct subsidiary versus step down subsidiaries

A holding company can be said to have greater reach and control when it comes to its direct subsidiaries. The same dilutes or becomes remote as the subsidiaries recede to lower layers. Quite often, the group structure may be so complex that the holding company itself may not be able to reach out the real operating entities where assets or operations reside. Therefore, determination of “large number” also has to be made basis the complexity of the structure of the subsidiaries of a company. The more complex the structure, and more intermediated or remote the access to the subsidiaries, the more is the stress on ensuring effective group surveillance at the holding company level.

Listed subsidiary versus unlisted subsidiary; Domestic or overseas

Where a subsidiary is a wholly owned subsidiary, the Board of the subsidiary is loyal and responsible only to the parent. Where the subsidiary is itself a widely held company, the Board of the subsidiary is required to be aligned to the interests of all the stakeholders including the minority shareholders.

Moreover, where subsidiary’s shares are listed at an exchange, the subsidiary board is subject to the securities market regulation. Such regulation is generally designed to ensure the protection of minority shareholders, and it is therefore prone to seek the larger responsibility of the listed subsidiary board in the governance[1].

Governance in domestic subsidiaries is different from the requirements in case of an overseas subsidiary on account of different legal environment.

Investment into associates as opposed to subsidiaries

There may be a situation where a company is having more number of associates as compared to its subsidiaries. Where the intent of the Circular is to monitor corporate governance of all group entities, focus should also be given on the number of associates a company is having in comparison to the number of subsidiaries.  Therefore, if the group has a large number of associates, even a smaller number of subsidiaries may be regarded as large, owing to the presence of the associates.

Material versus immaterial subsidiary

A company may have a material subsidiary generating more than 10% of its consolidated income or net worth in the immediately preceding accounting year. The more critical/ material a subsidiary, greater is the requirement to ensure governance.


Thus, one cannot quantify “large number” only on the basis of the number of subsidiaries a company has, but such determination is also required to be made on the basis of the group structure of the listed entity and other factors as discussed above.


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