Latest amendments made by SEBI in Listing Regulations and how they impact CS profession landscape
Summary: On December 12, 2024, SEBI introduced significant amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations (SEBI-LODR) to enhance corporate governance standards. These changes, which are effective immediately, include adjustments to related party transaction approvals, promoter reclassification norms, and disclosure timelines. Notably, two key changes directly impact the company secretaries’ (CS) profession. First, the amendments now require listed companies to appoint secretarial auditors for a five-year term, aligning the role with that of statutory auditors. These amendments also introduce restrictions on the services secretarial auditors can offer, enhancing their regulatory stature. Second, the amendments elevate the role of the compliance officer in listed companies by mandating that they be a qualified company secretary and a member of the Key Managerial Personnel (KMP), reporting directly to the Board. This change positions the CS as a critical component of the senior management team, underscoring the growing importance of compliance functions within companies. By clearly defining the compliance officer’s seniority, SEBI aims to strengthen the governance and accountability frameworks within listed entities. These amendments not only raise the stature of secretarial audits and compliance officers but also reflect SEBI’s ongoing commitment to improving corporate transparency and governance practices, placing greater emphasis on professional competence in these roles.
Introduction: On December 12, 2024, Securities and Exchange Board of India notified SEBI (Listing Obligations and Disclosure Requirements) Third Amendment Regulations, 2024 and made various amendments in the original SEBI-LODR Regulations of 2015. Most of these amendments are effective from December 12, 2024.
These amendments introduce several changes aimed at refining corporate governance and compliance standards for listed entities. Key changes include exemption from approval requirement for certain related party transactions, change in norms relating to promoter re-classification, change in timelines with regard to disclosure of certain events post board meetings, updation of transcript and recording of investor calls on public domain etc. These updates aim to enhance transparency and strengthen governance structures within listed companies.
Two of the most important changes introduced that have a direct bearing on the company Secretaries’ Profession are: (i)the requirement of appointment of secretarial auditors by the members for a period of 5 years with eligibility norms and restrictions on services to be offered prescribed bringing the provisions regarding appointment, re-appointment etc. of secretarial auditors at par with that of statutory auditors AND (ii) elevation of position of compliance officer in a listed Company.
Secretarial Audit
The amendment relating to secretarial auditors (in Regulation 24A) will bring about enhancement of role and responsibilities of secretarial auditors of listed companies. Currently the secretarial auditors of both listed and unlisted companies (as applicable) are required to be appointed by the Board of Directors usually for a period of 1 year. No periodicity with regard the tenure is prescribed under Companies Act, 2013. With this amendment, the manner of appointment and tenure have been prescribed. Further requirements regarding peer review etc., though was otherwise applicable under ICSI guidelines have now been given regulatory stamp. The amendments also seek to regulate the services that could be provided by the secretarial auditors to the listed companies, by coming out with a negative list in future which services could only be offered with the approval of the Board of Directors. Further the amendments also provide that the explanatory statement pertaining to appointment of secretarial auditor in the AGM notice shall specify the details of fees, like in the case of statutory auditors.
By providing regulations for appointment, tenure etc. of secretarial auditors, SEBI seeks to position the role of secretarial auditors of listed companies at par with that of statutory auditors. While the expectation of the regulator with regard to the enhanced role and responsibility of the secretarial auditors is implicit in the amendment, it is now the turn of the practising professionals and the industry to reciprocate and rise to the occasion by bringing in more comprehensiveness and objectivity in the audit process. We have to wait and see as to how MCA responds to these changes and makes amendments in the format of Form MR-3 (Secretarial Audit Report) to make it more exhaustive in case of listed companies. The Institute of Company Secretaries of India may also come out with more comprehensive guidelines with regard to the audit process.
Statutory auditors and audit of financial statements have always been valued by the industry higher in view more of the sheer commercial interest of stakeholders in the financial figures rather than as a compliance requirement alone. Pitted against the same, secretarial audit would rather not be viewed as significantly since it is purely a compliance requirement. With the compliance landscape having evolved drastically over the recent years, the secretarial audit may have gained some traction in terms of interest evinced by institutional investors or in the context of due diligence during restructuring, takeover etc., the concept has largely remained subdued. We may expect that in times to come, with professionals devoting more time on audit and exhibiting higher audit skills and the industry starting to recognize the function as an integral part of the annual positioning exercise of publication of annual reports, the secretarial audit is expected to gain prominence.
Compliance Officer
The provisions relating to appointment of compliance officer of a listed company are given in Regulation 6. With the new insertion of a proviso having been made in Regulation 6(1), it now reads:
“A listed entity shall appoint a qualified company secretary as the compliance officer. Provided that the compliance officer shall be an officer, who is in the wholetime employment of the listed entity, not more than one level below the Board of Directors and shall be designated as a Key Managerial Personnel.
With this amendment the level in the organizational hierarchy as well as the role of compliance officer has been prescribed.
The amendment seeks to have the compliance officer designated as a key managerial personnel (KMP). The term “key managerial personnel’ is not defined under SEBI Regulations but has been borrowed from the definition given under Section 2(51) of Companies Act, 2013 which in turn prescribes certain designations like CEO, MD, CFO, CS etc. So what is a KMP?
The Companies Act does not prescribe any functional role for KMP, rather only certain designations have been named. While one could identify the position of CEO, MD and to a large extent that of CFO, as a managerial personnel, the Company Secretary historically has been regarded as a ‘compliance professional’ rather than a managerial personnel. Though there is no statutory definition for what is meant by a managerial personnel, one may assume, in common parlance, that those who are engaged in functions directly related to operations or business may be termed as ‘managerial personnel’. In contrast, a company secretary who, with a systemic acknowledgment of the role as a “compliance professional or governance professional’ and a position that gets further accentuated by the fact that a role of company secretary has been defined under Companies Act, 2013 vide Section 204 which also predominantly deals with compliance functions, though with limited focus on advisory role, assumes the compliance role rather than a managerial role. Therefore, we should delve into the statutory intent of making company secretary a ‘KMP’.
It is patently clear that the statute expects the stakeholders to recognize the compliance function as a key managerial function just as any other business functions like operations, HR, finance etc. and not as a step down or subordinate role. The Companies Act left the definition of role at that without requiring a specific level of organisational hierarchy for a company secretary though the intention of a senior role expectation was writ large on it. However, SEBI (as it stands before the current sets of amendments) went a step ahead and defined the role of Company Secretary as a part of ‘core management team’ and as ‘senior management’ in a listed company, alongwith CFO, functional heads etc.
The recommendation of the Expert Committee appointed by SEBI under the Chairmanship of Shri S K Mohanty for suggesting changes in SEBI-LODR and SEBI-ICDR [SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018] with regard to the proposal relating to compliance officer is as follows:
“Compliance Officer to be designated as a KMP and to be a whole- time employee not more than one level below the board of directors. This shall help in strengthening the position of compliance officers commensurate with the responsibilities cast upon them.”
Listed companies usually appoint the Company Secretary (as appointed under Section 203 of Companies Act), as the Compliance Officer also under Regulation 6 to handle the dual role. Therefore, by implication, the compliance officer is a KMP. However, to ensure that when a different individual is appointed as compliance officer (if a company chooses to do so) he also becomes a KMP, this provision has been inserted by SEBI. Further by defining that the compliance officer shall not be more than one level below the Board, the seniority of the position has been given a statutory privilege. Well, how does this change the position from the current one? Let us examine that.
Under the current position before this amendment, a compliance officer, if appointed separate from the CS, could be at any level of organisational hierarchy and listed companies have been blissfully adopting the practice of appointing junior CS as compliance officers. And if appointed in dual capacity of compliance officer and CS, the seniority could still be not ensured with no seniority level prescribed for a CS under the statutes, except as a KMP or as part of “senior management”. Such provisions had their limitations in ensuring a defined seniority level because Companies could always place a CS at a junior positon in the organisational hierarchy and still could term it as “senior management” be defining in the Nomination and Remuneration Policy and get away with it. This problem is more pronounced in the case of private sector companies. Public sector companies generally have been gracious in positioning company secretaries at fairly senior levels and with a direct reporting channel to the MD or the CEO. However, in the private sector, company secretaries are usually placed at 2 or 3 level below the CEO/MD with either a singular or parallel reporting channel to another senior executive, usually the CFO. The private sector promoters seldom view company secretarial function as a separate role and consider it as part of finance function only. This may also have to do with the limited role a CS plays in business operations of the company. One may argue that a CS should start involving himself in more business related functions and shoulder more such responsibilities other than the core functional area, it should only be seen as a value addition proposition and it offers no justification to the perception of the promoters and the top management that CS role is diminutive. The compliance role in general and CS role in particular must get the due recognition it deserves. By not treating the compliance function as not critical, companies may be failing in their duty to behave as responsible entities and law abiding corporate citizens.
SEBI has taken the right step in prescribing that the compliance officer (and the company secretary by implication) shall not be placed at not more than one level below the Board. Though that may have been intention of the lawmakers all along, by making specific provision any ambiguity, scope of convenient interpretation, liberal construction etc. has been curbed.
It is important to note that the Compliance Officer under SEBI-LODR Regulations is entrusted with the responsibility of the compliance under the various securities laws only and not all types of statutes and regulations concerning a company. It is also worthwhile to mention that there are requirements of compliance officers under other Regulations, for e.g., RBI has prescribed requirement of compliance officer for Banks and certain NBFCs as per scale based criterion (middle and higher layer NBFCs) and also requires the CO/CCO to report directly to the MD. There is no doubt that the new SEBI-LODR amendment also proposes to achieve something like that, i.e., the compliance officer to report directly to the MD or the CEO or whoever the top executive is. Therefore, it is very clear that the Regulator intends to position the compliance officer at levels which are commensurate with the responsibilities cast upon him/her. This is evident from the recommendation given by the Expert Committee with regard to the amendment proposed by it in respect of Regulation 6. As such the companies cannot afford the luxury of placing the compliance officer/company secretary below the CFO or such other senior executives. Their reporting shall henceforth be only to the MD/CEO. Whether the companies shall also place company secretaries at such fairly senior positions in the organizational hierarchy justifying the reporting matrix as above, is something to be seen in the days to come.
The Regulator has played its role in clearly articulating its intention that compliance function should be viewed seriously. Now it is the role of the professional bodies especially ICSI, industrial associations and the professionals themselves in complementing the Regulator by conveying the message to the industry and demonstrating their expertise and skills in the matter of compliance function.
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Excellent Article