The Subsidiaries Maze

India makes conglomerates report financial statements of subsidiaries. Why can’t the US follow suit?
INDIA - 2023/04/01: In this photo illustration, the Reliance industries logo is seen displayed on a ... More mobile phone screen. (Photo Illustration by Idrees Abbas/SOPA Images/LightRocket via Getty Images)
SOPA Images/LightRocket via Getty Images
One of my PhD students was presenting his job market paper, looking at a particular aspect of India’s financial reporting to a well-known accounting group at a top university in the US Midwest. A prominent academic there raised his hand and asked, “why should we care about Indian reporting? It’s a tiny market, after all. Even if these results are right, they don’t generalize to the US setting.” The hapless student, of course, could not afford to offend this senior professor and said something polite and carried on with his talk. Needless to say, he did not get a job at this university.
Well, one answer might simply have been: India’s reporting system is better than ours in several respects. And we conduct international research to learn how other jurisdictions solve the same problems we face. In many ways, US reporting is hopelessly opaque. A case in point: it’s virtually impossible for a US investor to know what a US conglomerate does with its subsidiaries.
Consider HCA Healthcare, the hospital company. Exhibit 21 of its 10-K reports more than 1,000 subsidiaries. It is difficult for an outsider to know what the business purpose of each of these subsidiaries is, what their financial position might be or what inter-subsidiary exchange of goods and services might look like? The 10-K reports consolidated financial data across all these subsidiaries. HCA may be an outlier with more than a thousand odd subsidiaries because they have an insurance business intertwined with the hospital business. Even a relatively straight forward company such as Home Depot has 12 subsidiaries.
What’s the way out?
For an alternate arrangement, consider the financial statements of India’s largest company, Reliance Industries, which has around 200 subsidiaries and more than 15 associate companies. The financial statements of Reliance’s subsidiaries are publicly available. India’s related party disclosures are generally excellent partly because internal capital markets are important in countries such as India where external capital markets are not as developed. For instance, Reliance lent 41,865 crore Indian Rupees (around $5 billion) to its subsidiaries. Detailed statements of subsidiaries combined with disclosures about related parties might represent the best way to address the subsidiaries maze.