According to this alliance, Indian rulers were not allowed to have their independent armed forces. The Company army was to protect the Indian state but the ruler had to pay for the “subsidiary forces”. If an Indian ruler failed to make the payment, then part of his territory was taken away as penalty. For example; Awadh and Hyderabad were forced to cede territories on this ground.

After the battle of Plassey in 1757, the battle of Buxar in 1764 and gaining the Diwani of Bengal, the company began to expand its rule in many parts of India. For that it had devised several plans, one among them was the “Subsidiary Alliance”. According to the terms of this alliance –
(i) Indian rulers were not allowed to have their independent armed forces.
(ii) They were to be protected by the company but pay for the Subsidiary Forces, that the company was supposed to maintain for the purpose of their protection.
(iii) If the Indian rulers failed to make payment, then that part of territory was taken away by the company as penalty. For example, in 1801, the nawab of Awadh was forced to give over half of his territory to the Company for failing to pay for the “subsidiary forces”.