As a part of the Bi-monthly Monetary Policy on 6th June, 2019, the RBI’s review of Development and Regulatory Policies [https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47226] proposed to set up a working group to strengthen the regulatory framework for core investment companies (CICs). The RBI states: “Over the years, corporate group structures have become more complex involving multiple layering and leveraging, which has led to greater inter-connectedness to the financial system through their access to public funds. Further, in light of recent developments, there is a need to strengthen the corporate governance framework of CICs. Accordingly, it has been decided to set up a Working Group to review the regulatory guidelines and supervisory framework applicable to CICs.”
Core investment companies are group holding vehicles, which hold equities of operating or financial companies in a business group. These companies also give financial support in form of loans to group companies. However, CICs are barred from dealing with companies outside the group or engaging in any other business operation.
Currently as per the data as on 30th April, 2019, there are only 58 registered CICs in the country. There may be some unregistered CICs as well, since those not having “public funds” do not require registration.
If a CIC is not holding “public funds” (a broad term that includes bank loans, inter-corporate deposits, NCDs, CP, etc.), the CIC is exempt from registration requirement. Presumably such CICs are also excluded from any regulatory sanctions of the RBI as well. However, it is quite common for CICs to access bank loans or have other forms of debt for funding their investments. Such CICs require registration and come under the regulatory framework of the RBI, if their assets are worth Rs 100 crores or more.
Corporate governance norms applicable to systemically important NBFCs are currently not applicable to CICs.
The RBI has observed that CICs are engaged in layering of leverage. This observation is correct, as very often, banks and other lenders might have lent to CICs. The CICs, with borrowed money, use the same for infusing capital at the operating level below, which, once again, becomes the basis for leveraging. Thus, leveraged funds become basis for leverage, thereby creating multiple layers of leverage.
While agreeing with the contention of the RBI, one would like to mention that currently, the regulatory definition of CICs is so stringent that many of the group holding companies qualify as “investment companies” (now, credit and investment companies) and not CICs. There is a need to reduce the qualifying criteria for definition of CICs to 50% of investments in equities of group companies. This would ensure that a large number of “investment companies” will qualify as CICs, based on predominance of their investments, and would be viewed and regulated as such.
Prominent among the registered CICs are entities like Tata Sons, L&T Finance Holdings, JSW Investments, etc. The extension of corporate governance norms to CICs is unlikely to benefit any, but impact all.
The Reserve Bank has accordingly constituted the Working Group to Review Regulatory and Supervisory Framework for Core Investment Companies on 3rd July, 2019 [https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR43DDEE37027375423E989F2C08B3491F4F.PDF]. The Terms of Reference (ToR) of the Working Group are given below:
- To examine the current regulatory framework for CICs in terms of adequacy, efficacy and effectiveness of every component thereof and suggest changes therein.
- To assess the appropriateness of and suggest changes to the current approach of the Reserve Bank of India towards registration of CICs including the practice of multiple CICs being allowed within a group.
- To suggest measures to strengthen corporate governance and disclosure requirements for CICs
- To assess the adequacy of supervisory returns submitted by CICs and suggest changes therein
- To suggest appropriate measures to enhance RBI’s off-sight surveillance and on-site supervision over CICs.
- Any other matter incidental to the above.
As per the press release, the Working Group shall submit its report by October 31, 2019.
Amendment to Section 89 and insertion of Section 90 are one of the key amendments brought in by the Companies (Amendment) Act, 2017 (‘Amendment Act’). The said provisions were enforced w.e.f. June 14, 2018and Companies (Significant Beneficial Owners) Rules, 2018 were notified (‘SBO Rules’). MCA, thereafter, issued General Circular No 7/ 2018for extending the last date of filing eForm BEN-2 and 08/ 2018 to the effect that the format of declaration to be submitted by Significant Beneficial Owner (SBO) will undergo revision.
MCA on February 8, 2019 amended SBO Rules by amending the definition of significant beneficial owner. The due date for submission of declaration in Form BEN-1 was 90 days from the said amendment. However, eForm for filing the said declaration with MCA was not made available.
MCA, on July 1, 2019, issued Companies (Significant Beneficial Owners) Second Amendment Rules, 2019thereby notifying eForm BEN-2 required to be submitted by companies.
Scope of Section 90
Section 90 focuses on the identification of a ‘significant beneficial owner’ through his ‘indirect holdings’ in an entity, which is to be considered only where the individual has majority interest in the vehicle holding stake in the “reporting company”, or in the ultimate holding entity of such holding vehicle. That is to say, simply direct holding or direct control, or direct significant influence (without any indirect holdings) were not required to be reported as significant beneficial interest under the Rules, irrespective of the magnitude of direct holding. Therefore, the direct holding of interest by an individual is relevant only if the direct holding may be clubbed with indirect holding.
Onus of making the declaration
The individual holding significant beneficial interest by virtue of holding shares or voting rights or right to distributable dividend or exercising significant influence was required to furnish the declaration in Form No. BEN-1 within 90 days of February 8, 2019 and thereafter in case of any change, to the reporting company. Herein, the onus lies on the individual to come forward and submit the declaration. The reporting companies on the other hand were required to give notice to members (other than individual) holding 10% or more of participating interest [either of shares, voting rights, or right to receive or participate in the dividend or any other distribution], seeking information about the individual who is significant beneficial owner in the reporting company in Form BEN-4.
It is pertinent to note that the obligation of the individual to self-declare his significant beneficial holdings and the obligation of the company to send notice seeking information from members in terms of Rule 2Aare independent obligations.
Intimation to the ROC by the reporting entity
As per the SBO Rules as amended from time to time, the declaration of beneficial interest is required to be filed in e- Form BEN-2 with the Registrar in respect of such declaration, within a period of thirty days from the date of receipt of declaration by the company.
With the deployment of e-Form BEN -2 vide Companies (Significant Beneficial Owners) Second Amendment Rules, 2019, the Companies shall be required to intimate the same to the Registrar within 30 days of its deployment.
Companies are facing difficulty in identification of SBO in view of complex structures. Until receipt of declaration in Form BEN-1, companies will not be able to file eForm BEN-2.
Consequences of non-filing
Section 90(11) of the Act, 2013 provides for penal provisions for the failure of the part of the company and every officer in default in complying with the provisions of Section 90(4) i.e. filing of the above return and changes therein with the Registrar with a fine:-
- For company and every officer in default:- Rs. 10 Lakhs – Rs. 50 Lakhs
- For Continuing default: – Upto Rs. 1000 for every day after first day of failure.
Analysis of e-Form BEN -2
- Declaration of holding reporting company
Pursuant to Rule 8 of the SBO Rules, which states that the rules are not applicable to the extent the shares of the reporting company is held by its holding reporting company. It is presumed that the SBO of the holding company is also the SBO of the subsidiary company for the shares held by the holding company.
First bullet of Field no. 3 requires the companies to report the details of such holding reporting company which shall be mapped through the CIN of such company.
- Requirement to furnish copy of agreement
In order to specify the manner in which significant beneficial interest is being held or exercised either indirectly or together with any direct holding or right, the form requires attachment of agreement in following cases:
- Exercise of control
- Exercise of significant influence
This might be a serious constraint, as it may not be necessary that the companies might have in place a written and executed agreement specifying the control and/ or significant influence exercised by the members. However, at present the mode of mapping of control and/ or significant influence has only been done through the agreement to be attached in the form.
While, the eForm BEN-2 seems a derivative of the format of declaration Form BEN no. 1, companies will be able to report correctly subject to receipt of accurate declarations from the SBOs.
Other practical difficulties in reporting in the eForm can be ascertained once the eForm is deployed on MCA portal.
Other related articles on SBO can viewed here-
By Munmi Phukon
Principal Manager, Vinod Kothari & Company
How does a person get into the board of directors of a listed entity? Simply because he happens to be a majority shareholder, or the son of the promoter, or a morning-walk friend of the promoter? Or, is it that a listed company is expecting supervisory leadership to come from a body consisting of individuals with diverse skills and competencies? What are those key competences and skill sets required from directors, and which of the company’s directors possess which of these abilities? These are questions that listed entities and their stakeholders might have either not put before themselves, or even if considered, may not have had structured answers to these questions. However, come this year, every listed entity shall give a list of core skills/ expertise/ competencies of the Board members, and come next year, the names of the directors who actually possess such skills/ expertise/ competencies.
In the above para, one is referring to a new provision under Para C of Schedule V pertaining to the contents of corporate governance report which reads as follows:
“C. Corporate Governance Report: The following disclosures shall be made in the section on the corporate governance of the annual report.
(h) A chart or a matrix setting out the skills/expertise/competence of the board of directors specifying the following:
(i) With effect from the financial year ending March 31, 2019, the list of core skills/expertise/competencies identified by the board of directors as required in the context of its business(es) and sector(s) for it to function effectively and those actually available with the board; and
(ii) With effect from the financial year ended March 31, 2020, the names of directors who have such skills / expertise / competence.”
Importance & objectives of having a diverse Board
The importance of a diverse and skilled Board is recognised around the world. It is more than a necessity considering the complex and dynamic business environment. The Board is the set of leaders who provide comprehensive guidance, support and direction to the company towards its success. The objective of having skilled Board is manifold considering the involvement of public money, be it of the public shareholders, lenders or other creditors. Stakeholders are concerned about the attitude of the firm towards corporate governance as a diverse set of individuals collectively known as Board cannot take a casual approach on the management of the firm sitting on the pile of public money. Therefore, it is always required for the NRC to have a clear view as to what is being expected from the directors, what would be the set of skills, competencies, expertise, knowledge etc. that would be possessed by the directors, whether the same is broad based and also, to ensure an effective evaluation mechanism.
What does law require?
Till the amendments in the Listing Regulations coming into force, Regulation 36 required disclosure of the nature of the expertise in specific functional areas of a proposed appointee including a person seeking re-appointment to the shareholders. Further, Rule 5 of the Companies (Appointment and Qualification of Directors) Rules provided the qualification of the independent directors as persons who shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.
The new requirement of disclosure has been framed based on the Kotak Committee Recommendations whose rationale was primarily based on the fact that the existing requirement of law was not sufficient to the shareholders for their adequate analysis whether the Board of the company has sufficient mix of diverse expertise/ skill- sets.
The broad parameters
The Board is responsible for shaping the future of the organisation within its fiduciary characteristics. Therefore, identifying the key competencies of the Board members is very much essential to ensure that the qualified persons undertake this cardinal role. Globally, identifying the key competencies of Board members is considered as the step towards a successful Board. Broadly, the parameters for identifying key competencies or skill- set can be categorised as follows:
Industry knowledge/ experience
Having experience in and knowledge of the industry in which the organisation operates is one of the key competencies of a Board member. This is required for achieving the objectives of the organisation while operating effectively, responsibly, legally and sustainably. The Board members are required to demonstrate an understanding of-
- the relevant laws, rules, regulation policies applicable to the organisation/ industry/ sector and level/ status of compliances thereof by the organisation
- the best corporate governance practices, relevant governance codes, governance structure, processes and practices followed by the organisation
- business ethics, ethical policies, codes and practices of the organisation
- the structures and systems which enable the organisation to effectively identify, asses and manage risks and crises
- international practice
Technical skills/ experience
To assist with the ongoing aspects of Board’s role, the members are required to possess technical/ professional skills and specialist knowledge. The directors need to be able to obtain, analyse, interpret and use information effectively to develop plans and take appropriate decisions. In order to assess possession of such skills, the person will be required to have knowledge about-
- how to interpret financial statements and accounts in order to assess the financial health of an organisation
- the sources of finance available to an organisation and their related merits and risks
- how to assess the financial value of an organisation and potential business opportunities
- importance of information technology in the organisation
- marketing or other specific skills required for the effective performance of the organisation
Behavioural competencies/ personal attributes
Displaying high standards of conduct, ability to take responsibility for their own performance etc. are some of the behavioural competencies which the directors are required to possess. Interpersonal skills such as good communication skills, relationship building capacity etc. will come under this category. In brief, the following will be sub- sets under this head-
- Integrity and ethical standards
- Mentoring abilities
- Interpersonal relations
- Managing people and achieving change
- Curiosity and courage
- Genuine interest
- Active contribution
To create and implement effective strategies, a thorough knowledge of the strategic process is required. The ability to think strategically enables directors to propose ideas, options and plans that take advantage of available opportunities while reflecting a broad and future-oriented perspective. Having an understanding of the need for a clear vision and purpose to guide the strategy, models and methods of strategic analysis, option analysis the factors involved in successful strategy implementation by the directors is required for giving a strategic direction to the organisation. The sub- sets under this head may be as below:
- Strategic thinking
- Vision and value creation
- Strategy Development
- Strategy implementation and change
Mind- set or attitude
An ethical mind- set demonstrates a high standards of conduct. Further, professional attitude and independent mind- set enables director to provide the challenge and rigour required to help the Board achieve a comprehensive understanding of information and options, as well as high standards of decision-making. The head may be segregated into the following:
- Performance oriented
- Aware of self and others
Other skills may include decision making, communication, leadership, influencing, risk oversight, risk management, stakeholder relations etc. Good decision-making skills is required in order to arrive at a course of action in a timely manner that provides a clear direction and moves the organisation forward. Similarly, strong leadership skills enable directors to solve problems, cope up with the crises and change, and inspire others to follow them in pursuit of the values and goals of the organisation. The ability to build good networks and relationships within and beyond the organisation is important for the director to gain influence, have impact and progress organisational goals. The ability to communicate effectively through a variety of modes and channels and with a range of audiences is necessary for directors to work successfully with others and to fulfil their duties on the Board. Directors need to understand how to deliver effective leadership, build good stakeholder relations and develop a strategically aligned and values-based organisational culture in order to achieve good organisational performance. Therefore, the sub- sets hereunder may be-
- decision making skills
- communication skills
- leadership skills
- risk oversight
- risk management skills
- stakeholder relations
Suggestive format of reporting
|Broad parameter||Specific skills/ expertise/ competency
|Director 1||Director 2||Director 3|
Industry knowledge & experience
|Understanding of the relevant laws, rules, regulation policies applicable to the organisation/ industry/ sector and level/ status of compliances thereof by the organisation
|Understanding of the best corporate governance practices, relevant governance codes, governance structure, processes and practices followed by the organisation
|Understanding of business ethics, ethical policies, codes and practices of the organisation
|Understanding of the structures and systems which enable the organisation to effectively identify, asses and manage risks and crises
|Understanding of international practice
The amendments require listing out of the key skills/ competencies of the Board as a part of the corporate governance report for FY 18-19. From subsequent FYs, the disclosure will have to be by way of a matrix signifying the directors actually carrying such skills. It is anticipated that such a disclosure will help the shareholders to analyse the diversity of expertise/ skill – sets of the Board. This is believed that disclosure of each of the skills against the directors will make them responsible for each of the skills. Therefore, a director will not be able to escape responsibility with the shield of immunity provided by law which is circumstantial.
By Kanakprabha Jethani | Executive
ICSI has recently issued four Auditing Standards (‘Standards’) for the members in practice namely:
- CSAS-1 – Auditing Standard on Audit Engagement
- CSAS-2 – Auditing Standard on Audit Process and Documentation
- CSAS-3 – Auditing Standard on Forming of Opinion
- CSAS-4 – Auditing Standard on Secretarial Audit
in order to enable them to carry out the audit engagements more effectively. The first three Standards will be applicable to all kind of audit engagements and the fourth one will specifically be applicable for the Secretarial Audit under Section 204 of the Companies Act, 2013. In terms of ICSI’s own language, the Standards shall be mandatorily effective from the audit engagements accepted on or after 1st April, 2020.
Objective of the Standards
Seemingly, ICSI is seeking to promote best auditing practices, uniformity and consistency in conduct of the audits by the members in practice. These are expected to strengthen the audit process and corporate governance practices. Since, varied audit practices are being carried over by different auditors, monitoring of audit process becomes cumbersome and troublesome at the same time. These Standards are expected to harmonise the audit practices among the auditors all over the country. The objective is to streamline and enable members to effectively undertake secretarial audit and ensure compliance. It is also expected that these Standards will enhance the quality of compliance.
Applicability of Standards
These Standards shall be effective and recommendatory to be accepted by the auditors on or after 1st July 2019. However, the same shall be mandatorily applicable to the audit assignments obtained on or after 1st April 2020.
Whether these Standards are statutorily required?
In order to be statutorily applicable and binding, legal backing to the provision is required. For example, for the Secretarial Standard-1 and secretarial Standard-2 have a backing of legal provision i.e. Section 118 of the Companies Act 2013. Section 118(10) provides that every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India. In compliance of aforesaid section, companies follow these two secretarial standards. The same is not the case for other secretarial standards issued by ICSI such as, Secretarial Standard -3 relating to Dividend or Secretarial Standard-4 relating to maintenance of registers and records and hence purely voluntary.
Likewise, the Auditing standards issued by ICSI also do not carry a legal backing as of now though the same is being brought in by ICSI with an intent to make it mandatory.
What are the various audits a PCS can undertake?
A Practising Company Secretary is authorised to undertake various audits as prescribed under the Companies Act 2013, SEBI regulations and other applicable laws, some of which are as under:
- Secretarial Audit as per provisions of Section 204 of the Companies Act 2013;
- Half-yearly certificate certifying that all share certificates were issued by Share transfer Agent/ Registrar and transfer Agent within 30 days of lodgement of transfer as provided under regulation 40(9) of SEBI(Listing Obligations and Disclosure Requirements) Regulations;
- Annual Secretarial Compliance Report as per SEBI Listing Regulations;
- Half-yearly certification of maintenance of 100% asset cover for non-convertible debt securities as per regulation 56(d) of SEBI(Listing Obligations and Disclosure Requirements) Regulations;
- Certificate regarding compliance of conditions of corporate governance as per SEBI Listing Regulations;
- Share Reconciliation Certificate as per SEBI (Depositories and Participants) Regulations, 2018 etc.
These Standards shall be applicable to all these audits along with any other audit required to be done by PCS. Thus, for the purposes of these Standards, ‘Auditor’ shall mean a Practising Company Secretary undertaking any of such audits.
The list of TO DO’s for auditors
CSAS-1 – AUDITING STANDARD ON AUDIT ENGAGEMENT
This deals with roles and responsibilities of Auditor undertaking audit engagement. They also elaborates procedures and principles for entering into agreement with appointing authority.
Eligibility to take audit engagement
- Auditor shall not hold, singly or along with partners, spouse, parent, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person, more than 2% in the paid up share capital or shares of nominal value of Rs. 50,000, whichever is lower or more than 2% voting power in the Auditee, as the case may be.
- Auditor shall not be indebted to the Auditee for an amount of five lakh rupees or more except if such indebtedness is arising out of ordinary course of business.
- If an Auditor was in employment of the Auditee, its holding or subsidiary company and 2 (two) years must have lapsed from the date of cessation of employment.
Things to do pursuant to CSAS-1:
- Ensure that appointment is made as per provisions of Companies Act 2013 and rules made thereunder.
- Submit eligibility certificate to appointing authority.
- Obtain audit engagement letter and copy of resolution passed by appointing authority and provide acceptance thereto.
- Ensure audit engagement letter includes:
- The objective and scope of the audit; if the same has been established by law, reference to relevant provisions must be stated.
- The responsibilities of the Auditor and the Auditee;
- Written representations provided and/or to be provided by the Management to the Auditor, including particulars of the Predecessor or Previous Auditor;
- The period within which the audit report shall be submitted by the Auditor, along with milestones, if any;
- The commercial terms regarding audit fees and reimbursement of out of pocket expenses in connection with the audit;
- Limitations of audit, if any.
- Intimate previous auditor about such engagement, in writing.
- Ensure that such engagement is within the limits prescribed by ICSI from time to time.
- Maintain confidentiality of information obtained during the course of audit unless there is a legal obligation to disclose such information. Also, ensure that employees, staff and other team members also be bound by duty of confidentiality.
- Do not agree to change in terms of engagement unless there is reasonable justification for doing so.
- If terms of appointment are changed resulting in lower level of assurance, it shall be accepted only after considering the appropriateness of the same.
- Any changes in terms of engagement must be agreed by way of supplementary or revised engagement letter.
CSAS-2 AUDITING STANDARD ON AUDIT PROCESS AND DOCUMENTATION
This Standard deals with the roles and responsibilities of Auditor with respect to maintenance of proper audit records that provides-
- sufficient and appropriate record to form the basis for the Auditor’s Report; and
- evidence that the audit was planned and performed in accordance with the applicable Auditing Standards and statutory requirements.
Things to do pursuant to CSAS-2
- Formulate an audit plan as per terms of audit engagement.
- Ensure adherence to audit plan.
- Conduct risk assessment of auditee considering business, environmental and organisational structure and compliance requirements.
- Evaluate high-risk areas relating to internal control systems, transparency, prudence, probity, changes in compliance team etc.
- Obtain sufficient information of the auditee for conduct of audit.
- Make use of systematic and comprehensive checklists.
- Obtain necessary evidence and evaluate the same so as to support the opinion. This shall be adequately documented in audit working papers.
- Obtain third-party confirmations wherever required.
- Document discussions with management of the auditee in significant matters.
- Collate the documentation for records within 45 days of date of signing of auditor’s report.
- Maintain documentation in physical or electronic form for a period of 8 years from date of signing of auditor’s report.
Features of audit plan
- The audit shall be planned in a manner which ensures that qualitative audit is carried out in an efficient, effective and timely manner.
- Audit planning shall ensure that appropriate attention is accorded to crucial areas of audit and significant issues are identified in a timely manner.
- Audit plan should be based on professional scepticism, so that it is possible to exercise professional judgment in an objective manner.
CSAS-3 – Auditing Standard on Forming of Opinion
This Standard provides details about the manner of evaluation of conclusions derived out of audit evidence which leads to formation of Auditor’s opinion.
Things to do pursuant to CSAS-3
- Consider materiality while forming opinion.
- Consider all relevant audit evidence before issuing audit report.
- Apply professional judgement and scepticism to ensure evidence is factually correct.
- Prepare audit report within the agreed time-frame.
- Verify accuracy of facts and responses from concerned persons.
- Adhere to generally accepted principles and practices in relation to audit process.
- Indicate if any third-party report or opinion is being relied on.
- Indicate if third-party report is provided by the auditee and also consider important findings of third party.
- Carry out a supplemental test to check veracity of third-party report.
- Express unmodified opinion if satisfied that applicable laws have been duly complied with and relevant records are free from misstatement.
- Express modified opinion in bold or italic letters. Modified opinion is to be issued if:
- non-compliance of applicable laws is found,
- relevant records aren’t free from misstatement,
- sufficient and appropriate audit evidence to ensure the above is not available.
- Ask auditee to remove any such limitation on scope of audit which is likely to make the Auditor give modified opinion or disclaimer.
- Give unmodified opinion, if in case of absence of sufficient and appropriate evidence, Auditor can conclude that effects of unavailability of such evidence will be non-material. However, if the effects are likely to be material, the auditor shall express disclaimer of opinion.
Format of audit report
- The report shall be addressed to appointing authority unless the terms of engagement provide otherwise.
- Report must be detailed. Specific formats, if any, must be followed.
- Provide annexures for detailing of certain aspects, wherever necessary.
- Include a section named Auditor’s responsibility in the audit report.
- This section shall state that the audit was conducted in accordance with applicable Standards.
- The report shall state that due to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements or material non-compliances may not be detected, even though the audit is properly planned and performed.
- Signature block shall mention name of auditor/firm, certificate of practice number/registration number and membership number of the auditor.
- Mention clearly the date and place of signing audit report.
CSAS-4 – Auditing Standard on Secretarial Audit
This Standard lays down the manner of evaluation of statutory compliances and corporate conduct in the process of doing secretarial audit u/s 204 of the Companies Act, 2013. It gives a broad structure to the audit process.
Things to do pursuant to CSAS-4
- Take note of laws applicable to the auditee. This includes specific laws as well as general laws.
- Review Memorandum of Association, Articles of Association, statutory books, disclosure by the auditee etc.
- Identify events and corporate actions that took place in the audit period by reviewing website of the auditee, disclosures made to stock exchanges, statutory records of the auditee etc.
- Verify event based as well as calendar compliances of the auditee.
- Verify composition of Board of directors is in compliance with applicable rules and regulations i.e. optimum combination and strength is maintained and directors are not disqualified.
- Ensure formation of required committees and proper composition of such committees.
- Ensure decisions by board of directors are taken in compliance with the law i.e. in properly constituted meeting or by circulation.
- Ensure that systems of compliance are adequate and effective.
- Analyse instances of receipt of show cause notices, prosecutions initiated, fee or penalty levied etc.
- Collect further evidence and conduct in-depth checking if a fraud is suspected.
- If there is a sufficient reason to believe that a fraud has been committed, the same shall be reported to Audit Committee/Board/Central Government as per the process laid down under the Companies Act, 2013. Also, the same shall be included in Secretarial Audit Report.
- Verify the comments received on reporting fraud.
- Include fraud detected by other auditor in the audit report.
- Report all the events that affect auditee’s going concern or alters the charter or capital structure or management or business operation or control, etc.
These Standards provide a broad structure to the audit process and direction as to proceeding the audit. Having a direction to proceed will make the audit more systematic. To establish these structures and systems would initially require plenty of clerical nature work. However, this is a one-time labour to be put in for structuring all the future audits.
These Standards are issued with a motive to enhance the level and quality of compliance and at the same time harmonise the audit practices being followed by various auditors. Unity of procedures ensures clarity to the auditee which enables them to ensure systematic compliance. Application of these Standards is believed to be beneficial for the Auditors as well as the companies and regulators in the long run.
CS Nitu Poddar, Senior Associate, Vinod Kothari & Company
SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘Regulations’) is applicable in relation to securities listed and proposed to be listed. Companies having its debentures listed are also required to comply with the provisions of the Regulations. The intent of the Regulations is to prohibit trading in listed securities while in possession of Unpublished Price Sensitive Information (UPSI). UPSI has been defined to mean such information that is not generally available and which can materially affect the price of the securities on becoming generally available and includes information in relating to financial results, dividends, change in capital structure, restructuring and changes in key managerial personnel.
UPSI in case of debt listed entities
Sensitivity of an information largely depends on the kind of security it is associated with; Information that may be regarded as UPSI for an equity listed entity may not necessarily affect prices of the debt listed. For example, declaration of dividend is price sensitive information for an equity listed entity but may not have any impact on the debt listed. The reason for the same is that debentures receive fixed rate of interest and is not at the discretion of the management. However, default/ expected default in payment of interest on a loan is price sensitive information as it may result in non-service of obligations in relation to the debt listed too.
Generally speaking, the information with respect to the financial position of the company,revision in ratings, instance of defaultmade by the company in repayment of any debt or any such information which affects the payment of principal and /or interest of the debentures are probable price sensitive information for listed debt securities.
Given the uniform applicability of the Regulation for all listed companies, there are certain implementation issues with respect to the closure of trading window in case of debt listed company which has been discussed in this article.
Closure of Trading Window in case of Financial Results
Trading Window denotes a notional window used as an instrument of monitoring the trades of Designated Persons. A Designated Person is permitted to trade only when the Trading Window is not closed.
As per Para 4 of Schedule B to the Regulations, it is mandatoryfor all listed companies to close its Trading Windowfrom the end of “every quarter” till 48 hours after the declaration of financial results.
“Trading restriction period can be made applicable from the end of every quarter till 48 hours after the declaration of financial results”
An equity listed entity is required to submit financial results on a quarterly basis. In case of debt listed entity, listed entities are required to submit un-audited or audited financial results on a half yearly basis. If the debt listed entity is a subsidiary of an equity listed entity, in that case it is required to submit financial results on quarterly basis for consolidation purpose.
The quarterly results so submitted may not be published on the website of the debt listed entity; however, the information becomes generally available by forming part of the consolidated financial results.
Accordingly, few pertinent questions that arise are:
- Should the trading window of a debt listed entity be closed from the end of every quarter till the declaration of financial results by the company which will happen only after the completion of a half year?
- Should the debt listed company close the trading window every quarter while submitting results to holding company for consolidation purpose?
|Quarters/ Half Year||Timeline for submission of results to stock exchange||Period of trading window closure in case debt listed entity has not holding company.||Period of trading window closure in case of submission of results for consolidation.|
|April to June (Q1)||–||Not required||From July 1 till 48 hours of declaration of consolidated results by holding company.|
April – September (HY 1)
From October 1 till 48 hours after declaration of financial results
|From October 1 till 48 hours after declaration of financial results by debt listed entity.|
|October – December (Q3)||–||Not required||From January 1 till 48 hours of declaration of consolidated results by holding company.|
|January – March (Q4)
October – March (HY 2)
From April 1 till 48 hours after declaration of financial results.
|From April 1 till 48 hours after declaration of financial results by debt listed entity.|
It is to be noted that, with the amended provisions in place, the tenure of closure of Trading Window got elongated and covers almost 180 days/ 6 months of the year. Now, if the provisions of PIT, for a debt listed company, are interpreted in a way that the window should be closed from the end of each quarter and opened once the financial results are declared after the half year, one can easily imagine that the window is closed for almost the 8-9 months of the year! Does that mean that the designated person of such companies will be allowed barely 3 months for trading? Taking such a view will be squarely impractical.
A debt listed company which is not a subsidiary of an equity listed holding company, cannot be mandated to close trading window every quarter merely to comply with Schedule B requirements. This will result in absolute impractical situation.
Where the debt listed company is required to share quarterly financials for consolidation purpose,standalone financial results of the debtlisted company are notpublished separately. Accordingly, the UPSI becomes published and publicly available, to the extent of consolidated figures, on declaration of results by the holding company and therefore, keeping up with the intent of closing of the Trading Window (to prohibit trading by designated person while in possession of UPSI) it will be appropriate to interpret that the trading window of such debt listed companies should be closed quarterly and opened after 48 hours of declaration of consolidated financial results by the holding company to public.
Compliances for sharing of financial result with the Parent company
So far as sharing of the quarterly results of the debt listed company with the holding company is concerned, the same being for legitimate purpose, certain compliances have to be ensured by the debt listed company in line with its code of conduct viz.
- Promoters are regarded as Designated Persons under the Regulations. Therefore, signing of non-disclosure / confidentiality agreement with the holding company may not be required;
- Designated Person shall not trade in the listed securities of the debt listed company until the information becomes generally available either pursuant to publishing of financial results by the debt listed entity or publishing of consolidated figures by holding company, as applicable.
- Entry to be made in the structured digital database in relation to sharing of information with employees of the holding company.
Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2018 (w.e.f. April 01, 2019)
By Dibisha Mishra (email@example.com)
SEBI’s recent Discussion Paper[i] on amendment to the SEBI (PIT) Regulations, 2015 presses the fact that mere Regulator’s watch on the illegal transactions are not enough to practically eliminate trading on the basis of UPSI. Wherein insiders are finding new ways to get into such illegal transactions including transactions through proxy, difficulty in tracking and proving the same even if they are tracked remains a challenge for SEBI. Hence, to ensure better tracking and maintain the integrity of the securities market, the regulator is intending to bring in informants to the stage. The informants shall basically be the employees or any other person who observes actual or suspected cases on insider trading. Such mechanism shall have a dedicated reporting window and also provide for ‘near absolute confidentiality’ to so that the informants are not deterred by the fear of retaliation or discrimination or disclosure of personal data.
Is this altogether a new concept?
Such Informant Mechanism, is not a new concept brought in to tackle the issue of insider trading altogether. Several other regulation though out the globe have been following the same practice. One such example being UK’s Market Abuse Regulation (596/2014) which provides similar kind of reporting mechanism. This concept is similar to ‘Whistle Blower Policy’ for frauds as provided under the Companies Act, 2013. However, SEBI’s Informant Mechanism enables reporting to the regulator directly rather than routing the same to the Company’s management itself. It also takes a step further to incentivize the informants to encourage pro-active reporting.
The salient features of the proposed Informant Mechanism shall be as follows:
- Voluntary Information Disclosure Form where information can be reported.
- Disclosure on source of information: The information should be original and not sourced from any other person
- Office of Informant Protection(OIP): A dedicated department separate from investigation and inspection wings.
- Submission of Information: either by himself or through a practicing advocate where the informant decides to report unanimously.
- Confidentiality of Informant shall be maintained throughout the proceedings, if any, initiated by SEBI unless evidence of such informant is required such proceedings.
- Information reported shall be taken up further if the same is material. Such information may further be forwarded to the operational department for suitable actions only after slashing down the identity details of the informant.
- Reporting of the functioning of OIP on an annual basis to SEBI.
- A dedicated hotline to guide persons on how to file information.
- Grant of reward where information provided as as per informant policy and amount of disgorgement exceeds Rs. 5 crores. The reward shall be paid from IEPF account.
- Provision for amnesty.
- Smaller cases nor covered: While the proposed Informant Reward Policy is headed to incentivize the informant to promote pro-active reporting of insider trading transactions which were earlier left undetected, the department also proposes to put the minimum threshold for the amount of disgorgement. Only those information revealing insider trading transaction amounting to Rupees Five Crores or more shall be taken up for the purpose of rewarding. This clause itself slashes down majority of comparatively smaller but rather more frequent transactions from coming under its purview.
- Material cases: Proposed policy states that only those cases that are material shall be processed further. The official who shall be responsible to determine whether the information is material is nowhere mentioned.
- Tracking System: The policy mentions no such system of tracking by the informants regarding the status of information by them.
The discussion paper indicates SEBI’s intention to buckle up its systems for tracking down insider trading transactions and take appropriate action. However, the extent to which the proposed policy gets implemented along with modifications, if any, is yet to be seen.