Corporate Governance Revamp: SEBI’s Consultation Paper on Auditors, Compliance Reports and RPTs

Securities and Exchange Board of India (SEBI) issued a comprehensive consultation paper dated February 7, 2025 seeking public comments on proposed amendments to strengthen the corporate governance regulatory framework for listed entities (Consultation Paper, which can be viewed by clicking on this link). The Consultation Paper addresses three key areas: secretarial compliance reporting, appointment of auditors, and related party transactions (RPTs).

 

The proposals aim to enhance corporate governance practices, improve transparency, and ensure more effective oversight of listed entities and their subsidiaries. These recommendations come in response to identified gaps in the current regulatory framework under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). The specific proposals outlined in the Consultation Paper are inter alia as follows:

 

1. Strengthening the Secretarial Compliance Report

SEBI has proposed a revised format of the Annual Secretarial Compliance Report (ASCR) that currently requires Practicing Company Secretaries (PCS) to provide explicit “Yes/No/NA” confirmations on compliance with specific provisions of securities laws. The revised format requires the PCS to provide a confirmation that they have conducted a review as per the guidelines issued by the Institute of Company Secretaries of India and places the onus on the management of the listed entity to ensure the authenticity of documents and information furnished to the PCS. The revised format also mandates review of compliance with the Depositories Act, 1996, and compliance against the circulars and guidelines issued by SEBI under various regulations.

 

SEBI has also proposed certain other amendments to the LODR Regulations, which inter alia mandate disclosure of the ASCR as a part of the listed entity’s Annual Report, remove the applicability of certain certificates / reports overlapping with ASCR and mandate compliance with applicable secretarial standards by listed entities.

 

2. Eligibility Criteria for Statutory Auditors

The Consultation Paper notes that the role of a statutory auditor is amplified in a listed entity given the involvement of public funds. 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. Further, in light of certain allegations of audits by inadequately qualified firms, the Consultation Paper highlights that there is a need for statutory auditors for listed entities to have certain additional eligibility requirements (as compared to the Companies Act, 2013 which is generally applicable to all Indian companies).

 

In this regard, similar to Rule 3(1) of the Companies (Audit and Auditors) Rules, 2014, it has been proposed by the Consultation Paper that the audit committee of the listed entity should be required to evaluate whether qualifications and experience of both the audit firm and signing partners proposed to be appointed as statutory auditors of the listed entity, are commensurate with the size and requirements of the listed entity. This step will enable monitoring and enforcement of such requirements by SEBI and stock exchanges and also enhance stakeholder confidence on the financials of the listed entity.

 

3. Standardized Disclosures for Auditor Appointments

At present, the LODR Regulations do not prescribe any minimum information that is required to be disclosed to the board and audit committee of the listed entity at the time of seeking approval for appointment / re-appointment of a statutory auditor or secretarial auditor. Further, no standardized disclosure format has been prescribed by SEBI with respect to the information required to be provided to the shareholders of the listed entity while seeking approval on the aforesaid matters.

 

In this backdrop, the Consultation Paper has proposed certain amendments to the LODR Regulations to standardize and enhance disclosures made to the audit committee, board of directors, and shareholders at the time of appointment / re-appointment of both statutory and secretarial auditors. The proposed minimum information required to be provided to the board and audit committee inter alia includes:

 

• • Basic details (name, legal structure, addresses, registration details)
  • Experience and past associations including with promoter group
  • Compliance-related information (peer review status, necessary certificates, pending actions or proceedings)
  • Fee-related information (proposed fees, comparison with previous auditors, reasons for material change thereto)

 

Further, SEBI has also proposed the standardized format which is to be included in the shareholders’ meeting notice at the time of appointment/ re-appointment of both statutory and secretarial auditors – which requires the board and audit committee to provide rationale for recommending the concerned firm for appointment/ re-appointment.

 

4. Related Party Transaction Approvals for Subsidiaries

SEBI has identified gaps in the current framework for listed entity’s audit committee approval of RPTs undertaken by its subsidiaries, where the listed entity is not a party. The proposal includes:

 

• • Introduction of monetary thresholds (INR 1,000 crore for main board listed entities and INR 50 crore for small and medium-sized listed entities) in addition to the existing percentage-based standalone turnover threshold, and using the lower of the two thresholds;
  • For subsidiaries without one year of published financial statements, 10% of standalone net worth (certified by a practicing chartered accountant not more than three months prior to the date of seeking approval) may be used as a threshold instead of standalone turnover, along with the monetary thresholds mentioned in sub-clause (i) above. The lower of the two aforesaid thresholds shall be considered for determining materiality of a RPT;
  • In case of negative net worth, share capital plus securities premium (certified by a practicing chartered accountant not more than three months prior to the date of seeking approval) may be considered as the threshold instead of the net worth.

 

These changes aim to harmonize the existing threshold under Regulation 23(2) of the LODR Regulations for audit committee approval on RPTs with the materiality threshold prescribed for shareholder approval on RPTs under Regulation 23(1) and ensure higher standards of corporate governance with respect to RPTs.

 

5. Clarifications on RPT Provisions

The Consultation Paper also proposes clarifications on two aspects of RPT provisions under LODR Regulations:

 

• • An explanation to be added to the definition of ‘related party transactions’ under Regulation 2(1) (zc) of LODR Regulations, clarifying that related party of a subsidiary shall be identified as per clause Regulation 2(1)(zb) of LODR Regulations; and
  • Clarification that the exemptions under Regulation 23(5)(b) and Regulation 23(5)(c) are applicable only when the accounts of the wholly owned subsidiary(ies) are consolidated with the listed holding company and placed before the listed holding company’s shareholders for approval.

These proposed amendments reflect SEBI’s commitment to strengthen corporate governance frameworks and address existing regulatory gaps. The Consultation Paper invited public comments on these proposals, however, it is yet to be seen which proposals would be accepted and what impact the final amendments will have on corporate governance practices for listed entities in India.