SEBI clarifies position of Compliance Officer in a Listed Companies

SEBI has issued a circular dated 1^st April, 2025 to provide clarification on the designation and hierarchy of the Compliance Officer in listed entities, as per Regulation 6(1) of SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015. The regulation was updated via the SEBI (LODR) (Third Amendment) Regulations, 2024, issued on December 12, 2024.

Key Clarifications & New Requirements:

1. Position in the Organization:

• The Compliance Officer must be in whole-time employment of the listed entity.
• The officer should be not more than one level below the Board of Directors.
• The officer must be designated as a Key Managerial Personnel (KMP).

2. Definition of ‘One Level Below’ the Board:

• ‘One level below the Board’ means the Compliance Officer must report to the Managing Director (MD) or Whole-Time Directors (WTDs) who are part of the Board of Directors.
• This aligns with Regulation 2(1)(o) of LODR and Section 2(51) of the Companies Act, 2013.

3. If No MD or WTD Exists:

• If a listed entity does not have an MD or WTD, the Compliance Officer must be one level below the Chief Executive Officer (CEO), Manager, or any other person heading the day-to-day affairs of the entity.

Effect of the Circular:

• More Clarity for Listed Entities: Companies now have a clear understanding of where the Compliance Officer should be placed in their hierarchy.
• Stronger Compliance & Governance: Ensuring the Compliance Officer reports directly to top management enhances regulatory oversight.
• Impact on Corporate Structures: Entities may need to adjust their reporting structures to ensure compliance.

Background of the SEBI LODR Requirement on Compliance Officer’s Position

The requirement that the Compliance Officer must be not more than one level below the Board of Directors was introduced in the SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2024, notified on December 12, 2024. This amendment modified Regulation 6(1) of the SEBI LODR Regulations, 2015 to strengthen corporate governance and compliance oversight in listed entities. The amendment was as under:

III. in regulation 6,

1. in sub-regulation (1), the symbol “.” appearing after the words “as the compliance officer” shall be substituted with the symbol “:”;

2. after the existing sub-regulation (1) the following new proviso shall be inserted, namely,-

“Provided  that  the  Compliance  Officer  shall  be  an  officer,  who  is  in  whole  time employment  of  the  listed  entity,  not  more  than one  level  below  the  board  of  directors  and  shall be designated as a Key Managerial Personnel.”

The requirement introduced by SEBI is a welcome step towards strengthening the Corporate Governance in the Listed Entities mandating that the Compliance Officer in listed entities must be positioned not more than one level below the Board of Directors. This step ensure that the Compliance requirements will be directly reported to the MD or WTD or the Board of the Company. This will not only strengthen the position of the Compliance Officer but also the Compliance Officer power as well which will significantly strengthening the corporate governance and regulatory compliance in India.

Reasons Behind This Requirement:

1. Strengthening Corporate Governance

• SEBI has been making efforts to improve compliance culture in listed entities by ensuring that compliance functions are placed at a senior level within the organization.
• By mandating that the Compliance Officer reports directly to top-level management, SEBI aims to ensure better transparency, accountability, and regulatory adherence.

2. Concerns About Compliance Being Overlooked

• In the past, there were instances where Compliance Officers were positioned at lower levels in the corporate hierarchy, reducing their authority and effectiveness in ensuring regulatory compliance.
• This regulation prevents companies from placing the Compliance Officer in a junior role, where they may lack direct access to decision-makers.

3. Alignment with Key Managerial Personnel (KMP) Requirements

• The amendment aligns the role of the Compliance Officer with the definition of Key Managerial Personnel (KMP) under the Companies Act, 2013 (Section 2(51)).
• Since KMPs hold critical decision-making roles, positioning the Compliance Officer at a senior level ensures that regulatory compliance is treated as a core function rather than an administrative task.

4. Comparability with Global Best Practices

• Many international regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC) and the Financial Conduct Authority (FCA) in the UK, require compliance functions to be positioned at senior management levels.
• SEBI’s move aligns Indian regulations with global standards to improve investor confidence and corporate governance.

5. Clarifications in the April 1, 2025 Circular

• Following the December 2024 amendment, SEBI received queries about the meaning of “one level below the Board”.
• The April 1, 2025 Circular clarified that:
  • The Compliance Officer must report to the Managing Director (MD) or Whole-Time Director (WTD).
  • If there is no MD or WTD, the Compliance Officer must report to the CEO, Manager, or head of daily operations.

Impact of the Requirement

• Companies must review their organizational structure to ensure compliance.
• The Compliance Officer now has greater authority, improving the ability to enforce regulatory adherence.
• Reduced risk of non-compliance, as the role is elevated to a strategic level within the company.

The requirement introduced by SEBI, mandating that the Compliance Officer in listed entities must be positioned not more than one level below the Board of Directors, marks a significant step towards strengthening corporate governance and regulatory compliance in India. This regulation, inserted via the SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2024, and further clarified in the April 1, 2025 Circular, ensures that compliance functions receive the importance and authority they deserve within an organization.

One of the primary objectives of this regulatory change is to prevent companies from treating compliance as a mere administrative formality. In the past, many listed entities placed their Compliance Officers at lower levels in the corporate hierarchy, often reporting to mid-level management instead of top executives. This limited their ability to enforce regulatory adherence effectively, as they lacked direct access to key decision-makers. By ensuring that the Compliance Officer is always one level below the Board, SEBI has significantly enhanced the role, influence, and accountability of compliance functions within organizations.

Additionally, this move brings greater alignment with global best practices. Regulatory bodies worldwide, including the U.S. Securities and Exchange Commission (SEC) and the Financial Conduct Authority (FCA) in the UK, emphasize the importance of placing compliance functions at a senior level. By implementing similar guidelines, SEBI is fostering international confidence in Indian markets, making listed entities more attractive to foreign investors and ensuring that governance frameworks in India remain competitive on a global scale.

From a corporate governance perspective, this regulation also ensures greater transparency and risk mitigation. A Compliance Officer who reports directly to the Managing Director (MD), Whole-Time Director (WTD), or Chief Executive Officer (CEO) is more likely to detect and address regulatory breaches, unethical practices, or disclosure lapses in a timely manner. This reduces the risk of corporate scandals and regulatory penalties, protecting the interests of shareholders, investors, and stakeholders. Furthermore, by defining ‘one level below the Board’ in clear terms, SEBI has eliminated ambiguities that could have led to inconsistent interpretations by different companies.

For listed entities, this regulatory requirement calls for an organizational restructuring, if necessary, to ensure compliance. Companies that currently have a Compliance Officer reporting to a mid-level executive must upgrade the reporting structure to meet SEBI’s expectations. This may also lead to a reassessment of responsibilities, remuneration, and authority associated with the Compliance Officer’s role, ensuring that compliance professionals are given the resources and independence required to carry out their duties effectively.

Conclusion:

In conclusion, SEBI’s decision to clarify and enforce the position of Compliance Officers within listed entities is a positive development for India’s corporate governance framework. By elevating compliance to a strategic function, SEBI has ensured that compliance officers have a direct line of communication with top management, enabling them to play a more effective role in ensuring regulatory adherence. This move not only safeguards the interests of investors but also enhances market credibility, transparency, and trust in India’s financial ecosystem. Over time, this is expected to reduce compliance failures, improve corporate accountability, and strengthen India’s position as a well-regulated financial market.