Secure with Securitisation: Global Volumes Expected to Rise in 2025

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-Dayita Kanodia (finserv@vinodkothari.com)

Despite global macroeconomic challenges, including persistent inflation, securitization volumes and ratings across most structured finance asset classes demonstrated remarkable stability in FY 2024. Strong housing markets bolstered credit performance in sectors like U.S. and Australian RMBS, while European housing markets faced concerns of overvaluation. 

Overall, the performance of the securitisation market in FY 2024 was considered to be stable with a few exceptions of leveraged lending and collateralized loan obligations (CLOs) which remained in focus for numerous reasons, including their elevated exposures to lower-rated obligors.1

This article delves into the securitization trends observed in FY 2025, analyzing the market’s performance and offering insights into future projections.

Global Securitisation Volumes for FY 2025

US 

As of December 2024, the total US Structured Finance issuance reached USD 770 Billion. In this, the total RMBS issuance accounted for USD 137.9 Billion (17.9% of the total structured finance issuance). It may be noted that total RMBS issuance for FY 2023 amounted to USD 78 Billion, therefore leading to an increase of roughly 76% in the current fiscal year. Securitisation of Credit Card receivables accounted for about USD 20.6 Billion while auto loans accounted for USD 126.4 Billion.2

As per S&P Global, the total credit card ABS issuance will be about $33 billion in 2025 thus leading to a 60% increase from the previous year. It also estimates the total RMBS issuance to reach USD 160 Billion supported by home price appreciation and low unemployment rates. 

The below chart shows structured finance issuances by sub-sector:

Traditionally, US data has excluded agency-backed transactions (the data above, therefore, would mostly be non-qualifying residential mortgage loans). SIFMA data shows that agency and non-agency RMBS issuance added to USD 1.592 trillion, registering an increase of 21%. This includes an increase of 119% in non-agency RMBS, and about 19% in agency-RMBS.

Yet another segment which is typically boosted by the benign credit conditions is CMBS. US CMBS volumes touched USD 103 billion [S&P data]. This is over 2.5 X of the volume seen last year.

European Market

European securitisation issuance in 2024 reached USD 142 billion, reflecting an over 50% increase compared to 2023.While fewer outstanding transactions in the European securitisation market are anticipated to hit their call dates in 2025, typically a factor that negatively impacts volumes; improvements in underlying credit originations offer a positive outlook3.

A highlight of 2024 was the record-setting bank-originated securitisations, which soared to a 12-year high of over USD 36 billion. Additionally, sustainable-labelled securitisation rebounded strongly, with issuances exceeding USD 5 billion during the year. RMBS volumes in Europe rose by approximately 60% to USD 46 billion, a trend likely to persist into 2025.

The below chart shows the RMBS and ABS issuance over last 3 years in the European market:

China 

In China, new securitization issuances grew by 4.8% year-on-year to USD 200 billion during 1Q-3Q 2024. Issuances of consumer loan ABS and account receivables ABS saw noticeable growth and MSE loan ABS issuances surged by 76%. However, the issuance of certain major asset classes, such as auto loan ABS declined significantly (Auto loan ABS issuance fell 39% in 1Q-3Q 2024 to USD 11.83 billion. The number of transactions issued during the period dropped to 22 from 29 a year earlier).4

Consultation on Securitisation

A highpoint  of the EU securitisation market in 2024 is the consultation by the  European Commission to mend the regulatory framework for securitisation. This exercise was prompted by several positive noises about securitisation at a policy-makers’ level. Enrico Letta, former Italian Prime Minister, in his report to the EU, made a strong case for securitisation. He said: “Securitization acts as a unique link between credit and capital markets. In this sense, the securitization market offers significant potential. Increasing its utilization brings two key benefits: i) broadening and diversifying the pool of assets available for investment, and ii) unlocking banks’ balance sheet capacity to facilitate additional financing. Moreover, the adoption of green securitization, whether through securitizing green assets or directing securitization proceeds towards green financing, holds promise as a significant contributor to the transition towards sustainability. Therefore, we advocate for reforms in the European securitization framework to enhance its accessibility and effectiveness”5 In addition, comments by Noyer and those by Mario Draghi favoured changes in securitisation framework. Thus, in October, 2024, the Eurpean Commission began a targeted consultation on several aspects of securitisation market. The responses from the consultation are currently available on the Commission’s website. 

Surge in CLO market

One of the notable developments in 2024 was the surge in CLO volumes. US CDO/CLO issuance, as per SIFMA statistics, recorded an issuance volume of USD 85 billion, which is 195% higher than the issuance last year. European CLO volume registered a volume of Euro 46 billion, substantially higher than last year. One report, citing a BofA research, states that the global outstanding CLO volume reached nearly USD 1.2 trillion. 

The growth in the CLO market is a direct result of the activity in the leveraged loan market, as the feedstock of CLOs primarily is leveraged loans. Leveraged loans, a term that is rather understood than defined, is mostly low-rated loans to entities that are already carrying significant leverage. The US leveraged loan market adds to upwards of USD 1.2 trillion, and that in Europe stood at about Euro 280 billion. Most of these leveraged loans tend to “syndicated” or downsold in pieces to various participating banks – which may number from a dozen to even 200, and hence, reflecting the extent of lender participation, this market is called “broadly syndicated loan” or BSL market.

While private credit financiers are increasingly making inroads into the space, a lot of capital in the leveraged loan market comes from CLOs. 

Another interesting development in the US CLO market has been the growth of CLO ETFs. A report by S&P says that CLO ETFs’ AUM rose from USD 120 million in 2020 to USD 19 billion in Nov., 2024.

Regulatory updates

UK enacted the Securitisation Regulations, 2024, which replaced the earlier 2017 Regulations. Pursuant to the Regulations, the Financial Conduct Authority has framed the set of rules called Securitisation Sourcebook. The rules lay particular emphasis on the Simple, transparent and standardised (STS criteria) of securitisation transactions, and by way of amendments made later in the year, bar the domiciling of SPVs in certain high risk jurisdictions.

Growth in synthetic securitisation

Synthetic securitisation, also sometimes known as synthetic risk transfer or significant risk transfer (SRT) transactions, were mostly limited to Europe and SE Asia jurisdictions, due to lack of clarity on regulatory capital treatment in the USA. In Sept., 2023, the Federal Reserve board clarified that capital relief will be applicable in case of synthetic transactions. Since the clarification, US share in global synthetic securitisations grew to over 30%, from a small fraction earlier. The IMF Global Financial Stability Report of October, 2024 states that globally, more than $1.1 trillion in assets have been synthetically securitized since 2016, of which almost two-thirds were in Europe.

The said IMF report highlights several risks of SRT transactions. First of all, it states, basis anecdotal evidence, that banks are providing funding to credit funds for buying tranches of SRT deals of other banks, thereby implying that the risks are eventually within the banking system. It also states that SRTs may “mask banks’ degree of resilience because they may increase a bank’s regulatory capital ratio while its overall capital level remains unchanged.” Furthermore, overreliance on SRTs exposes banks to business challenges should liquidity from the SRT market dry up. Financial innovation may lead to securitization of riskier asset pools, challenging banks with less sophisticated tools for risk management, because some more complex products make the identity of the ultimate risk holder less clear. Finally, although lower capital charges at a bank level are reasonable, given the risk transfer, cross-sector regulatory arbitrage may reduce capital buffers in the broad financial system while overall risks remain largely unchanged. 

Sustainable-labelled Securitisation

The European market saw an issuance exceeding USD 5 Billion during 2024 with first time issuances in solar ABS sectors. 

In the U.S., government-sponsored enterprises are purchasing mortgage pools targeting low-carbon buildings and refinancing these assets in the mortgage-backed securities market to finance energy and water efficiency programmes6. For instance, in September 2024, Fannie Mae a GSE came up with a single family green bond framework. Under this framework, loans which conform to the eligibility requirements are acquired from lenders and are securitised into Fannie Mae MBS which are either delivered to the lenders or sold to investors. Here, only projects achieving certain environmental performance standards such as Solar Loans and water efficiency loans are eligible7

Indian Securitisation Market8 

Securitisation volumes surged about 27% on-year to Rs 1.78 lakh crore in the first nine months of FY 24-25, supported by large issuances from private sector banks. In the third quarter alone, issuances touched Rs 63,000 crore with private sector banks contributing to 28% of this (HDFC bank alone securitised new car loans by issuing PTCs valued at just over Rs 12,700 crore). However, originations by NBFCs were only up by 5%. The market also saw 15 first time NBFC issuers, bringing the total number of originators to 152, compared with 136 in the last financial year. 

Among asset classes, vehicle loans (including commercial vehicles and two-wheelers) accounted for 48% of securitisation volume (vs 40% in the corresponding period last fiscal).

Mortgage-backed loans accounted for about 23% of securitisation volume (vs 20% in the corresponding period last fiscal). 

Overall, the Indian Securitisation Market volume is expected to reach Rs 2.4 trillion by the end of FY2025. 

On the regulatory front, SEBI, in its board meeting dated December 18, 2024, approved amendments to the framework for the issuance and listing of Securitised Debt Instruments (SDIs). These amendments aim to expand the SDI market and align the regulations with the current securitisation norms prescribed for RBI-regulated entities.

This growth trajectory is expected to persist into FY26, fueled by strong securitization volumes and the expanding involvement of private sector banks. With evolving market dynamics and growing investor confidence, the securitization market is poised for sustained momentum for years to come.

Related articles: 

  1. India securitisation volumes 2024: Has co-lending taken the sheen?
  2. Indian securitisation enters a new phase: Banks originate with a bang
  3. Securitisation: Indian market grows amidst global volume contraction
  1.  https://www.spglobal.com/_assets/documents/ratings/research/101591938.pdf
    ↩︎
  2.  https://www.spglobal.com/_assets/documents/ratings/research/101610419.pdf
    ↩︎
  3.  https://www.spglobal.com/ratings/en/research/pdf-articles/easset_upload_file78691_3234527_e.pdf
    ↩︎
  4.  https://www.spglobal.com/_assets/documents/ratings/research/101607929.pdf
    ↩︎
  5.  https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market-report-by-enrico-letta.pdf
    ↩︎
  6.  https://www.spglobal.com/_assets/documents/ratings/research/101604403.pdf ↩︎
  7.  https://capitalmarkets.fanniemae.com/media/20626/display
    ↩︎
  8. Source – https://www.crisilratings.com/en/home/newsroom/press-releases/2025/01/securitisation-volume-up-27percent-in-nine-months-of-this-fiscal.html
    ↩︎

Closure and Scaling Down of Business

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Closure and Scaling Down of Business_18012025_ICAIDownload

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Section 53: Liquidation

Affixing Vicarious Liability on Directors: See a Breakthrough

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Introduction:

It is well established that a company, being an artificial legal entity, conducts its day-to-day operations through a collective body of individuals known as the Board of Directors. This body bears direct responsibility for the company’s functioning and decision-making. Consequently, in instances of default, both the company and its directors are often held accountable. Under Section 2(60) of the Companies Act, 2013 (hereinafter referred to as “the Act”), directors can be designated as “officers who are in default,” thereby making them personally liable in specific situations.

Despite its artificial nature, a company is recognized as a separate legal entity under the law. Therefore, for any offence committed by a company, it is primarily the company itself that is liable to face legal consequences. However, this fundamental principle is sometimes overlooked, and directors are held accountable for the corporation’s adverse actions. This stems from the perception that directors act as the “mind” of the company and control its operations.

Recently, the Supreme Court of India, in Sanjay Dutt & ORS. v. State of Haryana & ANR (Criminal Appeal No. 11 of 2025), reaffirmed the distinction between the company’s liability and that of its directors. This decision underscores the importance of adhering to the principle of separate legal personality, ensuring that directors are not unfairly held liable unless their personal involvement or negligence in the offence is established.

Brief facts of the Case: 

The case under discussion revolves around a complaint lodged under the Punjab Land Preservation Act, 1900 (PLPA) against three directors of a company, alleging environmental damage caused by uprooting trees using machinery in a notified area. The appellants (directors of Tata Realty and related entities) sought to quash the complaint, asserting that the alleged actions were conducted by the company and not attributable to them personally. The complaint, however, excluded the company as a party and focused on the directors’ liability under Section 4 read with Section 19 of the PLPA.

Key observations by the Supreme Court:

  1. Primary Liability of the Company: The Court emphasized that the company itself, as the licensee and beneficiary of the land, was primarily liable for any violations. Excluding the company from the complaint undermined the case’s premise.
  1. Vicarious Liability Not Automatic: The Court reiterated that directors cannot be automatically held vicariously liable unless the statute explicitly provides for such liability or there is evidence of their personal involvement in the offence.
  1. Lack of Specific Allegations: The complaint failed to attribute specific actions or responsibilities to the directors. It merely assumed liability based on their official positions, which is insufficient for criminal prosecution.
  1. Legal Fiction Requires Explicit Provision: Vicarious liability in criminal matters requires clear statutory backing. The PLPA contains no provisions imposing vicarious liability on directors for offences committed by the company.

Understanding the Concept of Vicarious Liability:

The concept of vicarious liability allows courts to hold one person accountable for the actions of another. This principle is rooted in the idea that a person may bear responsibility for the acts carried out by someone under their authority or on their behalf. In the corporate context, this doctrine extends to holding companies liable for the actions of their employees, agents, or representatives.

Initially developed within the framework of tort law, the doctrine of vicarious liability later found application in criminal law, particularly in cases involving offences of absolute liability. This marked a departure from the once-prevailing notion that corporations, as artificial entities, could not commit crimes. Modern legal interpretations now recognize that a corporation may be held criminally liable if its human agents, acting within the scope of their employment, engage in unlawful conduct.

Doctrine of Attribution:

Currently, a company does not have the immunity to safeguard itself under the blanket of laxity of mens rea, an important component for the constitution of a criminal intent. It was established that corporations are  liable for  criminal and civil wrongdoings if the offences were committed through the corporation’s ‘directing mind and will’. This attribution of liability to the corporations is known as the ‘Doctrine of Attribution’

‘Doctrine of Attribution’ says that in the event of an act or omission leading to violation of criminal law, the mens rea i.e. intention of committing the act is attributed to those who are the ‘directing mind and will’ of the corporations. It can be said that Doctrine of Attribution is a subset of Principle of Vicarious Liability wherein a corporation can be held responsible even in case of a criminal liability.

The landmark judgment in H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd., (1957 1 QB 159) provided a foundational understanding of corporate liability. The court compared a corporation with a human body, with its directors and managers representing the “mind and will” of the organization. These individuals dictate the company’s actions and decisions, and their state of mind is legally treated as that of the corporation itself. Employees or agents, by contrast, are viewed as the “hands” that execute tasks but do not represent the company’s intent or direction.

This conceptual framework underscores that while corporations are artificial entities, they can be held criminally liable when those who embody their directing mind commit offences. The recognition of corporate criminal liability has since evolved, balancing the need for accountability with the distinction between the roles of employees and the decision-makers within an organization.

You can read more about the corporate criminal liability here.

Analyzing the Sanjay Dutt Judgment:

  1. Liability must be expressly mentioned

In the present case, the Court underscored the principle that vicarious liability cannot be imposed on directors or office-bearers of a company unless explicitly provided by statute. This was reiterated in Sunil Bharti Mittal v. Central Bureau of Investigation, (AIR 2015 SC 923) where it was held that individual liability for an offence must be clearly established through direct evidence of involvement or by a specific statutory provision. Without such statutory backing, directors cannot be presumed vicariously liable for a company’s actions.

The Court further emphasized that statutes must clearly define the scope of liability and the persons to whom it applies. This clarity is essential to prevent ambiguity and ensure that only those genuinely responsible for the offence are held accountable.

  1. Personal involvement of Directors :

The Court reaffirmed that corporate liability does not inherently extend to directors unless supported by statutory provisions or evidence of personal involvement. In Pharmaceuticals Ltd. v. Neeta Bhalla and Anr. (AIR 2005 SC 3512), it was held that directors are not automatically vicariously liable for offences committed by the company. Only those who were directly in charge of and responsible for the conduct of the company’s business at the time of the offence may be held liable.

The judgment further emphasized that liability must stem from personal involvement or actions beyond routine corporate duties. Routine oversight or general authorization does not suffice to establish criminal liability unless it can be shown that the director personally engaged in, or negligently facilitated, the unlawful act.

  1.  ‘In charge of’ and ‘responsible to’

In K.K. Ahuja vs V.K. Vora & Anr. (2009 10 SCC 48), the Supreme Court analysed the two terms often used in vicarious liability provisions, i.e., ‘in charge of’ and ‘responsible to’. It was held that the ‘in-charge’ principle presents a factual test and the ‘responsible to’ principle presents a legal test. 

A person ‘responsible to’ the company might not be ‘in charge’ of the operations of the company and so in order to be vicariously liable for the act, both the principles must satisfy. It stated as, “Section 141 (of the Negotiable Instrument Act, 1881), uses the words “was in charge of, and was responsible to the company for the conduct of the business of the company”. There may be many directors and secretaries who are not in charge of the business of the company at all.”

  1. The Complainant’s Burden of Proof:

Under Section 104 of the Bharatiya Sakshya Adhiniyam, 2023, the burden of proof lies on the complainant. It is the complainant’s responsibility to make specific allegations that directly link a director’s conduct to the offence in question. This principle was reiterated in Maksud Saiyed v. State of Gujarat (AIR 2007 SC 332), where the Court held that vague or generalized accusations against directors are insufficient.

A valid complaint must include:

  1. Clear and specific allegations detailing the director’s role in the offence.
  2. Evidence linking the director’s actions to the company’s criminal liability.
  3. Statutory provisions or legal grounds for attributing vicarious liability.

Referring to Susela Padmavathy Amma and M/s Bharti Airtel Limited (Special Leave Petition (Criminal) No.12390-12391 of 2022), wherein it was reaffirmed by the Supreme Court that even when statutes explicitly provide for vicarious liability, merely holding the position of a director does not automatically render an individual liable for the company’s offences.

To establish a director’s liability, the Court emphasized the need for specific and detailed allegations that clearly demonstrate the director’s involvement in the offence. It must be shown how and in what manner the director was responsible for the company’s actions.

The Court further clarified that there is no universal rule assigning responsibility for a company’s day-to-day operations to every director. Vicarious liability can only be attributed to a director if it is proven that they were directly in charge of and responsible for the day-to-day affairs of the company at the time the offence occurred.

  1. MCA Directive to RD and ROCs: Circular Dated March 2, 2020:

It’s noteworthy that, even MCA, vide its General Circular no. 1/2020 dated 2nd March, 2020, directed Regional Directors and Registrar of Companies that at the time of serving notices relating to non-compliances, necessary documents may be sought so as to ascertain the involvement of the concerned officers of the company.

  1. Duties of Directors under the Companies Act, 2013

Section 166 of the Act lists down duties of directors of a company. To summarise, directors must adhere to the company’s articles, act in good faith for members’ benefit, exercise due care and independent judgment, avoid conflicts of interest, undue gain. However, of note, it does not mention that a director shall be responsible for all the affairs of a company. 

In addition to the above case, the following related judgements are also noteworthy:

  1. Pooja Ravinder Devidasani vs. State of Maharashtra and another, (2014) 16 SCC 1: In this case, the Court asserted that, only those persons who were in-charge of and responsible for the conduct of the business of the Company at the time of commission of an offence will be liable for criminal action.
  1. S.M.S. Pharmaceuticals Ltd. vs Neeta Bhalla and another, (2005) 8 SCC 89: the Court considered the definition of the word “director” as defined in Section 2(13) of the Companies Act, 1956. It held that “…There is nothing which suggests that simply by being a director in a company, one is supposed to discharge particular functions on behalf of a company. It happens that a person may be a director in a company but he may not know anything about the day-to-day functioning of the company…”.
  1. SEBI vs. Gaurav Varshney, (2016) 14 SCC 430: The Court held that even a person without any official title or designation such as “director” in a company may still be liable, if they fulfill the main requirement of being in charge of and responsible for the conduct of business at the relevant time. Liability is contingent upon the role one plays in the affairs of a company, rather than their formal designation or status.
  1. Maharashtra State Electricity Distribution Company Limited and Anr., v. Datar Switchgear Limited and Ors., (10 SCC 479): The Supreme court held that wherever by a legal fiction the principle of vicarious liability is attracted and a person who is otherwise not personally involved in the commission of an offence is made liable for the same, it has to be specifically provided in the statute concerned and it is necessary for the the complainant to specifically aver the role of each of the accused in the complaint.

Vicarious liability must be explicitly provided for in the statute and supported by clear evidence of personal involvement and criminal intent. Also, it is necessary for the complainants to make specific averments in the complaints.  

Conclusion:

The above judgments reinforces the principle that corporate and individual liabilities are distinct. Vicarious liability of directors is not presumed and can only be imposed with statutory backing or compelling evidence of personal involvement. By placing the burden of proof on the complainant, the judiciary ensures fairness and prevents misuse of the legal system to harass directors without substantive evidence. This balanced approach safeguards both corporate governance and individual accountability.

You can read more about this subject here.

Can NBFCs “outsource” internal audit functions to external auditors? 

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– Anshika Agarwal (finserv@vinodkothari.com)

The Reserve Bank of India (RBI) has consistently emphasized the significance of robust internal control systems; where gaps are found by the supervisor, it has penalised  regulated entities for non-compliance. Recently, the RBI imposed a penalty on an NBFC for outsourcing one of its core management functions, i.e., internal audit to an external auditor, thereby raising doubts as to whether internal audit for NBFCs can be conducted by external auditors. Does the very fact that internal audit is being conducted not internally but by an external chartered accountancy firm amount to “outsourcing” of core management function?  This article examines outsourcing in the context of internal audit function,  and the conditions subject to which internal audit may be conducted by external agencies. 

Understanding the concept of ‘Outsourcing’

Outsourcing is defined under the Basel 2005 document1 as “a regulated entity’s use of a third party (either an affiliated entity within a corporate group or an entity that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the regulated entity, now or in the future.” Similarly, the IOSCO Consultation Paper2 refers to outsourcing as “a business practice in which a regulated entity uses a service provider to perform tasks, functions, processes, or activities that could otherwise be undertaken by the regulated entity itself.”

NBFCs, especially those with asset-light models or limited resources, opt for outsourcing to manage financial as well as non-financial functions. Outsourcing by NBFCs typically involves delegating tasks such as loan application processing, collection of documents, data processing, IT support, customer service, and back-office operations to third-party providers. While outsourcing boosts operational efficiency, they also carry risks, particularly when core management functions are outsourced. Notably, outsourcing is distinct from availing professional services like legal, audit, consulting, or property management, which are ancillary to the NBFC’s core business. In case of outsourcing of financial functions by regulated entities, there are specific guidelines issued by the RBI to regulate the arrangements. Clear regulatory oversight is crucial to strike a balance between leveraging external expertise and maintaining ethical, efficient practices in the financial services sector.

Regulatory Framework: The RBI’s Perspective

The RBI guidelines are specifically aimed at managing risks related to outsourcing of financial services. Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (‘SBR Directions’)3, particularly Annexure 13 on Instructions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs (‘Outsourcing Guidelines’), Para 2 lays down stringent conditions for outsourcing to ensure compliance, accountability, and effective risk management. While outsourcing can support operational efficiency, core management functions must remain under the direct control of the regulated entity.

Core Management Functions: Non-Negotiable Responsibilities 

The Outsourcing Guidelines explicitly prohibits NBFCs from outsourcing core management functions vital to governance, decision-making, and risk management. The core management functions are those that are vital and crucial for the existence as well as operations of the entity. These have been defined to include:

These functions are critical for ensuring the organization’s stability and operational integrity. For example, internal audit functions identify risks, ensure regulatory compliance, and assess control effectiveness. Entrusting such functions to external entities could compromise decision-making and erode organizational trust.

Contractual Engagement for Internal Audit

While the internal audit function itself is a core management process, the Outsourcing Guidelines in the same lines allows regulated entities to engage internal auditors on a contractual basis. This means external professionals can be brought in to execute internal audits, provided their engagement adheres to regulatory standards, independence is maintained, and the entity retains oversight and control rather than putting all the responsibility on a third party. 

For example, an entity may handle several operational tasks related to an audit, such as preparing documentation, organizing records, or conducting initial reviews. However, the ultimate responsibility for decision-making, oversight, and ensuring compliance with regulations rests with the audit committee or the entity’s senior management. This approach ensures that the internal management retains control over key aspects of the audit process, even while delegating specific tasks or availing expertise support. In contrast, the action of outsourcing shifts the entire responsibility for the audit to a third-party. This means the external firm is accountable for managing and executing all aspects of the audit, from operational tasks to final implementation. Such an outsourcing may reduce the internal workload, however, it also transfers control and accountability to an external entity, which may not align entirely with the entity’s internal objectives and strategic priorities. 

In other words, what is permitted is to avail the expertise services of a third party for carrying out the internal audit function but not the transfer of the entire responsibility of carrying out internal audit to a third party.

ICAI Standards: Expertise and Independence in Internal Audits

The Institute of Chartered Accountants of India (ICAI) Standards on Internal Audit4 states that “Where the Internal Auditor lacks certain expertise, he shall procure the required skills either though in-house experts or through the services of an outside expert, provided independence is not compromised”. 

The aforesaid guidance from the ICAI emphasizes maintaining expertise and independence. While not explicitly addressing outsourcing, these standards recognize that internal auditors may lack certain specialized skills. In such scenarios, they encourage engaging in-house or external experts while safeguarding independence.

The standards indirectly allow for outsourcing when:

  • Specific expertise is unavailable in-house,
  • Independence remains uncompromised

By availing the services of experts ensures that internal audit teams possess the necessary skills to perform effective reviews, while the entity retains oversight and accountability.

Companies Act, 2013: Flexibility in Internal Audit Assignments

Section 138 of the Companies Act, 2013 (‘CA 2013’)5, specifies the requirement for internal audits for certain classes of companies. It allows the appointment of internal auditors, which may include chartered accountants, cost accountants, or other professionals, as decided by the Board. Explanation of Rule 13 of the Companies (Accounts) Rules, 2014, states that “the internal auditor may or may not be an employee of the company”.

The aforesaid provision also enables companies to engage external auditors to perform internal audits, even if they are not part of the organization. While the CA 2013 does not explicitly prohibit outsourcing of internal audit functions, it places the ultimate responsibility for conducting and reporting on internal audits with the Board. This also clarifies that companies may utilize external expertise while maintaining oversight and control of the audit process.

Conclusion

In conclusion, the RBI’s recent penalties underscore the importance for regulated entities to maintain strict compliance with outsourcing regulations, particularly regarding core management functions. While the Outsourcing Guidelines as well as the provisions of CA 2013 permit engaging external auditors on a contractual basis to perform operational tasks related to audits, accountability and strategic control such as having audit plan approved by the audit committee, regular reporting to the audit committee, discussion of the board and audit committee on the conduct of audit,implementing remedial measure on the oversight of the audit committee or senior management must remain firmly within the organization. Adherence to these principles will help maintain the fine distinction between outsourcing the internal audit function and appointing external auditors as internal auditors, specifically in the context of internal audits.

Read our other related resources –

  1. UNDERSTANDING THE CONCEPT OF OUTSOURCING- ENVISAGING A TOUGH ROAD AHEAD FOR THE SERVICE PROVIDERS
  2. Draft framework for Financial Services Outsourcing

  1.   https://www.bis.org/publ/joint12.pdf (last accessed in November 2024) ↩︎
  2.   https://www.iosco.org/library/pubdocs/pdf/IOSCOPD654.pdf (last accessed in November 2024) ↩︎
  3.  Reserve Bank of India, Master Direction – Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs, October 22, 2021. Available at: https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12550 ↩︎
  4.  Institute of Chartered Accountants of India, Standard on Internal Audit (SIA) 2: Basic Principles Governing Internal Audit. Available at: https://resource.cdn.icai.org/52727iasb-basicprinciples-3.pdf ↩︎
  5.  The Companies Act, 2013, Ministry of Corporate Affairs, Government of India. Available at: https://www.mca.gov.in/. ↩︎

Disclosures in Financial Statements: Role of CS

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ICSI Conference – Financial Statements – disclosures under the CA and role of CS.pptxDownload

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Disclosure in financial statements: Relationship with struck off companies

Changes in Auditors’ Report and Financial Statements to reveal camouflaged financial transactions

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Secretarial auditors for listed entities: FAQs on disqualifications and prohibited services

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Updated as on 25th April, 2025

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SEBI’s Implementation Circular for several LODR Amendments

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SEBI notifies circular for implementation of LODR amendmentsDownload

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  5. Perched at the Peak: Compliance Officer as CXO

LODR Resource Centre

Presentation on Small Companies

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Small CompanyDownload

Read our other resources:

  1. Definition of Small Company
  2. Do NBFCs qualify as Small Companies?
  3. Abridged Annual Return for Small Companies

SEBI approves cartload of amendments 

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– Team Corplaw | corplaw@vinodkothari.com

SEBI in its Board meeting dated December 18, 2024, has approved amendments pertaining to BRSR, HVDLEs, DTs, SMEs, Intermediaries, etc.  This article gives a brief overview of the approved amendments.

Ease of Doing Business for BRSR

  • Scope of BRSR Core for Value Chain Partners shrunk
    • Value chain partners now consist of individuals comprising 2% or more of the listed entity’s purchases and sales (by value) instead of 75% of listed entity’s purchases/sales (by value).
    • Further, the listed entity may limit disclosure of value chain to cover 75% of its purchases and sales (by value), respectively.
  • Deferred applicability of ESG disclosures for the value chain partners & its limited assurance by one financial year
    • Applicability of ESG disclosures for the value chain deferred from FY 24-25 to FY 25-26.
    • Applicability of limited assurance deferred from FY 25-26 to FY 26-27.
  • Voluntary disclosure of ESG disclosures for the value chain partners & its limited assurance instead of comply-or-explain
    • Top 250 listed entities by market cap can now comply with the ESG disclosures for the value chain partners & its limited assurance on a voluntary basis in place of  comply-or-explain.
  • Term ‘Assurance’ replaced with ‘assessment or assurance’ to prevent unwarranted association with a particular profession (specifically audit profession).
    • Assessment defined as third-party assessment undertaken as per standards to be developed by the Industry Standards Forum (ISF) in consultation with SEBI. 
  • Reporting of previous year numbers voluntary in case of first year of reporting of ESG disclosures for value chain.
  • Addition of disclosure pertaining to green credits as a leadership indicator under Principle 6 – Businesses should respect and make efforts to protect and restore the environment of BRSR

Immediate actionables for Listed entities:

  • Entity to re-assess its value chain partners as per the revised definition.
  • Entity forming part of top 250 listed entities by market cap to undertake third party assessment of its BRSR Core disclosure for FY 24-25 as per the standards to be developed by ISF.
  • To disclose about the green credits procured/generated by the entity during FY 24-25.

Debenture Trustee (‘DT’) Regulations:

  • Introduction of provisions relating to ‘Rights of DTs exercisable to aid in the performance of their duties, obligations, roles and responsibilities’, which broadly indicates (as proposed in the CP):
    • Calling information/ documents from issuer w.r.t. the issuance;
    • Calling documents from various intermediaries;
    • Calling of and utilization of Recovery Expense Fund, with consent of holders.
  • Corresponding obligations on the issuers to submit necessary information/documents to DTs.

VKCo comments: In addition to the corresponding obligations on the issuer, CP also proposed to mandate Depositories and Stock exchanges to provide requisite information to DTs, which is yet to be approved. The right to call information from issuers and market participants including corresponding obligations on them will enable DTs to perform their functions efficiently.

  • Introduction of standardized format of the Debenture Trust Deed (‘DTD’)
    • To be issued by Industry Standards Forum with SEBI consultation;
    • In case of deviation from the format of DTD, disclosure is to be made for investor review. (CP proposed to disclose deviation as insertion of a key summary sheet of deviation in GID/KID)

VKCo comments: While the introduction of model DTD is appreciated, the draft model DTD proposed in the CP was not aligned with the general market practices followed by the DTs as well as the applicable laws such as SEBI Listing Regulations, NCS Regulations, Indian Trust Act, etc.

  • Activity-based Regulation for DTs:
    • DTs are to undertake only such activities regulated by other financial sector regulators/ authorities (as SEBI specifies);
    • Hive off non-regulated activities to a separate entity – within 2 years;
    • Sharing of resources between DT and hived-off entity is allowed, subject to segregation of legal liabilities;
    • Hived-off entity can use DT’s brand/logo – only for a period of 2 years (CP suggested 1 year); Both DT and hived-off entity to abide by SEBI’s code of conduct during such period.

Applicability of CG norms on HVDLEs 

Under this segment of changes discussed by SEBI, most of the proposals are in alignment with the Consultation Paper dated 31st October, 2024, except for few changes in relation with PSUs coming together with public enterprises under Public Private Partnership.

  • Threshold for being identified as HVDLE increased from 500 Crores to 1,000 Crores to align with the criteria of Large Corporates

VKCo Comments: The proposal to enhance the extant threshold is encouraging in terms of governing the maximum value of outstanding debt while at the same time achieving the same without bearing the burden of compliance by an increased number of purely debt listed entities. Subsequently, effective implementation of such a proposal aligns it with the identification criteria of Large Corporates. 

  • Introduction of a separate chapter for entities having only debt listed, and sunset clause for applicability of CG norms

VKCO Comments: While this proposal is noteworthy, however, instead of rolling out a new chapter, there could have been certain modifications in the existing regulations by way of a proviso to align with the needs of an HVDLE. Further, one also needs to wait to see the fine print -of the provisions once the same is issued.

VKCo Comments: The proposal is welcome since it clearly sets the HVDLEs free from the barrier of once an HVDLE so always an HVDLE. This proposal sets a clear nexus between the compliance and the size of the debt outstanding, for the protection of which in the very first place, the compliance triggered.

  • Optional constitution of RMC, NRC, and SRC and delegation of their functions to the AC and Board respectively.

VKCo Comments: Given the close construct of debt listed entities, it is often observed that the constitution of such committees becomes more of a hardship than in smoothing compliance and discussing specific matters. Accordingly, it looks appropriate to redirect the functions of NRC and RMC to the Audit Committee and that of the SRC to the Board.

  • HVDLEs to be included in the counting of maximum no. of directorships, memberships and chairmanships of committees. However, this shall exclude directorships arising out of ex-officio position by virtue of statute or applicable contractual framework in case of PSUs and entities set up under the Public Private Partnership (PPP) mode respectively, in the count. The said exclusion was not in the CP.

VKCo Comments: The rationale completely aligns with the proposal made and seems to be justified. Further, as far as the exclusion is concerned, this seems more from excluding those members who are part of the board not on the basis of their appointment but their current tenure being served in a particular position in the company.

  • RPT Approval by way of NOC from DT (who obtains it from holders), before going for shareholders’ approval [w.e.f. 1st April, 2025]

VKCo Comments – While the CP suggested two ways of seeking approval for material RPTs of an HVDLE. The Board has only considered the alternative mode of first seeking NOC of DT and thereafter approaching the shareholders. Further, as discussed in our related write up on the CP, there does not seem to be any incentive to first approach the DT and thereafter the DT to approach the NCD holders. Instead the approval of the NCD holders can be taken up directly by the HVDLE. 

  • Submission of BRSR on a voluntary basis

VKCo Comments: The inclusion of a voluntary provision in the legislation with respect to a comprehensive report like BRSR is not likely to be submitted given the huge details under the BRSR. However, an opportunity to submit BRSR can be a game changer for an HVDLE from the perspective of being able to raise funds based on its reporting standards in this regard. 

One of the changes discussed by the Board is relaxation to HVDLEs set up under the PPP mode from composition requirements of directors. While this was not a part of the CP, however, even if we have to understand that change proposed, this looks like relaxing the composition requirement of the Board of Directors. 

CHANGES NOT APPROVED: 

  • Compulsory filing of CG compliance report in XBRL format

VKCo Comments: This proposal was with an objective to align and standardize the filing of quarterly CG compliance report for bringing parity as in the case of equity listed entities 

  • Exemption to entities not being a Company

VKCo Comments: While SEBI refers to the introduction of similar exclusion for equity listed entities, however, it has also mentioned the subsequent amendment wherein the same was omitted. The proposal not being notified is in alignment with the position of equity listed entities, however, the same would have been a welcome change since it would have helped such entities to give preference to their principal statutes and not an ancillary one like LODR. 

Our detailed write up on the CP can be accessed here.

Amendments in the definition of UPSI – making the law more prescriptive

  • Inclusion of 17 items in definition of UPSI: The illustrative list of USPI in reg. 2 (1) (n) of the PIT Regulations has been expanded to include 17 items from the list of material events laid out in Part A of Schedule III of the Listing Regulations [Originally proposed in the CP – 13 items] 
  • Threshold limits under reg. 30 made applicable: materiality thresholds specified in reg. 30 (4) (i) (c) of the Listing Regulations have been made applicable for identification of events as UPSI 
    • As per the current practice, any event that is likely to materially affect the price of the securities can be identified as UPSI 
  • Extended timelines for making entries in SDD: for an event of UPSI that emanates outside the company, entries can be made in the SDD within 2 days of occurrence. Further closure of the trading window will not be mandatory in such cases. 
    • This has been introduced as a part of EODB
    • As per the current practice entries in the SDD have to be made promptly

Refer to our discussion on CP in: Laundry List: SEBI’s proposal to elongate list of deemed UPSIs