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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.
Immediate actionables for Listed entities:
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.
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.
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.
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.
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.
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.
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.
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.
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:
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
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.
Refer to our discussion on CP in: Laundry List: SEBI’s proposal to elongate list of deemed UPSIs
– Vinita Nair, Senior Partner (corplaw@vinodkothari.com)
This version: 3rd April, 2025 (Updated as per SEBI Circular dated 1st April, 2025)
With the enforcement of recent amendments in LODR Regulations effective December 12, 2024 a qualified company secretary appointed as a Compliance Officer (‘CO’) is required to be an officer, who is in whole-time employment of the listed entity, not more than one level below the board of directors, designated as a Key Managerial Personnel (‘KMP’) and form part of senior management.
Listed entities now face the question of whether this entails a re-look at the organisation structure, hierarchy, profile of the CO? Whether the board of directors needs to be sensitised of this requirement and the impact, if any?
Watch our YouTube video on the same here.
Scope of “compliance”
The Basel paper of 2005 gives clarity on what is compliance, and the ambit of compliance function. First of all, the scope of the word “compliance” is not limited to laws and regulations only. “Compliance laws, rules and standards have various sources, including primary legislation, rules and standards issued by legislators and supervisors, market conventions, codes of practice promoted by industry associations, and internal codes of conduct applicable to the staff members of the bank. For the reasons mentioned above, these are likely to go beyond what is legally binding and embrace broader standards of integrity and ethical conduct.”
The compliance function is a cornerstone of an entity’s governance, internal control, and risk management framework. It includes the systems, procedures, and organisational infrastructure required to ensure:
Appointment of Compliance Officers (‘COs’)
Appointment of COs is required under different statutes. In case of listed entities, for the purpose of ensuring compliance with securities law, appointment of CO is specified in the initial listing regulations viz. SEBI ICDR[1], SEBI ILNCS[2] Regulations and the responsibility of CO for continuous listing requirement is included in the common obligations under LODR. In case of LODR the person is required to be a qualified Company Secretary (‘CS’) and in case of ILNCS, the CS of the issuer is required to be the CO. Similarly, the requirement under the Listing Agreement[3] was to appoint the CS of the issuer as the CO.
SEBI PIT Regulations (applicable to a listed entity as well as an intermediary/ fiduciary) requires appointment of a senior officer, who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under PIT regulations as the CO, who reports to the board of directors and ensures compliance of policies, procedures, UPSI preservation, implementation of codes etc, under the overall supervisions of the board of directors.
Additionally, Banks, NBFCs, Insurance companies, SEBI registered intermediaries, etc all are required to appoint CO as per laws specifically applicable to the company operating in that particular sector.
Whether one person can serve as CO for each of the above requirements? This is surely feasible, unless there is an express bar. For e.g., in case of banking regs/ NBFCs regs, there is a bar on dual hatting – that is, the CO as per those laws should not be dealing with any other line function.
Position of CO under LODR post amendment
It may be contended that the role of a CS is a mix of compliance and ministerial functions. He/ she may be tasked with several other functions as well – depending on the organization. The provision of the LODR Regs is obviously not concerned with either other functions performed by the CO, nor with other compliance roles.
The intent of the provision, as we read it, is that the compliance function pertaining to LODR Regs is directly discharged by the CO under the supervision of the board of directors. The board has the supervisory responsibility, and the CO has the executive responsibility. The provision is intended to attach significance to the organisation-wide role of compliance function.
As observed from the report of the Expert Committee, recommendations were made for strengthening the position of the CO. The challenge faced by the CO, despite forming part of ‘senior management’, was inability to advise the management to act in accordance with the law and being in a position to get influenced by other people in senior management due to the reporting structure. Therefore, the suggestion was for appropriate positioning to get adequate power, commensurate with the responsibilities cast upon the CO, to be able to advise the management on points of law and ensure effective discharge of statutory duties and responsibilities.
In the light of above, the regulations now clarify the position of the CO by having them one level below the board of directors. Here the intent of the regulator, in our reading, did not seem to define the organisational structure, but to clear the path for the CO for effective discharge of its responsibilities. In our view, the amendment results in fixing the responsibility of the CO and that the CO, now, cannot shirk its responsibility or cannot take the pretext of being a junior person, having no power or access, having a reporting line limited to someone in senior management. It now provides the CO with straight access to the board of directors, when it comes to ensuring compliance with LODR requirements. To the extent of the compliance function the CO will now be directly accountable to the board.
The way we read this requirement is that it certainly attaches significance to the compliance function, and therefore, may result in repositioning of compliance officers in the organization hierarchy. But is the law concerned with organisation hierarchy, designations, scales, ranks, etc? In our view, the objective of the law is attained by a functional reporting line to the board. This is also evident from SEBI’s analysis of the suggestions/ comments received,[4] that the objective is to empower COs to perform their duties and discharge their responsibilities effectively. Some companies do have the practice of having a CO report to the Managing Director / CEO. However, it is for the listed entity to decide the reporting structure of its KMPs and senior management while ensuring compliance with the regulatory requirements.
However, SEBI has issued a Circular dated April 1, 2025, where SEBI states: “it is clarified that the term ‘level’ used in regulation 6(1) refers to the position of the Compliance Officer in the organization structure of the listed entity. Therefore, ‘one level below the board of directors’ means one level below the Managing Director or Whole-time Director (s) who are part of the Board of Directors of the listed entity.” After issuing this Circular, SEBI staff has also issued two Informal Guidance letters, being for DCB Bank Ltd and Pakka Ltd.
Hence, SEBI seems to be clearly opining that SEBI is intending the organisational hierarchy of the entities to also be adjusted to reflect the CO’s position at one level below the board.
Reporting structure of CO post amendment
Organizational hierarchy is a matter of many things. Regular reporting structure for the various functions that a position has: lines of authority and responsibility, scales and other benefits related to the scale, promotion policies, regular administrative roles such as approval of claims, benefits, etc
The CO stands empowered to manage the compliance function independently and without fear, and to that extent the CO needs to report to the board. However, boards meet infrequently. The company may or may not have an MD/ WTD – it may be working with a CEO/president reporting to the board. It is quite possible in an organisation to have one or more WTDs who report to the MD. There are several officers who report to the MD but their level in the organisation is not the same as those of other seniors placed at one level below the board. In such cases, whether the CO reporting to an MD is a sufficient compliance? SEBI’s IG, specifically in the matter of DCB Bank Ltd , seems to answer in the negative. Therefore, SEBI suggests the organisational levels also to align to the expected reporting lines. Therefore, the amendment, seen in the SEBI’s circular of 1st April, is concerned with both reporting lines as well as organisational hierarchy of the CO. Irrespective of the SEBI Board agenda dated 30th September, 2024 stating that organisational structure is an internal matter for companies, “…it is for the listed entity to decide the reporting structure of its KMPs and senior management while ensuring compliance with the regulatory requirements”, it seems that the regulator has done so in the 1st April 2025 circular. Although, in general, the organisational hierarchy usually corresponds to and is commensurate with functional hierarchy; however, the law has sought to interfere with the organisational structure.
CS as CO under LODR
Does the amendment necessitate a relook on whether the CS can continue as CO? The answer to this also seems negative, as law only prescribes who can be the CO. SEBI has also clarified that the CO and CS may be different persons. While law admits having different persons occupying the position, practically, it seems less feasible in view of the overlap and interconnectedness in the functions discharged by a CS in terms of Companies Act, 2013 and by a CO under LODR.
Actionable for listed entities
The amendment is certainly required to be sensitised to the board of directors. However, do the regulations expect companies across the country to revisit their organisational structures? SEBI has expressed its views in the 1st April, 2025 circular. Therefore, listed entities need to evaluate if the functional level and organisational level of the CO is in line with the regulatory requirements and expectations. If no, listed entities may want to revisit the same.
Power brings onus
Everyone may also readily understand that SEBI’s intent in empowering the CO is not just to confer a new power, but to be able to hold the CO answerable for any compliance gaps. Therefore, if it is a new cap that the CO is donning, the cap is made of flowers and nettles both.
[1] Reg 23 (8) ICDR – The issuer shall appoint a compliance officer who shall be responsible for monitoring the compliance of the securities laws and for redressal of investors’ grievances.
[2] Reg 27 (4) of ILNCS – The lead manager(s) shall ensure that the draft offer document clearly specifies the names and contact particulars including the postal and email address and telephone number of the compliance officer who shall be a Company Secretary of the issuer.
[3] The requirement was notified on May 18, 1999 pursuant to the recommendations of the Accounting Standards Committee constituted by SEBI under the Chairmanship of Shri Y. H. Malegam to the effect that Compliance officer to be appointed by Listed companies in Compliance with Circular No. SMD/POLICY/CIR-06/98 dated February, 12, 1988 (every company shall appoint a Senior Officer as Compliance Officer) shall be the Company Secretary of the Company.
[4] Agenda of SEBI BM dated September 30, 2024 [Clause (iii) (a) of Para 28.3.2].
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SEBI notifies changes that take immediate effect
– By Team Corplaw (corplaw@vinodkothari.com)
– Updated as on 24.01.2025
Please find details about our workshop on the same here: https://vinodkothari.com/2024/12/online-workshop-on-sebi-lodr-3rd-amendment-2024/
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Lavanya Tandon, Executive | corplaw@vinodkothari.com
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SEBI’s IG on RP identification by unlisted subsidiaries
Team Vinod Kothari & Company | corplaw@vinodkothari.com
October 14, 2024
Related Party Transactions (‘RPT’) regime under the Listing Regulations, consequent to substantial amendments made in November, 2021[1], is very wide and includes cross RPTs across the group. That is, transactions of a listed entity with related parties of its subsidiaries; as well as, transactions of a subsidiary (listed or unlisted) with related parties of the parent listed entity would come under the purview of “related party transactions”; and therefore, would be subject to enhanced controls at the parent level.
Therefore, the prerequisite for effective implementation of the RPT controls is the correct identification of the Related Party (‘RP’) at both levels – by the parent and by the subsidiary. While in the case of a listed entity, it is clear that the definition of RP under LODR has to be followed; there was a lack of clarity as to whether an unlisted subsidiary should also follow the same definition or it can simply go by the law as applicable to it.
In this regard, SEBI, in a recent Informal Guidance, has opined that unlisted subsidiaries of the listed entities are required to identify the RPs and RPTs as per the provisions of the LODR Regulations.
Read more: Subsidiaries to refer LODR definition of “related party” – going too far with relationships?Possible alternatives for identifying RPs of subsidiaries
The Listing Regulations under Reg. 2(1)(zb), defines an RP to mean the following:
While the listed entities identified RP based on the above definition, there was a lack of clarity on the manner of RP identification for unlisted subsidiaries in India and overseas. The Listing Regulations do not specify the approach to be followed for identifying RPs of unlisted subsidiaries.
Consequently, there could be two possible approaches – one, the subsidiaries maintain a list of their RPs as per Listing Regulations; alternatively, subsidiaries may be allowed to maintain an RP list as per their respective applicable/local laws[2]. The IG, however, states that the first approach needs to be followed for assessing the RPTs done by the subsidiary with its own RPs.
While the approach of applying an entity-agnostic definition of the Listing Regulations may seem to bring consistency and ease of collation of information across the group; however, there may be several arguments against this approach, as we discuss below.
Issues related to the approach
[Note: As for applicable accounting standards, it very clearly seems to be referring to standards applicable to the entity in question, and therefore, in our view, an entity-agnostic approach does not seem implied there. In the case of overseas entities, “applicable accounting standards” will mean accounting standards as may be applicable to the entity, therefore, entity-specific accounting standards.]
Alternatively, if the subsidiaries identify the RPs based on the definition applicable to it, the same would be more convenient for the subsidiaries as it would anyways maintain the list of RPs to comply with its applicable law.
Concluding remarks
The framework of RPTs requires accurate RP identification to ensure compliance and effective group governance. SEBI’s informal guidance on identifying RPs for unlisted subsidiaries, although provides a view on the approach to identification of related parties by subsidiaries for the purpose of enabling compliances by the listed parent; however, in our humble view, the approach may pose its own set of difficulties as discussed above. On the other hand, a group-wide approach to RPTs which simultaneously respects entity-specific boundaries might be more feasible in terms of ease of interpretation as well as ease of implementation of the law. It is to be noted that the views expressed in the IG are those of the department and do not constitute SEBI’s final decision, as explicitly stated in the IG. Therefore the views expressed in IG should not be seen as the regulators final take on the issue.
In any case, a clear explanation in the Regulations itself might be desired to ensure uniformity in the implementation of RPT controls by listed entities and their unlisted subsidiaries
[1] SEBI (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021, w.e.f. 1.4.2022
[2] We have discussed both approaches in our write-up, Identification Of Related Parties Of Subsidiaries.
[3] Needless to say that, if the unlisted subsidiary is tracking the RPTs between itself and RPs of its parent listed entity, it will have to the RP list of the parent listed entity prepared in accordance with Listing Regulations.
Simrat Singh, Executive | corplaw@vinodkothari.com
“I decline to read into any enactment, words which are not to be found there and which would alter its operative effect because of provisions to be found in any proviso.”
– Lord Herschell in West Darby Union vs. Metropolitan Life Assurance Society[1]
Listed entities in India bear significant compliance obligations, including enhanced disclosure requirements and scrutiny by regulators, primarily due to the involvement of public funds and retail investors. To ensure market transparency and investor protection, several measures of ensuring a strong corporate governance (CG) culture have been provided by SEBI. Several of such requirements are enumerated under Regulations 17 to 27 of SEBI (LODR) Regulations, 2015[2] and are applicable on listed entities. However, all listed companies are not required to comply with these CG provisions, as Regulation 15(2)(a) provides certain exemptions for small size entities whose paid up equity capital and net worth do not exceed Rs. 10 Cr. and 25 Cr. respectively.
There are 2 things about the carve out for small listed companies – (a) it is based on monetary limits which were prescribed 9 years ago, and never revised since then, though the official loss of value due to inflation itself would be approx 42.9%[3] (b) Though the Regulation provides a twin-test window for qualifying for the exemption – small capitalisation and small net worth, SEBI was reading these qualifying conditions as being cumulative, with the effect that unless a listed entity was small by both these tests, it will not qualify for the exemption.
While the said Regulation provides for exempting specified classes of listed entities, however, the manner in which the amendment to the said exemption was framed raised two different views on availing the said exemption.
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