On February 07, 2025, the Securities Exchange Board of India (“SEBI”), issued a consultation paper on the review of on aspects relating to secretarial compliance report, appointment of auditors and related party transactions of a listed entity (“Consultation Paper”)[1]. The Consultation Paper invites public comments and suggestions, to be submitted at the latest by February 28, 2025.
The Consultation Paper seeks public feedback on proposed amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) and SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEBS Regulations”). The key features of the Consultation Paper include:
I. Strengthening the Secretarial Compliance Report:
Regulation 24(A)(2) of the LODR Regulations mandates listed entities to submit a secretarial compliance report within 60 (sixty) days of the financial year-end. Additionally, the concept of secretarial compliance, which focuses on review of compliance with securities laws, was introduced by SEBI vide circular dated February 08, 2019, along with a reporting format.
In line with this, SEBI aims to enhance enforcement mechanisms by introducing explicit confirmation from Practicing Company Secretaries (“PCS”) regarding compliance with securities laws. The key proposals are as follows:
- It is proposed that there shall be a revised format for the Annual Secretarial Compliance Report (“ASCR”), as provided in Annexure 1of the Consultation Paper. The PCS shall also provide an explicit confirmation on compliance with securities laws.
- In order to enhance secretarial compliance at listed entities, several amendments are proposed to the LODR Regulations, SBEBS Regulations, and the circulars issued thereunder. The details of these proposed amendments, along with their rationale, are as outlined in Annexure 2 of the Consultation Paper.
II. Eligibility Criteria for Appointment of Statutory Auditors
Currently, the LODR Regulations do not specify the size, qualification or experience requirements for statutory auditors of listed entities and certain concerns have been raised regarding unqualified auditors handling audits of large listed entities. The key proposals regarding the same are as follows:
- Similar to the provisions contained in Rule 3(1) of the Companies (Audit and Auditors) Rules, 2014 shall be incorporated in LODR Regulations, which require the audit committee or the board of directors to consider the qualifications and experience of the auditor to be commensurate with the size and requirements of the company.
- The LODR Regulations are proposed to be amended by incorporating appropriate provisions in Schedule II, Part C, under ‘Role of the Audit Committee and Review of Information by the Audit Committee,’ as detailed in Annexure 3 of the Consultation Paper.
III. Enhancing Disclosures for Auditor Appointments:
Regulation 36(5) of LODR Regulations requires disclosures when appointing statutory auditors. However, there is no standardized format for disclosures to be made to the audit committee and shareholders. The key proposals pertaining to such issues are as follows:
- Minimum disclosures may be required to be provided to the audit committee, board, and shareholders before auditor appointments. These may include firm details, audit experience, prior affiliations with the company, peer review status, pending regulatory actions, and fee details. The proposed amendments to Regulation 36(5) of the LODR Regulations has been captured in Annexure 3of the Consultation Paper.
- It is also proposed to prescribe a standardized format for disclosing minimum information to the audit committee, board of directors, and shareholders when considering the appointment or re-appointment of statutory or secretarial auditors. The proposed format is provided in Annexure 4 of the Consultation Paper.
IV. Amendments to Related Party Transactions (“RPTs”):
As per the second proviso of Regulation 23(2) of LODR Regulations, any RPT involving a subsidiary of a listed entity, where the listed entity itself is not a party, requires approval from the audit committee, if the total transaction value during a financial year exceeds 10% (ten percent) of the subsidiary’s standalone turnover, based on its last audited financial statements.
Additionally, under Regulation 23(1) of LODR Regulations, RPTs require approval of shareholders of the listed entity on main board, if they exceed INR 1,000 crores (Indian Rupees One Thousand Crores Only) or 10% (ten percent) of the listed entity’s consolidated turnover, whichever is lower. For Small and Medium Enterprises (“SMEs”) – listed entities, the SEBI Board, in its meeting on December 18, 2024, set the threshold at INR 50 crores (Indian Rupees Fifty Crores Only) or 10% (ten percent) of the consolidated turnover of the listed entity. The key proposals pertaining to the same are as follows:
- For RPTs undertaken by a subsidiary of a listed entity, a monetary threshold is proposed in addition to the existing 10% (ten percent) of standalone turnover requirement for audit committee approval. The proposed thresholds are:
- INR 1,000 crores (Indian Rupees One Thousand Crores Only) for subsidiaries of main board-listed entities.
- INR 50 crores (Indian Rupees Fifty Crores Only) for subsidiaries of SME-listed entities.
- The 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 aligns Regulation 23(2) of the LODR Regulations with the threshold under Regulation 23(1) of LODR Regulations and applies to subsidiaries with a financial track record.
- For subsidiaries without published financial statements for at least 1 (one) year, the threshold will be based on 10% (ten percent) of standalone net worth, certified by a practicing-chartered accountant within the last 3 (three) months, instead of 10% (ten percent) of standalone turnover. Additionally, the INR 1,000 crores (Indian Rupees One Thousand Crores Only)/ ₹50 crores (Indian Rupees Fifty Crores Only) monetary threshold shall also apply, with the lower of the two thresholds being considered. To ensure consistency, in cases of negative net worth, share capital plus securities premium may be used instead of 10% (ten percent) of net worth.
- The proposed amendments to Regulation 23(2) of LODR Regulations are provided in Annexure 3 of this Consultation Paper.
V. Clarifications on the Applicability of RPT Provisions:
Regulation 2(1)(zc) of LODR Regulations defines an RPT as a transaction between a listed entity (or its subsidiaries) and a related party of the listed entity (or its subsidiaries). In relation to the same, SEBI has received representations seeking clarity on how this definition applies to subsidiaries of listed entities for RPT compliance.
Further, in November 2021, Regulation 23(5)(c) of the LODR Regulations was introduced, exempting transactions between 2 wholly owned subsidiaries of a listed holding company from RPT approval requirements. However, ambiguity remains regarding Regulation 23(5)(b) of the LODR Regulations, which exempts transactions between a holding company and its wholly owned subsidiary, whether this applies only to listed holding companies or includes unlisted ones as well. To clarify the same, SEBI has made the following proposals:
- Regulation 2(1)(zc) of LODR Regulations shall be read alongside Regulation 2(1)(zb) of the LODR Regulations, to determine the related parties for subsidiaries. SEBI proposes adding an explanatory note to Regulation 2(1)(zc) of the LODR Regulations to explicitly state that related parties of subsidiaries shall be identified per Regulation 2(1)(zb) of the LODR Regulations.
- The exemption under Regulation 23(5)(b) of the LODR Regulations applies only when the wholly owned subsidiary’s accounts are consolidated with a listed holding company and placed before shareholders.
- To avoid ambiguity, SEBI proposes inserting the word “listed” before “holding company” in Regulation 23(5)(b) of the LODR Regulations, to confirm that the exemption applies only to listed holding companies.
- The proposed amendments to Regulations 2(1)(zc) and 23(5) of LODR Regulations are as detailed in Annexure 3 of the Consultation Paper.
[1] https://www.sebi.gov.in/reports-and-statistics/reports/feb-2025/consultation-paper-on-aspects-relating-to-secretarial-compliance-report-appointment-of-auditors-and-related-party-transactions-of-a-listed-entity_91740.html