● According to the terms of this alliance, Indian rulers were not allowed to have their independent armed forces. ● They were to be protected by the Company, but had to pay for the 'subsidiary forces' that the Company was supposed to maintain for the purpose of this protection. ● If the Indian rulers failed to make the payment, then part of their territory was taken away as a penalty. ● For example, when Richard Wellesley was Governor-General (1798-1805) , the Nawab of Awadh was forced to give over half of his territory to the Company in 1801, as he failed to pay for the 'subsidiary forces. So, option 2 is correct.