diff --git a/git-submodule.sh b/git-submodule.sh
index bc1d3fa663..7576d14769 100755
--- a/git-submodule.sh
+++ b/git-submodule.sh
@@ -122,14 +122,49 @@ module_clone()
 	path=$1
 	url=$2
 	reference="$3"
+	gitdir=
+	gitdir_base=
+	name=$(module_name "$path")
+	base_path=$(dirname "$path")
 
-	if test -n "$reference"
+	gitdir=$(git rev-parse --git-dir)
+	gitdir_base="$gitdir/modules/$base_path"
+	gitdir="$gitdir/modules/$path"
+
+	case $gitdir in
+	/*)
+		a="$(cd_to_toplevel && pwd)/"
+		b=$gitdir
+		while [ "$b" ] && [ "${a%%/*}" = "${b%%/*}" ]
+		do
+			a=${a#*/} b=${b#*/};
+		done
+
+		rel="$a$name"
+		rel=`echo $rel | sed -e 's|[^/]*|..|g'`
+		rel_gitdir="$rel/$b"
+		;;
+	*)
+		rel=`echo $name | sed -e 's|[^/]*|..|g'`
+		rel_gitdir="$rel/$gitdir"
+		;;
+	esac
+
+	if test -d "$gitdir"
 	then
-		git-clone "$reference" -n "$url" "$path"
+		mkdir -p "$path"
+		echo "gitdir: $rel_gitdir" >"$path/.git"
+		rm -f "$gitdir/index"
 	else
-		git-clone -n "$url" "$path"
-	fi ||
-	die "$(eval_gettext "Clone of '\$url' into submodule path '\$path' failed")"
+		mkdir -p "$gitdir_base"
+		if test -n "$reference"
+		then
+			git-clone "$reference" -n "$url" "$path" --separate-git-dir "$gitdir"
+		else
+			git-clone -n "$url" "$path" --separate-git-dir "$gitdir"
+		fi ||
+		die "$(eval_gettext "Clone of '\$url' into submodule path '\$path' failed")"
+	fi
 }
 
 #
diff --git a/t/t7406-submodule-update.sh b/t/t7406-submodule-update.sh
index c679f36a4d..1ae6b4e936 100755
--- a/t/t7406-submodule-update.sh
+++ b/t/t7406-submodule-update.sh
@@ -408,6 +408,7 @@ test_expect_success 'submodule update exit immediately in case of merge conflict
 	 test_cmp expect actual
 	)
 '
+
 test_expect_success 'submodule update exit immediately after recursive rebase error' '
 	(cd super &&
 	 git checkout master &&
@@ -442,4 +443,110 @@ test_expect_success 'submodule update exit immediately after recursive rebase er
 	 test_cmp expect actual
 	)
 '
+
+test_expect_success 'add different submodules to the same path' '
+	(cd super &&
+	 git submodule add ../submodule s1 &&
+	 test_must_fail git submodule add ../merging s1
+	)
+'
+
+test_expect_success 'submodule add places git-dir in superprojects git-dir' '
+	(cd super &&
+	 mkdir deeper &&
+	 git submodule add ../submodule deeper/submodule &&
+	 (cd deeper/submodule &&
+	  git log > ../../expected
+	 ) &&
+	 (cd .git/modules/deeper/submodule &&
+	  git log > ../../../../actual
+	 ) &&
+	 test_cmp actual expected
+	)
+'
+
+test_expect_success 'submodule update places git-dir in superprojects git-dir' '
+	(cd super &&
+	 git commit -m "added submodule"
+	) &&
+	git clone super super2 &&
+	(cd super2 &&
+	 git submodule init deeper/submodule &&
+	 git submodule update &&
+	 (cd deeper/submodule &&
+	  git log > ../../expected
+	 ) &&
+	 (cd .git/modules/deeper/submodule &&
+	  git log > ../../../../actual
+	 ) &&
+	 test_cmp actual expected
+	)
+'
+
+test_expect_success 'submodule add places git-dir in superprojects git-dir recursive' '
+	(cd super2 &&
+	 (cd deeper/submodule &&
+	  git submodule add ../submodule subsubmodule &&
+	  (cd subsubmodule &&
+	   git log > ../../../expected
+	  ) &&
+	  git commit -m "added subsubmodule" &&
+	  git push
+	 ) &&
+	 (cd .git/modules/deeper/submodule/modules/subsubmodule &&
+	  git log > ../../../../../actual
+	 ) &&
+	 git add deeper/submodule &&
+	 git commit -m "update submodule" &&
+	 git push &&
+	 test_cmp actual expected
+	)
+'
+
+test_expect_success 'submodule update places git-dir in superprojects git-dir recursive' '
+	mkdir super_update_r &&
+	(cd super_update_r &&
+	 git init --bare
+	) &&
+	mkdir subsuper_update_r &&
+	(cd subsuper_update_r &&
+	 git init --bare
+	) &&
+	mkdir subsubsuper_update_r &&
+	(cd subsubsuper_update_r &&
+	 git init --bare
+	) &&
+	git clone subsubsuper_update_r subsubsuper_update_r2 &&
+	(cd subsubsuper_update_r2 &&
+	 test_commit "update_subsubsuper" file &&
+	 git push origin master
+	) &&
+	git clone subsuper_update_r subsuper_update_r2 &&
+	(cd subsuper_update_r2 &&
+	 test_commit "update_subsuper" file &&
+	 git submodule add ../subsubsuper_update_r subsubmodule &&
+	 git commit -am "subsubmodule" &&
+	 git push origin master
+	) &&
+	git clone super_update_r super_update_r2 &&
+	(cd super_update_r2 &&
+	 test_commit "update_super" file &&
+	 git submodule add ../subsuper_update_r submodule &&
+	 git commit -am "submodule" &&
+	 git push origin master
+	) &&
+	rm -rf super_update_r2 &&
+	git clone super_update_r super_update_r2 &&
+	(cd super_update_r2 &&
+	 git submodule update --init --recursive &&
+	 (cd submodule/subsubmodule &&
+	  git log > ../../expected
+	 ) &&
+	 (cd .git/modules/submodule/modules/subsubmodule
+	  git log > ../../../../../actual
+	 )
+	 test_cmp actual expected
+	)
+'
+
 test_done
diff --git a/t/t7408-submodule-reference.sh b/t/t7408-submodule-reference.sh
index cc16d3f05d..ab37c368d0 100755
--- a/t/t7408-submodule-reference.sh
+++ b/t/t7408-submodule-reference.sh
@@ -43,7 +43,7 @@ git commit -m B-super-added'
 cd "$base_dir"
 
 test_expect_success 'after add: existence of info/alternates' \
-'test `wc -l <super/sub/.git/objects/info/alternates` = 1'
+'test `wc -l <super/.git/modules/sub/objects/info/alternates` = 1'
 
 cd "$base_dir"
 
@@ -66,7 +66,7 @@ test_expect_success 'update with reference' \
 cd "$base_dir"
 
 test_expect_success 'after update: existence of info/alternates' \
-'test `wc -l <super-clone/sub/.git/objects/info/alternates` = 1'
+'test `wc -l <super-clone/.git/modules/sub/objects/info/alternates` = 1'
 
 cd "$base_dir"