Regulatory Context
Under Regulation 16 (1) (c) and Regulation 24 (1) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”), the determination of a subsidiary as a ‘Material Subsidiary’ is based on the turnover or net worth of the listed entity as per audited figures for the immediately preceding accounting year.
Interim Performance and Emerging Questions
However, in certain cases, listed entities have observed that their subsidiaries have performed exceedingly well mid-year, leading them to appear to qualify as Material Subsidiaries before year-end.
This raises an important question: in the interest of transparency and disclosure, should listed entities determine and disclose such a change in the nature of their subsidiaries as ‘Material Subsidiaries’ immediately upon such qualification?
Interpreting the phrase ‘Immediately Preceding Accounting Year’
The phrase ‘immediately preceding accounting year’ in the aforementioned regulations clearly indicates that materiality should be determined with reference to audited financial statements of the previous financial year.
The SEBI LODR deliberately seeks to tie the test of materiality of a subsidiary of a listed entity to the figures contained in the audited financial statements of the listed entity as it pertains to the previous completed financial year – providing an objective and fixed measure to anchor the test of materiality on.
This approach ensures that such determination of materiality is based on consistent, objective, audited figures, providing clarity and predictability.
Avoiding Complexity in Compliance
Periodic assessment based on unaudited or interim figures would introduce additional complexity and potential inconsistency into the compliance process. Furthermore, such periodic assessment increases the risk of inadvertent errors or misleading disclosures that could arise from relying on unaudited or changing financial data.
Moreover, such assessments could change the nature of the obligation under Regulation 16 (1) (c) and Regulation 24 (1) from an annual compliance exercise into a continual in-year re-assessment requiring compliance – which is not intended under the SEBI LODR.
It is important to note that there is no obligation to re-assess the materiality of a subsidiary during the course of the financial year based on interim or unaudited financials under SEBI LODR. Interim figures are subject to change upon finalization of the audited accounts and using them for materiality assessment could result in uncertainty.
Company Policies and Voluntary Assessment
However, if the listed entity’s policy for determining material subsidiaries, includes quarterly assessments or any other periodic evaluation, such assessments can be followed, and changes identified and appropriately documented.
Conclusion
Therefore, the formal classification of a subsidiary as a ‘Material Subsidiary’ should ordinarily be made at the end of the financial year, based strictly on the audited financial statements.
This approach ensures a consistent, predictable, and transparent framework for compliance aligned with SEBI’s intent.
