Summary: The article examines whether Regulation 10(6) of the SEBI (Infrastructure Investment Trusts) Regulations, 2014 permits an InvIT auditor to be appointed for a shorter term or requires a five-year tenure. Before the 2023 amendment, Regulation 10(6) permitted appointment for a period of not more than five consecutive years and reappointment for another five consecutive years, indicating a ceiling. On 14 February 2023, Regulation 10(6) was substituted with effect from 1 April 2023, providing that the auditor shall hold office from the conclusion of the annual meeting at which the auditor is appointed until the conclusion of the sixth annual meeting. Regulation 10(6A) was also inserted concerning reappointment and consecutive terms. The article states that the amended language fixes the commencement and expiry of the auditor’s term and, together with the removal of “not more than” and use of “shall hold office”, prescribes a five-year term. It also refers to SEBI’s December 2022 Board Meeting release concerning alignment of auditor tenure for REITs and InvITs with the Companies Act, 2013, and to Section 139(1) of the Companies Act, 2013. The conclusion is that the IM’s view is correct and the auditor cannot initially be appointed for only three years, although the auditor may leave office earlier due to resignation, removal, disqualification or another legally permitted reason.
Introduction
The investment manager (“IM”) of ABC InvIT proposes to appoint a statutory auditor for the InvIT. The proposed auditor has requested a tenure of three years. The IM, however, is of the view that Regulation 10(6) of the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”) requires the auditor to be appointed for a five-year tenure
The question is whether Regulation 10(6) prescribes a maximum tenure, within which a shorter term may be fixed, or mandates the tenure specified in the provision. This article examines that question.
Regulatory framework
The provisions governing the appointment and tenure of an InvIT’s auditor are contained in Regulations 10(6) and 10(6A) of the InvIT Regulations. Before the 2023 amendment, Regulation 10(6) permitted the auditor to be appointed for a period not more then five consecutive years and to be reappointed for another period of five consecutive years, subject to the applicable conditions. The expression “not more then” indicated a ceiling. On that language, a shorter initial tenure was arguably permissible
The 2023 amendment
On 14 February 2023, Regulation 10(6) was substituted, with effect from 1 April 2023. The amended provision states that the auditor shall hold office from the conclusion of the annual meeting at which the auditor is appointed until the conclusion of the sixth annual meeting. Regulation 10(6A) was also inserted to govern reappointment and the maximum number of consecutive terms
Effect of the Amended Language
Following the amendment, Regulation 10(6) no longer uses language merely prescribing a maximum period. It fixes both the commencement and the expiry of the auditor’s term: from the conclusion of the annual meeting at which the appointment is made to the conclusion of the sixth annual meeting. The amended language therefore prescribes the tenure itself, rather than merely setting its outer limit.
Further the intentional removal of words “not more than” makes it clear that the term of 5 years is a fix term and cannot be less then that. Additionally, if we refer the language of reg 10(6), it is seen that the provision uses the word “shall hold office” while specifying the term. As per principles of interpretation of statutes, the use of word “shall” in the provision of a statute, indicates that the action followed by the word “shall” is mandatory. That means, if the provision states that auditor should be appointed for 5 years, then appointment has to be made for 5 years. The entity making the appointment does not have a choice with respect to the term in such case.
This interpretation is consistent with SEBI’s stated objective behind the amendment. In its December 2022 Board Meeting release, SEBI described the proposal as one intended to align the tenure of auditors of REITs and InvITs with that under Companies Act 2013. The structure of amended Regulation 10(6) is also broadly aligned with Section 139(1) of the Companies Act, 2013, under which an auditor ordinarily holds office from the conclusion of the appointing annual general meeting until the conclusion of the sixth annual general meeting. The Companies Act framework therefore provides useful corroborative context, although the conclusion under the InvIT Regulations follows sprimarily from the language of Regulation 10(6) itself.
Conclusion.
The earlier provision allowed an auditor to be appointed for a period of up to five years. After the 2023 amendment, Regulation 10(6) prescribes a five-year term instead of merely fixing a maximum limit. So, to answer the question we saw at the beginning, the IM’s view is correct, and the auditor cannot be appointed at the outset for only three years. However, the auditor may leave office earlier due to resignation, removal, disqualification or any other legally permitted reason.
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Author: Rutuja Umadikar – Deputy Manager
