Corporate group structures are common among Indian listed companies which hold shares in subsidiaries both in India and other countries around the world. Due to differences in financial reporting requirements in all jurisdictions where the corporate group is present, the Companies Act as well as regulations issued by the Securities and Exchange Board of India (SEBI) have sought to harmonize such requirements so that the shareholders of the Indian listed parent are able to obtain the necessary information regarding the financial position of the corporate group, both at the consolidated level and the individual company levels.
A proviso to section 136 of the Companies Act states that every company having subsidiaries shall place separate audited accounts in respect of each subsidiary on its website. However, on 9 February 2018 the Ministry of Corporate Affairs (MCA) issued a relaxation which made a distinction between subsidiaries depending on whether their home jurisdiction required auditing or consolidation. The MCA stated that where a foreign subsidiary is required to provide consolidated financial statements under its home country law, then the requirements of the proviso to section 136(1) shall be met if those consolidated statements are placed on the website of the Indian listed parent company. Similarly, if a foreign subsidiary is not required to audit its financial statements, then its unaudited financial statements can be placed on the website of the Indian parent. In that sense, the rigours of section 136(1) were mitigated through a more practical approach that the MCA adopted.
On the other hand, listed companies are required to comply with financial reporting requirements that SEBI imposes under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Regulation 46 thereof was amended with effect from 1 April 2019 to provide that a listed company is required to disseminate on its website separate audited financial statements of each of its subsidiaries in respect of a financial year, at least 21 days before the date of the annual general meeting. Hence, the SEBI requirements now impose more onerous obligations than the moderated position under the Companies Act.
The ability of companies to address these dual (and somewhat conflicting) positions came up for consideration before SEBI by way of an informal guidance request made by HCL Technologies Limited. This was specifically in the context of HCL’s acquisition of a US company, Actian Corporation, which has 15 subsidiaries, 13 of whom are incorporated outside India, and two in India. The laws in the jurisdiction of incorporation of Actian and some of its subsidiaries do not require the publication of audited financial statements. HCL therefore proposed to SEBI that it will publish the consolidated audited financial statements of Actian and its subsidiaries on its website. However, when it comes to individual subsidiary accounts, it will publish unaudited statements of those subsidiaries where there is no legal requirement to generate audited statements, and for the remaining subsidiaries it will publish audited statements on its website. The principal question for SEBI was whether this will satisfy the requirements of regulation 36 of the SEBI Regulations.
In its informal guidance letter, SEBI answered in the affirmative and permitted HCL to publish unaudited financial statements of subsidiaries where no auditing requirement exists under the subsidiary’s home jurisdiction and to publish audited statements in case of other subsidiaries. This bifurcated approach enables Indian listed companies with a large number of overseas subsidiaries to mitigate the difficulties involved where Indian law necessitates a higher level of compliance than what the laws of the home jurisdiction of the subsidiary requires. Through this broad interpretation of regulation 36, it brings the SEBI Regulations in line with the relaxation granted by the MCA under the Companies Act.