SEBI Consultation Paper on strengthening Secretarial Compliance Report. - MMJC

• Revamping provisions of Annual Secretarial Compliance Report [‘ASCR’]

Regulation 24A (2) of the LODR Regulations mandates listed entities to submit an Annual Secretarial Compliance Report [‘ASCR’] to stock exchanges within 60 days of the financial year-end. SEBI has now stated that given the regulatory developments during the last 2 years there is a need to further review and revise the existing format of ASCR. This proposal seeks to make ASCR more explicit.

Key Aspects of the Proposed Changes:

Secretarial Compliance Report: Revision of ASCR format to ensure explicit confirmation from the Practicing Company Secretary (PCS) on compliance with following points under applicable securities laws:

• Board composition
• Composition and working of statutory committees
• Compliance with provisions of SEBI (PIT) regulations
• Fund raising compliances under SEBI (ICDR)
• Appointment and re-appointment of directors, KMP and senior management
• Remuneration of directors, KMP and senior management
•  Related party transactions
• Subsidiary related compliances
• Disclosure of material events and information under regulation 30 of SEBI (LODR).

In addition to explicit confirmation for certain compliances it is also proposed to consolidate various certifications provided by a PCS under various SEBI regulations into ASCR. The purpose of consolidating these certifications is to reduce the various compliance timeline for market participants and bring in uniformity of compliance for shareholders.

Now with one ASCR the compliance status of the company would be highlighted. Following compliances are now included in the ASCR:

• Certificate on non-disqualification of directors
• Certificate on compliance with corporate governance provisions given by statutory auditors or PCS.
• Compliance certificate given by PCS on employee benefit schemes a listed entity may float pursuant to SEBI (Share Based Employee Benefit) regulations.

• Increased compliance requirement for appointment of secretarial and statutory auditor:

SEBI vide LODR amendment dt: December 12, 2024, mandated appointment of secretarial auditor for a term of 5 year. With increasing complexity of area of operations of a listed company and ever-changing regulatory needs, role of secretarial auditor and statutory auditor have increased in recent period. In furtherance to this SEBI has now mandated some minimum information that needs to be prescribed while considering appointment or re-appointment of secretarial and statutory auditor.

The broad baskets and few significant points that are proposed to be included as part of minimum information that needs to be placed before board of directors, audit committee and shareholders of the company are as follows.

• Basic details of auditors: Name, details of statutory auditor and firm etc.
• Details of experience and past associations of auditors which inter-alia include:
• Names of other listed entities (equity / debt) for which the individual / Firm is the Secretarial Auditor.

• Names of the group companies (holding, subsidiary, associate, joint ventures) of the listed entity for which the individual / Firm is the Secretarial Auditor.

• Past association (name and number of years to be disclosed) of the proposed Secretarial Auditor with

(i) Promoter / Promoter Group during the last 3 years

(ii) Group companies (holding, subsidiary, associate, joint ventures) of the listed entity during the last 3 years.

• Compliance related which inter-alia include:
• Details of orders passed against the proposed Statutory Auditor by ICAI/NFRA/SEBI/MCA/any other competent authority / Court, both in India or outside India, in past 5 years.

• Details of pending proceedings relating to professional matters of conduct against the proposed Statutory Auditor with ICAI/NFRA/SEBI/MCA/any other competent authority / Court, both in India or outside India.

• Fee related which inter-alia include:

• Total Fees paid to previous/outgoing auditor
• Rationale for material change in the audit fees proposed to be paid the proposed statutory auditor as compared to the previous / outgoing auditor;
• Disclosure of % of non-audit fees, paid/payable to the proposed statutory auditor or/and its associate concerns, over audit fees paid/payable to the said auditor.
• Total remuneration/fees, etc. received by the proposed Statutory Auditor from the company or group companies (holding, subsidiary, associate, joint ventures) in the last financial year along with details.
• Proposed fees payable to the individual / firm as: auditor, for taxation matters, for company law matters, for other services, for reimbursement of expenses.
• Whether audit committee and board of directors have recommended appointment of the individual / firm as the statutory auditor of the listed entity?

• Past association (name and number of years to be disclosed) of the proposed Statutory Auditor with:
• Promoter / Promoter Group during the last 3 years
• Group companies (holding, subsidiary, associate, joint ventures) of the listed entity during the last 3 years.

Provided that the details mentioned above shall be disclosed only if the past association in any of the 3 years has resulted in the following:

• For partnership firm / LLP: Total income received by the firm from entities mentioned at (i) and (ii) above during that particular financial year exceeded 10% of the gross turnover of the firm at the end of the immediately preceding financial year of appointment / reappointment

• For individual / sole proprietorship concern: Total income received by the individual / sole proprietorship concern from entities mentioned at (i) and (ii) above during that particular financial year exceeded 10% of the total annual income of the individual / proprietor for the immediate previous financial year of appointment / reappointment

• Revamping related party transactions framework for transactions where listed entity is not a party:
• SEBI has now proposed that following transactions by subsidiary of listed entity, where listed entity is not party to the transactions shall require prior approval of audit committee of the listed entity:
• Where value of transactions whether entered individually or taken together with previous transactions exceed one thousand crores or 10% of annual standalone turnover whichever is lower.
• Where subsidiary of listed entity has listed its securities on small and medium enterprises exchange and value of transactions individually or taken together with previous transactions exceeds Rs 50 crores or 10% of annual standalone turnover whichever is lower.
• Where subsidiary entity does not have a financial track record and value of transactions taken individually or together with previous transactions exceed 1000 crores or 10% of standalone net-worth of subsidiary as certified by practicing chartered accountant not more than three months prior to seeking approval, whichever is lower.
• Where subsidiary has listed its securities on small and medium enterprises exchange, it does not have financial track record and value of such transaction whether entered into individually or taken together with previous transactions during a financial year, exceeds rupees fifty crore or ten per cent of the standalone net worth of the subsidiary as certified by practicing chartered accountant not more than three months prior to seeking approval, whichever is lower.

• Clarification on identification of related party: Further it is being clarified by SEBI that identification of related parties of subsidiary of listed entity shall be as per related party definition as specified under SEBI (LODR).

Conclusion: If implemented, these proposals aim to improve compliance oversight, enhance transparency in auditor appointments, and strengthen RPT governance. Increased scope of ASCR and guidance in this regard from ICSI will help determine compliance status of a listed company. Listed companies will need to ensure rigorous compliance monitoring and enhance disclosures to align with these new regulatory expectations.

Last date for comments on this consultation paper is February 28, 2025.

Link of SEBI consultation paper: 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