Securities and Exchange Board of India (SEBI) has issued a consultation paper inviting public comments on enhancing secretarial compliance, statutory auditor criteria, and related party transaction (RPT) disclosures for listed entities. Key proposals include revising the Annual Secretarial Compliance Report (ASCR) format for better compliance monitoring, specifying eligibility criteria for statutory auditors, and mandating disclosures at various levels for auditor appointments. The paper also discusses facilitating ease of RPT approvals by subsidiaries and clarifying RPT provisions. Recommendations stem from SEBI’s Advisory Committee on Listing Obligations and Disclosure Requirements (ACLOD). Amendments are proposed for SEBI’s Listing Obligations and Disclosure Requirements (LODR) and Share-Based Employee Benefits and Sweat Equity Regulations. SEBI invites stakeholder feedback on various aspects, such as including the ASCR in annual reports, aligning statutory auditor qualifications with listed entity size, and introducing standardized disclosure formats for auditor appointments. Comments are open on the implementation and impact of these changes.
Securities and Exchange Board of India
CONSULTATION PAPER ON ASPECTS RELATING TO SECRETARIAL COMPLIANCE REPORT, APPOINTMENT OF AUDITORS AND RELATED PARTY TRANSACTIONS OF A LISTED ENTITY
Feb 07, 2025| Reports : Reports for Public Comments
1. Objective
1.1. This consultation paper seeks views / comments / suggestions from public on proposals relating to the following:
1.1.1. Strengthening the secretarial compliance report of a listed entity.
1.1.2. Specifying eligibility criteria for appointment of statutory auditor of a listed entity.
1.1.3. Disclosures to the Audit Committee, Board of Directors and shareholders at the time of appointment / re-appointment of statutory auditor and secretarial auditor of a listed entity.
1.1.4. Facilitating ease of implementation with respect to approval of Related Party
Transactions (RPT) undertaken by subsidiaries of a listed entity.
1.1.5. Clarifications pertaining to applicability of RPT provisions.
The proposals in this Consultation Paper are based on the recommendations of the Advisory Committee on Listing Obligations and Disclosures (ACLOD) of SEBI and subsequent internal discussions. The proposals would require amendments to the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations” or “LODR”) and circulars issued thereunder, and to the provisions of SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEBS Regulations”).
2. Strengthening the secretarial compliance report of a listed entity 1. Background
2.1.1. Regulation 24A(2) of the LODR Regulations requires every listed entity to submit a secretarial compliance report to Stock Exchanges within 60 days from the end of each financial year. Section IV-A of SEBI Master Circular dated November 11, 2024 on compliance with LODR Regulations inter-alia deals with the format of secretarial compliance report.
2.2. Need for review
2.2.1. In a disclosure-based regime, secretarial audit and secretarial compliance report serve as a post-facto audit / review of listed entities’ compliance with applicable laws, especially securities laws. The concept of secretarial compliance, which focuses on review of compliance with securities laws, was introduced by SEBI vide circular dated February 8, 2019 along with a reporting format.
2.2.2. Subsequently, a ‘Study Group on Strengthening of Secretarial Compliance Report’ (“Study Group”) was constituted by SEBI in 2021 for strengthening the secretarial compliance report of listed entities. The Study Group submitted its report to SEBI in March 2022 inter-alia suggesting changes to the format of Annual Secretarial Compliance Report (ASCR). The Stock Exchanges, in consultation with SEBI, had carried out some modifications to the format of ASCR in 2023.
2.2.3. Given the regulatory developments during last 2 years, there is a need to further review and revise the existing format of secretarial compliance report for better enforcement of compliance with securities laws and to identify non-compliance, if any, through the annual review carried out by the Practicing Company Secretary (PCS). The format needs to include a specific confirmation on listed entity’s compliance with substantial provisions of securities laws in light of the regulatory developments in the last 2 years.
2.3. Proposal and rationale
2.3.1. It is proposed to revise the existing format of ASCR with a view to obtain explicit confirmation from PCS on compliance with specific provisions of securities laws. The revised format of ASCR is placed at Annexure 1.
2.3.2. In order to strengthen secretarial compliance at listed entities, certain amendments are proposed to the LODR Regulations and SBEBS Regulations and circulars issued thereunder. The details of the proposed amendments along with rationale is given at Annexure 2.
2.4. Public comments
2.4.1. Public comments / suggestions are invited on the following:
Proposal 1: Do you agree with the revised format of Annual Secretarial Compliance Report as proposed in Annexure 1 of this Consultation Paper?
Proposal 2: Should the Annual Secretarial Compliance Report be disclosed as part of the Annual Report of a listed entity?
Proposal 3: Should the requirement to obtain separate certificates on compliance with corporate governance and disqualification status of directors, as required under schedule V of the LODR Regulations, be exempt if Annual Secretarial Compliance Report is annexed to the Annual Report?
Proposal 4: Should the requirement to place a certificate from secretarial auditor in the general meeting on compliance with SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, as required under regulations 13, 26, 27 and 36, for schemes implemented by the listed entity be exempt if Annual Secretarial Compliance Report is annexed to the Annual Report?
Proposal 5:Do you agree with the proposal to amend regulation 48 of the LODR Regulations to require listed entities to comply with applicable secretarial standards?
Proposal 6: Do you agree with the proposal to include change or resignation of a secretarial auditor as a deemed material event under schedule III of the LODR Regulations?
Proposal 7: Do you agree with the proposal to mandate disclosures on total fees paid and change of secretarial auditor, if any, during the financial year in the Annual Report of the listed entity?3. Specifying eligibility criteria for appointment of statutory auditor of a listed entity
3.1. Background
3.1.1. Regulation 36(5) of LODR Regulations inter-alia specify requirements for disclosures as part of the explanatory statement to the notice being sent to shareholders for an annual general meeting, where the statutory auditor(s) is/are proposed to be appointed / re-appointed.
3.1.2. Rule 3(1) of the Companies (Audit and Auditors) Rules, 2014 specifies that audit committee, and in its absence, board of directors, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.
3.2. Need for review
3.2.1. The statutory auditor plays a crucial role in ensuring the accuracy and reliability of a company’s financial statements, enhancing stakeholder trust, and promoting the stability of the company.
3.2.2. In case of listed entities, the role of statutory auditor is amplified since public funds are involved. With the increase in the size of the entity, the role and responsibility of the statutory auditor increases due to greater operational complexity and large amount of ledger entries and transactions. In recent times, allegations have surfaced that financials of some large listed entities have been audited by individuals / firms having no or little experience.
3.2.3. While there is no provision in the LODR Regulations regarding the size, qualification or experience of the statutory auditor, Companies (Audit and Auditors) Rules, 2014 requires that audit committee / board of directors should consider that the qualifications and experience of the auditor are commensurate with the size and requirements of the company.
3.3. Proposal and rationale
3.3.1. A provision similar to that specified in Rule 3(1) of the Companies (Audit and Auditors) Rules, 2014 may be incorporated in the LODR Regulations. This would enable monitoring and enforcement of such requirement by SEBI and stock exchanges, and also enhance stakeholder confidence on the financials of the listed entity. Further, audit committee may also be required to consider whether the qualifications and years of experience of the signing partner(s) of the firm appointed as statutory auditor are commensurate with the size and requirements of the listed entity.
3.3.2. The LODR Regulations are proposed to be amended by insertion of suitable provisions in Schedule II, Part C on ‘Role of the Audit Committee and Review of information by Audit Committee’ as given at Annexure 3.
3.4. Public comments:
3.4.1. Public comments are invited on the following:
Proposal 8: Should a provision similar to that specified in Rule 3(1) of the Companies (Audit and Auditors) Rules, 2014 be incorporated in the LODR Regulations?
Proposal 9: Should audit committee be required to consider whether the qualifications and years of experience of the signing partner(s) of the firm appointed as statutory auditor are commensurate with the size and requirements of the listed entity?
4. Disclosures to the Audit Committee, Board of Directors and shareholders at the time of appointment / re-appointment of statutory auditor and secretarial auditor of a listed entity
4.1. Background
4.1.1. Regulation 36(5) of LODR Regulations specify requirements for disclosures as part of the explanatory statement to the notice being sent to shareholders for an annual general meeting, where the statutory auditor(s) / secretarial auditor(s) is/are proposed to be appointed / re-appointed.
4.1.2. The disclosures include proposed fees payable to statutory auditors / secretarial auditor(s) along with terms of appointment, any material change in the fee payable to such auditor from that paid to the outgoing auditor along with rationale for change. Further, basis of recommendation for appointment including the details in relation to and credentials of the statutory auditor(s) / secretarial auditor(s) proposed to be appointed are to be disclosed to shareholders.
4.2. Need for review
4.2.1. While the regulations require some minimum disclosures to shareholders at the time of considering appointment / re-appointment, there is no standardized format for disclosure of such information to shareholders. Further, there is no specific requirement in the LODR Regulations for disclosure of minimum information to the Audit Committee / Board of Directors at the time of considering appointment / re-appointment of statutory auditor and secretarial auditor.
4.3. Proposal and rationale
4.3.1. It is proposed to amend regulation 36(5) of the LODR Regulations to mandate disclosure of relevant information to the Audit Committee and / or Board of Directors, shareholders at the time of appointment / re-appointment of statutory and secretarial auditors of the listed entity. The proposed amendments to regulation 36(5) is captured in Annexure 3 of this Consultation Paper.
4.3.2. It is also proposed to prescribe the format for disclosure of minimum information to the Audit Committee and / or Board of Directors, shareholders of the listed entity at the time of considering appointment or re-appointment of statutory or secretarial auditors of the listed entity. The proposed format is placed as Annexure 4.
4.4. Public comments
4.4.1. Public comments / suggestions are invited on the following:
Proposal 10: Do you agree with the proposal to mandate disclosure of minimum information to the Audit Committee, Board of Directors and shareholders at the time of appointment or re-appointment of Statutory Auditors and Secretarial Auditors of the listed entity?
Proposal 11: Do you agree with the proposed format for disclosure of minimum information, as specified in Annexure 4 (Part A) of this Consultation Paper, at the time of appointment or re-appointment of Statutory Auditors of the listed entity?
Proposal 12: Do you agree with the proposed format for disclosure of minimum information, as specified in Annexure 4 (Part B) of this Consultation Paper, at the time of appointment or re-appointment of Secretarial Auditors of the listed entity?
5. Facilitating ease of implementation with respect to approval of RPTs undertaken by subsidiaries of a listed entity
5.1. Background:
5.1.1. As per second proviso to Regulation 23(2) of LODR, a related party transaction to which a subsidiary of a listed entity is a party but the listed entity is not a party shall require approval of audit committee of the listed entity if the amount of such transaction taken together with previous transactions during a financial year exceed 10% of the standalone turnover of the subsidiary, as per the last audit financial statements of the subsidiary.
5.1.2. The threshold for material RPTs which require approval of shareholders of the listed entity on Main Board is Rs. 1000 crore or 10% of the consolidated turnover of the listed entity, whichever is lower, as per Regulation 23(1) of LODR. In case of entities which have listed their specified securities on the Small and Medium Enterprises (SME) Exchange (“SME listed entities”), the SEBI Board in its meeting dated December 18, 2024 has decided that the materiality threshold for RPTs shall be Rs. 50 crore or 10% of the consolidated turnover of the listed entity1.
5.2. Need for review:
5.2.1. Issue (i): There may be instances where a transaction undertaken by the subsidiary of the listed entity exceeds the threshold for material RPTs requiring shareholder approval but does not exceed 10% of the standalone turnover of the subsidiary, thus not requiring audit committee approval. For example, consolidated turnover of a listed entity on Main Board is Rs. 20,000 crore and standalone turnover of a subsidiary of the listed entity is Rs. 12,000 crore. A transaction amounting to Rs. 1100 crore undertaken by the subsidiary is more than the material RPT threshold viz. Rs. 1000 crore (i.e. lower of Rs. 1000 crore and 10% of consolidated turnover of the listed entity viz. Rs. 2000 crore). Hence, it would require shareholder approval. However, the transaction amount is lower than 10% of standalone turnover of the listed entity viz. Rs. 1200 crore. Hence, it would not require approval by audit committee.
5.2.2. Issue (ii): The threshold limit for approval by audit committee is based on standalone turnover of the subsidiary of the previous financial year. In case of subsidiaries which do not have a financial track record, i.e., published financial statements for at least one year, such a threshold limit in terms of turnover cannot be determined. As per the sample data analyzed for turnover and net worth of 316 subsidiaries of listed entities, 10% of standalone turnover, the existing threshold, is equivalent to 17.21% of standalone net worth on an average.
5.3. Proposal and rationale:
5.3.1. Proposal (i): In case of RPTs undertaken by a subsidiary of a listed entity, a monetary threshold may be specified in addition to the existing percentage-based threshold of 10% of standalone turnover of the subsidiary for approval of RPTs by audit committee of the listed entity. A monetary threshold of Rs. 1000 crore may be specified for subsidiaries of listed entities on Main Board and a monetary threshold of Rs. 50 crore may be specified for subsidiaries of SME listed entities. Further, lower of the two thresholds, monetary threshold and percentage-based threshold, may be considered for approval of RPTs by the audit committee of the listed entity. This would harmonize the existing threshold under Regulation 23(2) of LODR with the materiality threshold under Regulation 23(1) of LODR. This proposal shall be applicable to subsidiaries which have financial track record.
5.3.2. Proposal (ii): In case of subsidiaries which do not have financial track record, i.e., published financial statements for at least one year, the percentage-based threshold may be specified as 10% of standalone net worth of the subsidiary, as certified by a practicing chartered accountant not more than 3 months prior to the date of seeking approval, instead of 10% of standalone turnover. Further, the monetary threshold limit of Rs. 1000 crore or Rs. 50 crore as proposed in para 5.3.1 above may also be applicable in such cases and lower of the two thresholds, monetary threshold and percentage-based threshold, may be considered for approval of RPTs by the audit committee of the listed entity. This will maintain consistency in the thresholds for subsidiaries which have and the subsidiaries which don’t have financial track record. It may also be clarified that in case of negative net worth, share capital plus securities premium may be considered instead of 10% of net worth.
5.3.3. The proposed amendments to Regulation 23(2) of LODR are placed at Annexure 3.
5.4. Public comments:
5.4.1. Public comments are invited on the following:
Proposal 13: In case of related party transactions (RPTs) undertaken by a subsidiary of a listed entity and where the subsidiary has published financial statements for at least one year, whether a monetary threshold should be specified as proposed in para 5.3.1 of this Consultation Paper in addition to the existing percentage-based threshold of 10% of standalone turnover of the subsidiary for approval of the RPTs by audit committee of the listed entity?
Proposal 14: In case of related party transactions (RPTs) undertaken by a subsidiary of a listed entity and where the subsidiary does not have published financial statements for at least one year, whether the monetary threshold and percentage-based threshold as proposed in para 5.3.2 of this Consultation Paper should be specified for approval of the RPTs by audit committee of the listed entity?
6. Clarifications pertaining to applicability of RPT provisions
6.1. Background:
6.1.1. Issue (i): The definition of ‘related party transaction’ under Regulation 2(1)(zc) of LODR includes transaction between a listed entity or any of its subsidiaries on one hand and a related party of the listed entity or any of its subsidiaries on the other hand. SEBI has received representation seeking clarity on the definition of related party applicable to the subsidiaries of listed entities for compliance with the RPT norms under LODR.
6.1.2. Issue (ii): Regulation 23(5) of LODR specifies RPTs which are exempted from approval requirements. The said regulation was amended in November, 2021 by insertion of clause (c) which exempted transactions between two wholly-owned subsidiaries of the ‘listed’ holding company since RPTs by subsidiaries was brought into the ambit of approval requirements under LODR. This has created ambiguity whether the exemption under clause (b) of Regulation 23(5) of LODR, which refers to transaction between holding company and its wholly owned subsidiary, is applicable to only listed holding company or unlisted holding company as well.
6.2. Proposal and rationale:
6.2.1. Proposal (i): The definition of ‘related party transaction’ under Regulation 2(1)(zc) of LODR has to be read in conjunction with the definition of ‘related party’ under Regulation 2(1)(zb) of LODR. Hence, the related parties of subsidiaries shall be identified as per Regulation 2(1)(zb) of LODR in order to ensure compliance with RPT requirements under LODR. An explanation to this effect may be added in Regulation 2(1)(zc) of LODR.
6.2.2. Proposal (ii): The exemptions from RPT approval requirements under clauses (b) and (c) of Regulation 23(5) of LODR are applicable when the accounts of the subsidiary(ies) are consolidated with the listed holding company and placed before the shareholders of the listed entity at the general meeting for approval. Hence, the exemption from RPT approval requirements is applicable when the transaction is between the listed holding company and its wholly owned subsidiary and the accounts of the wholly owned subsidiary are consolidated with the listed holding company. The above may be clarified in Regulation 23(5) of LODR by inserting the word ‘listed’ in reference to holding company in clause (b).
6.2.3. The proposed amendments to Regulation 2(1)(zc) and Regulation 23(5) of LODR are placed at Annexure 3.
6.3. Public comments:
6.3.1. Public comments are invited on the following:
Proposal 15: Whether a clarification should be added in the LODR Regulations that related parties of subsidiaries have to be identified as per the definition of ‘related party’ given in Regulation 2(1)(zb) of LODR Regulations?
Proposal 16: Whether the word ‘listed’ should be inserted in reference to holding company under clause (b) of Regulation 23(5) of LODR Regulations to clarify that the exemption from RPT approval requirements are applicable to transactions between a listed holding company and its wholly owned subsidiary?
7. Public Comments
7.1. In order to take into consideration, the views of various stakeholders, public comments are invited on Proposals 1 to 16 mentioned at paragraphs 2.4, 3.4, 4.4, 5.4 and 6.3 above.
7.2. The comments or suggestions, along with rationale, may be submitted latest by February 28, 2025 through the following link: link to provide comments online.
7.3. In case of any technical issue in submitting your comments through web based public comments form, you may send your comments through e-mail to consultationcfd@sebi.gov.in with the subject “CONSULTATION PAPER ON ASPECTS RELATING TO SECRETARIAL COMPLIANCE REPORT, APPOINTMENT OF AUDITORS AND RELATED PARTY TRANSACTIONS OF A LISTED ENTITY”.
Notes:-
1 Amendments to LODR Regulations shall be notified at a later date.
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