SEBI Floats Proposals For Tighter Audit, Compliance, And Related Party Transaction Rules

To strengthen corporate governance at listed firms, Securities and Exchange Board of India has proposed a revised format for Annual Secretarial Compliance Report, eligibility criteria for the appointment of auditors and inclusion of monetary thresholds for Related Party Transactions approvals.

These proposals are aimed at ensuring that listed entities maintain high standards of compliance and transparency in their dealings.

In its consultation paper, SEBI has proposed changes to improve the format and content of the ASCR, aiming for more explicit confirmation of compliance with securities law.

The suggestions have been made for exemptions related to corporate governance certifications and secretarial auditor reports when ASCR is attached to the annual report. The proposals include better enforcement mechanisms and making the ASCR a mandatory part of the annual report.

On specifying eligibility criteria for the appointment of statutory auditors, the regulator has proposed incorporating provisions in the LODR Regulations similar to those in the Companies Rules 2014, which ensure that auditors' qualifications and experience match the listed entity's size and complexity.

It has proposed that the audit committee consider the qualifications and experience of the signing partner(s) to ensure alignment with the listed entity's needs.

"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," SEBI said in its consultation paper floated on Friday.

With regards to disclosures related to auditor appointments, SEBI has proposed mandating the disclosure of key information related to the appointment or re-appointment of statutory and secretarial auditors to the audit committee, board of directors, and shareholders at the time of such appointments. It also suggested for standardising the format for these disclosures to improve transparency.

Further, SEBI has recommended monetary thresholds for RPTs conducted by subsidiaries of listed entities to determine whether approval from the audit committee is required.

The proposal suggested setting two approval thresholds for RPTs by the audit committee of listed entities' subsidiaries. For subsidiaries with a financial track record, the lower of a 10% turnover-based threshold or a monetary threshold (Rs 1,000 crore for main-board and Rs 50 crore for SME-listed subsidiaries) will apply.

For subsidiaries without a financial track record, the threshold will be 10% of the subsidiary's net worth, certified by a chartered accountant, or the same monetary limits. In case of negative net worth, share capital plus securities premium will be considered instead. This ensures consistency in thresholds for both types of subsidiaries.

Also, SEBI has proposed clarifying the definition of RPTs to ensure that transactions involving subsidiaries of listed entities are compliant with RPT norms.

It suggested amendments to LODR norms to clarify whether exemptions for RPTs between holding and wholly-owned subsidiaries apply to listed and unlisted entities.

SEBI has sought public comments on the proposals till Feb. 28.