Summary: SEBI’s December 2024 amendments to the SEBI LODR Regulations introduced Regulation 24A, mandating that only Peer Reviewed Company Secretaries (PCS) or firms with a majority of Peer Reviewed partners can be appointed as secretarial auditors for listed entities and their material unlisted subsidiaries. This led to confusion as ICSI issues Peer Review Certificates (PRC) at the firm level rather than individually for partners, making SEBI’s requirement impractical. ICSI later clarified that all partners of a Peer Reviewed firm are deemed Peer Reviewed by default, making SEBI’s mandate redundant. Additionally, SEBI’s amendments allow listed entities to remove secretarial auditors through an ordinary resolution without cause, unlike the stringent removal process for statutory auditors under the Companies Act 2013. Despite these inconsistencies, ICSI has not opposed SEBI’s changes, raising concerns about its passive stance on regulatory matters affecting Company Secretaries.
BACKGROUND
SEBI vide its amendments dated December 13, 2024 to SEBI LODR 2016, has inserted the new Regulation 24A which reads as follows
24 1A) Eligibility, Qualifications and Disqualifications of Secretarial Auditor:
(a) A person shall be eligible for appointment as a Secretarial Auditor of the listed entity only if such person is a Peer Reviewed Company Secretary and has not incurred any of the disqualifications as specified by the Board:
Provided that a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be Secretarial Auditor of the listed entity
(b) Where a firm including a limited liability partnership is appointed as Secretarial Auditor of the listed entity, only the partners who are Peer Reviewed Company Secretaries shall be authorised to act and sign on behalf of the firm.
(c) Where a person appointed as Secretarial Auditor of the listed entity incurs any of the disqualifications as specified by the Board, after appointment, such person shall vacate the office as Secretarial Auditor and such vacation shall be deemed to be a casual vacancy in the office of the Secretarial Auditor
This should be read in conjunction with the following provisions of revised regulation 24 (1):
(a) Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake Secretarial Audit by a Secretarial Auditor who shall be a Peer Reviewed Company Secretary and shall annex a Secretarial Audit Report in such form as specified, with the annual report of the listed entity.
Explanation:
(i) “Secretarial Auditor” means a Company Secretary in Practice or a firm of Company Secretary(ies) in practice appointed to conduct the Secretarial Audit.
(ii) “Peer Reviewed Company Secretary” means a Company Secretary in practice, who is either practicing individually or as a sole proprietor or as a partner of a Peer Reviewed Practice Unit, holding a valid certificate of peer review issued by the Institute of Company Secretaries of India.
Effect of this amendment
In terms of this amendment, only PCS Firms where majority of the partners are peer reviewed, are eligible to be appointed in their firm name as Secretarial auditors of listed entities or their material unlisted subsidiaries.
Issues raised by ICSI Professionals:
The above amendments caused some confusion since the Peer Review Certificate (PRC) is issued by ICSI {in the case of Firms (whether partnership firm or LLP)} only in the name of the Firm and not individually in the name of partners; while In the case of individuals in practice , the PRC is issued in the name of the individuals.
In other words, if it is a PCS Firm, the PRC is issued in the name of the Firm, and therefore none of the partners of the Firm would have PRC issued in his /her name
This being the case, how could PCS Firms meet the SEBI stipulation that majority of the partners should have PRC in their names – was the query
2 CLARIFICATION FROM ICSI
In response to the queries on this subject from some of its members, the ICSI has since issued the following clarification:
We wish to submit that as per the Guidelines for Peer Review of Attestation and Audit Services by Company Secretaries in Practice, Practice Unit means members in practice practicing either individually in own name, or as a sole proprietorship, Partnership, Limited Liability Partnership (LLP) or any other entity of professional Company Secretaries registered with the Institute and bearing a Unique Identification Number.
The partners/designated partners of the Partnership, Limited Liability Partnership (LLP) are considered as Peer Reviewed upon review of respective Partnership, Limited Liability Partnership (LLP) and the information is updated on ICSI Website https://www.icsi.edu/media/webmodules/List_Peer_Reviewed_Practice_Units.pdf) and UDIN portal with the details of the partners associated with the Partnership, Limited Liability Partnership (LLP) as on date of issuance of Peer Review Certificate.
Accordingly, it is submitted that as per the existing Guidelines for Peer Review of Attestation and Audit Services by Company Secretaries in Practice, partners of the Partnership, Limited Liability Partnership (LLP) are not required to be reviewed in their Individual Capacity as long as they render services on behalf of the Partnership, Limited Liability Partnership (LLP).
The ICSI has posted in its website a detailed list of all peer reviewed practice units (that runs to 323 pages with 6367 entries) from which one can notice that the same PRC no of a PCS Firm is also allotted to each of the partners of the Firm.
IGNORANCE OF SEBI
For example, if Firm A which has been issued a PRC and has 5 partners (B,C,D,E & F) , is allotted PRC no X , each of the 5 partners –viz., B to F is also allotted the same X as his /her PRC.
In other words, in the case of a Firm holding PRC , the PRC will be the same for the Firm as well as all the partners of the said Firm
This means that all the partners in a Peer Reviewed Firm are by default considered as holders of PRC individually . Therefore there cannot be a situation, where, in a Peer Reviewed Firm , the number of partners with PRC falling below the majority of the total no of partners of that Firm.
In simple terms, so long as a Firm continues to hold the PRC in its name, all the partners of that Firm are deemed to be peer reviewed individually. Only when , for any reason ,the PRC of the Firm is cancelled, the PRC of all the partners, as a consequence would stand cancelled automatically
So in effect, it is 100% of the partners in a Firm holding the PRC or none of them holding the PRC in their individual names.
Then, what is the need /relevance of the prescription in terms of R 24A of the SEBI LODR to the effect that unless a majority of the partners of a Firm of PCS hold PRC, a Firm is not eligible for being appointed as secretarial auditor of listed entities/ their material unlisted subsidiaries.
If some partner resigns/ passes away / ceases to be partner / become ineligible to continue ,as partner , then the total number of partners in the firm after such event, comes down but still the percentage of continuing partners will remain t more than the majority level. e . Eg: if there are 5 PRC partners in a Firm and two of them resign , resulting in the 3 continuing, it still amounts to 100% of the total partners.
One possibility for the actual number of partners in a PCS Firm with PRC dropping below the majority number of partners in the Firm could be because of admission of new partners in the Firm. This may be say, in the case of a Firm of PCS with PRC with 3 partners admitting 2 new partners resulting in the total number of partners increasing to 5.
To consider such a case, let us review the ICSI Regulations on admission of partners in a Firm of PCS
ICSI REGULATIONS ON ADMISSION OF NEW PARTNERS IN A FIRM
- This is covered in the FAQ on Peer Review issued by ICSI:
FAQ 47 reads as follows :
“What will be the status of Induction of Partner in Peer Reviewed Unit?
Ans. The benefit of Peer Review is available to the partners of the Practice Unit as on last day of the year under review.
In case a new partner is inducted in the Peer Reviewed unit, the newly inducted partner would not be eligible to get the benefit of Peer Review.
If PU wish to extend benefit of Peer Review to the partner(s) inducted in the Practice Unit (PU), it has to undergo Peer Review again with the services rendered by inducted partner(s) in the PU.
However, in case the partner(s) belonging to a Peer Reviewed Unit resigns and is inducted in another Peer Reviewed Unit, the benefit will be extended to such partner(s).”
The effect of this clarification is :
1. if a Peer reviewed Firm admits a new partner, ( the new partner would not be eligible to get the benefit of peer review), such Firm has to undergo Peer Review again with the services rendered by the newly inducted partner.
2. if a peer reviewed Firm admits new partner(s) who have resigned from another peer reviewed Firm, the benefits of Peer review would be extended to such partners.
Practically speaking , A peer reviewed Firm, would not admit a new partner which would require the Firm undergo Peer Review again, unless it is around the time the PRC for the Firm is due for renewal – so that the Firm with all existing partners and new partner(s) would be subjected to PRC renewal process
On the other hand, where a Peer Reviewed Firm admits a new partner(s) who has resigned from another Peer Reviewed Firm, such a Firm would continue to have the same PRC number of the Firm where he has joined and which number would be extended to the new partner too. Continuing with the previous example of the Peer Reviewed Firm A with number X with 5 partners -B to F, who are all allotted the same number X. the newly joined partner (s) ( who resigned from another Peer Reviewed Firm) too will be allotted the same no X.
Therefore there is absolutory no meaning in the newly introduced R24 A of SEBI LODR that makes it mandatory requirement that unless majority of the partners of a PRC Firm are peer reviewed, such a firm is not eligible to be appointed as Secretarial Auditor of listed entities / their material unlisted subsidiaries. DAMP SUQUIB!!! A classic example that SEBI has not understood the basic principles governing the process of grant of PRC for PCS firms by ICSI. Ideally, SEBI should have consulted ICSI before the amendments were introduced in its LODR Regulations
ICSI BEING SUBMISSIVE TO SEBI
But it remains to be seen as to whether ICSI which has been lying low on the amendments made by SEBI , would, in order to please the Regulator , amend its regulations on Peer Review of Firms – such that the redundant /infructuous would be made meaningful / relevant ? – viz. “Trim the foot to fit the shoe”
Another subject – part of the amendments made to the R 24 A of the SEBI LODR Regulations is: proviso to sub regulation 1 (b) (ii) that says” nothing continued in these regulations shall prejudice the right of the entity to remove Secretarial auditor with the approval of the shareholders in its Annual General Meeting …” , So, the management of the entity without giving any reasons for removal/ giving an opportunity of being heard to the PCS , may remove the PCS by means of an ordinary resolution. Compare this with the elaborate provisions in the Companies Act 2013 in relation to the removal of a director or the statutory auditor. In fact in terms of S 140 of the CA 2013 , without the prior approval of the Regional Director, MCA and a subsequent special resolution of the shareholders, a statutory auditor cannot be removed.
But SEBI has empowered the entities to remove the secretarial auditors simply by an ordinary resolution when the promoters could muster the required votes to pass the resolution. Here again, the ICSI even after 75 days of the amendment made , has chosen to remain a silent spectator without taking steps for amendments to R24 A on the lines of S 140 (1)/140 (5) of the CA 2013!!!
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CS Raghunath Ravi | B.COM., FCS | compsecravi@gmail.com
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