Taxmann’s Analysis | SEBI Proposes Key Reforms to Strengthen Audit Oversight & Corporate Governance

SEBI Corporate Governance Reforms are a series of regulatory initiatives introduced by the Securities and Exchange Board of India to enhance transparency, accountability, and compliance in the capital markets. These reforms focus on strengthening audit oversight, standardising disclosure norms for related party transactions, and improving secretarial compliance reporting among listed entities. By updating key regulations and tightening auditor qualification criteria, SEBI aims to build investor trust and ensure robust corporate governance practices that foster long-term market stability.

Table of Contents

1. Introduction
2. Background and Rationale
3. SEBI’s Proposals at Glance
4. Evaluation of Auditor Qualifications and Alignment with Size and Complexity of Listed Entity
5. Mandatory Disclosures of Key Information Related to Appointment or Re-Appointment of Auditors
6. SEBI Proposes a Dual Threshold for Audit Committee Approval of RPTs by Subsidiaries of Listed Entities
7. Clarification on Exemption from RPT Approval Requirements Limiting to Listed Holding Companies
8. Strengthening the ‘Annual Secretarial Compliance Report’ for Listed Entities
9. Conclusion

1. Introduction

“Trust in the market begins with strong compliance”.

The Securities and Exchange Board of India (SEBI) has been stepping up its efforts to enhance the integrity of India’s capital markets. To further improve transparency, accountability and corporate governance in listed entities, SEBI has proposed a series of significant reforms. On February 7, 2025, SEBI released a consultation paper outlining a set of proposals aimed at strengthening audit oversight, refining the regulatory framework for related party transactions (RPTs) and enhancing compliance reporting. These proposed amendments are designed to address existing gaps, strengthen market practices and boost investor confidence. Comments on the proposals may be submitted by February 28, 2025.

2. Background and Rationale

The proposals are based on the recommendations of SEBI’s Advisory Committee on Listing Obligations and Disclosures (ACLOD) and subsequent internal discussions. They aim to strengthen compliance reporting and enhance the transparency and accountability of listed entities. The amendments would require changes to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and the SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021. These changes aim to address emerging regulatory needs and ensure the consistency and reliability of disclosures made by listed companies.

3. SEBI’s Proposals at Glance

SEBI’s proposed amendments target a broad spectrum of corporate governance and compliance areas, focusing on statutory auditor eligibility, disclosure norms, RPT approval thresholds and the strengthening of secretarial compliance frameworks. These proposals aim to create a more consistent and stronger compliance environment for listed companies. The changes are expected to enhance transparency and accountability, ensuring that companies adhere to higher standards of governance.

The key proposals are as follows –

• Evaluation of auditor qualifications and alignment with the size and complexity of the listed entity
• Mandatory disclosure of key information related to the appointment/re-appointment of auditors
• Dual Threshold for audit committee approval of RPTs by subsidiaries of listed entities
• Strengthening the ‘Annual Secretarial Compliance Report’ for listed entities
• Clarification on exemption from RPT approval requirements limiting to listed holding companies

4. Evaluation of Auditor Qualifications and Alignment with Size and Complexity of Listed Entity

4.1 Extant Norms

As per Rule 3(1) of the Companies (Audit and Auditors) Rules, 2014, the audit committee, or in its absence, the board of directors, must consider the qualifications and experience of the individual or firm proposed for the appointment as an auditor and whether these qualifications and experience align with the company’s size and requirements.

4.2 Need for Amendment

The statutory auditor plays a crucial role in ensuring the accuracy and reliability of a company’s financial statements, thereby enhancing stakeholders’ trust and promoting the company’s stability. However, the LODR Regulations currently do not prescribe specific provisions regarding the size, qualification, or experience of the statutory auditor.

The term’ auditor’ has not been defined under Section 2 of the Companies Act, 2013. However, as per Explanation II of Section 140(5), the term’ auditor’ includes a firm of auditors.

Only a chartered accountant shall be eligible for appointment as an auditor of a company[1]. A firm in which the majority of partners practising as Chartered Accountants in India are eligible for appointment by its firm name as auditor of a company[2].

4.3 Proposed Norms

To address this gap, SEBI has proposed incorporating a provision in the LODR Regulations similar to that specified in the Companies (Audit and Auditors) Rules, 2014. This would ensure that auditors’ qualifications and experience are commensurate with the size and complexity of the listed entity, thereby enhancing stakeholder confidence in financial disclosures.

Further, the audit committee may be required to assess whether the qualifications and years of experience of the signing partners of the firm appointed as statutory auditors are appropriate for the size and requirements of the listed entity.

5. Mandatory Disclosures of Key Information Related to Appointment or Re-Appointment of Auditors

5.1 Extant Norms

Regulation 36(5) of the LODR Regulations specifies the disclosure requirements as part of the explanatory statement in the notice sent to shareholders for an annual general meeting, where the appointment or re-appointment of statutory or secretarial auditors is proposed.

The disclosures include the proposed fees payable to the statutory or secretarial auditors, the terms of appointment and any material change in the fee payable to such auditors. Further, the basis for recommending the appointment, including details and credentials of the proposed statutory or secretarial auditors, must be disclosed to shareholders.

5.2 Need for Amendment

While the LODR Regulations provide certain minimum disclosures to shareholders when considering the appointment or re-appointment of statutory and secretarial auditors, there is no standardised format for disclosing such information. Also, there is no specific requirement in the LODR norms for disclosing minimum information to the Audit Committee or the Board of Directors when considering the appointment or re-appointment of statutory and secretarial auditors.

5.3 Proposed Norms

To address this gap, SEBI has proposed amending Regulation 36(5) of the LODR Regulations to mandate the disclosure of key information related to the appointment or re-appointment of statutory and secretarial auditors to the Audit Committee or the Board of Directors and shareholders at the time of such appointment or re-appointment.

Further, SEBI has proposed to prescribe a standardised format for disclosing minimum required information to the Audit Committee or Board of Directors, as well as shareholders of the listed entity.

6. SEBI Proposes a Dual Threshold for Audit Committee Approval of RPTs by Subsidiaries of Listed Entities

6.1 Extant Norms

As per the proviso to Regulation 23(2) of the LODR, a related party transaction (RPT) to which a subsidiary of a listed entity is a party must require approval of the audit committee (AC) of the listed entity (LE) if the value of such transaction taken together with previous transactions during a financial year exceed 10% of the annual standalone turnover, as per the last audited financial statements of the subsidiary. The threshold for material RPTs, which require approval of shareholders of the listed entity on the 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 the LODR.

For entities that have listed their specified securities on the Small and Medium (SME) Exchange, the SEBI Board, in its meeting dated December 18, 2024, decided that the materiality threshold for RPTs must be Rs 50 crore or 10% of the consolidated turnover of the listed entity.

6.2 Need for Amendment

SEBI observed that there may be cases where a transaction undertaken by a subsidiary of a listed entity exceeds the material RPT threshold, requiring shareholder approval, but does not exceed 10% of the subsidiary’s standalone turnover, thus bypassing the Audit Committee approval.

For example, consider a listed entity with a consolidated turnover of Rs 20,000 crore and a subsidiary with a standalone turnover of Rs 12,000 crore. A transaction of Rs 1,100 crore undertaken by the subsidiary would cross the material RPT threshold of Rs 1,000 crore. This would require shareholder approval. However, since Rs 1,100 crore is below 10% of the subsidiary’s standalone turnover (Rs 1,200 crore), approval of the Audit Committee would not be required.

Secondly, the threshold limit for approval by the audit committee is based on the standalone turnover of the subsidiary of the previous financial year. However, for subsidiaries that 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.

6.3 Proposed Norms

In order to address these gaps, SEBI has proposed the following amendments –

6.3.1 Introduction of Monetary Threshold for Audit Committee Approval of RPTs by Subsidiaries

In the 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 the standalone turnover of the subsidiary for approval of RPTs by the audit committee of the listed entity.

A monetary threshold of Rs. 1000 crore may be specified for subsidiaries of listed entities on the Main Board, and a monetary threshold of Rs. 50 crore may be specified for subsidiaries of SME-listed entities.

Further, the audit committee must consider the lower of the two thresholds, either a percentage-based or monetary threshold, for approval of RPTs. The proposal must apply only to subsidiaries with a financial track record.

6.3.2 Revised Threshold for Subsidiaries Without a Financial Track Record

For subsidiaries without a financial track record, the percentage-based threshold may be specified as 10% of the subsidiary’s standalone net worth instead of 10% of its standalone turnover.

The monetary threshold limit of Rs. 1000 or 50 crore may also apply in such cases, with the lower of the two being considered for approval of RPTs by the audit committee. This would ensure consistency in the thresholds for subsidiaries with and without financial track records.

The threshold is as tabulated below:

6.3.3 Alternative Consideration for Subsidiaries with Negative Net Worth

If a subsidiary has a negative net worth, share capital plus securities premium may be considered instead of 10% of net worth to determine the threshold.

7. Clarification on Exemption from RPT Approval Requirements Limiting to Listed Holding Companies

7.1 Extant Norms

The definition of ‘related party transaction’ (RPT) under Regulation 2(1)(zc) of the LODR Regulations includes transactions between a listed entity or any of its subsidiaries and a related party of the listed entity or any of its subsidiaries.

SEBI received various representations seeking clarity on the definition of related party applicable to the subsidiaries of listed entities for compliance with the RPT norms under the LODR Regulations.

Regulation 23(5) of the LODR Regulations specifies related party transactions that are exempted from various approval requirements. Regulation 23(5)(c) exempts transactions between two wholly-owned subsidiaries of a ‘listed holding company’.

However, Regulation 23(5)(b) exempts transactions between a holding company and its wholly-owned subsidiary. This has created ambiguity regarding whether the exemption for RPTs between holding and wholly-owned subsidiaries applies only to listed holding companies or also to unlisted holding companies.

7.2 Proposed Norms

The exemptions from RPT approval requirements under Regulation 23(5)(b) and Regulation 23(5)(c) apply when the accounts of the subsidiaries 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 applies when the transaction is between the listed holding company and its wholly-owned subsidiary and the wholly-owned subsidiary’s accounts are consolidated with the listed holding company.

Accordingly, SEBI has proposed clarifying Regulation 23(5)(b) by adding the word ‘listed’ to the holding company. Further, SEBI has proposed that the definition of ‘related party transaction’ under Regulation 2(1)(zc) of the LODR has to be read along with the definition of ‘related party’ under Regulation 2(1)(zb) of LODR.

Thus, related parties of subsidiaries must be identified as per Regulation 2(1)(zb) to ensure compliance with RPT requirements. An explanation for this effect may be added to Regulation 2(1)(zc) of LODR.

8. Strengthening the ‘Annual Secretarial Compliance Report’ for Listed Entities

8.1 Extant Norms

Currently, 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 the SEBI Master Circular, dated November 11, 2024, on compliance with LODR Regulations inter-alia, deals with the format of the secretarial compliance report.

8.2 Need for Amendment

SEBI constituted a study group in 2021 to strengthen secretarial compliance reports of listed entities. The study group submitted its report to SEBI in March 2022, suggesting changes to the format of the Annual Secretarial Compliance Report (ASCR). The Stock Exchanges, in consultation with SEBI, modified the format in 2023.

Considering the regulatory developments over the last two years, SEBI believes that the existing format of the secretarial compliance report needs to be further reviewed and revised to better enforce compliance with securities laws and identify non-compliance.

8.3 Proposed Norms

To strengthen secretarial compliance in listed entities, SEBI has proposed certain amendments to the (Listing Obligations and Disclosure Requirements) Regulations, 2015 and the SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021. Some of the key proposed amendments are as follows –

8.3.1 Revision in the Existing Format of ‘Annual Secretarial Compliance Report’ (ASCR)

SEBI has proposed revising the existing ASCR format to include explicit confirmation from PCS on compliance with specific provisions of securities laws.

8.3.2 Mandatory Disclosure of ‘Annual Secretarial Compliance Report’ in Annual Report of Listed Entities

SEBI has proposed to mandate disclosure of the ‘Annual Secretarial Compliance Report’ in the Annual Report of listed entities, in addition to the disclosure of the secretarial audit report.

8.3.3 Mandatory Compliance with Both Accounting Standards and Secretarial Standards

‘Annual Secretarial Compliance Report’ (ASCR) requires confirmation of compliance with applicable secretarial standards. Therefore, SEBI has proposed to modify Reg. 48 of LODR Regulations relating to ‘Accounting Standards’ to mandate compliance with both accounting standards and secretarial standards.

8.3.4 Disclosure w.r.t Fees and Resignation or Removal of Secretarial Auditor

SEBI has proposed making annual disclosure requirements regarding the fees paid and any change in the secretarial auditor during the financial year in the Annual Report.

8.3.4 Removal of Duplication in Certifications Between ASCR and Requirements in Other SEBI Regulations

SEBI has proposed to remove the requirement of certifications already being provided as part of the secretarial compliance report from the other relevant provisions of the LODR Regulations and SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations to avoid repetition.

8.3.5 Adherence to the Guidance Note issued by ICSI on Secretarial Audit and ASCR

SEBI has proposed that the Practising Company Secretary (PCS) must adhere to the guidance note issued by the Institute of Company Secretaries of India (ICSI) for secretarial audit reports and secretarial compliance reports.

9. Conclusion

In conclusion, SEBI’s proposals reflect a concerted effort to enhance corporate governance, transparency, and compliance in listed entities. By strengthening the eligibility criteria for statutory auditors, mandating standardised disclosures, refining RPT approval thresholds, and reinforcing secretarial compliance reporting, SEBI aims to instil greater accountability and confidence among investors and stakeholders.

The proposed amendments seek to close existing regulatory gaps, ensure uniformity in the compliance framework, and uphold the integrity of financial and secretarial disclosures. Once implemented, these measures will contribute to a stronger and more transparent regulatory ecosystem for listed companies, building trust and long-term market stability.

[1] Section 141(1) of the Companies Act, 2013

[2] Proviso to Section 141(1) of the Companies Act, 2013