Market regulator Sebi turns the wrench on auditor appointments, RPT rules

Guardrails set to defend against ambiguity and strengthen compliance

The Securities and Exchange Board of India (Sebi) has unveiled a series of proposals aimed at reducing ambiguity in related party transaction (RPT) norms and improving transparency in secretarial audit reports.

 

These measures come amid allegations that several listed companies have engaged auditors with limited experience.

 

Sebi has recommended adding a monetary threshold alongside the existing 10 per cent standalone turnover threshold for subsidiaries seeking RPT approvals from listed companies’ audit committees. The proposed limits are ~1,000 crore for mainboard companies and ~50 crore for small and medium enterprises (SMEs) listed on exchanges.

 

For subsidiaries without financial records, the threshold would be set at 10 per cent of standalone net worth, calculated three months before approval. If a subsidiary has negative net worth, Sebi suggests using share capital plus securities premium instead of 10 per cent of net worth, as outlined in its consultation paper.

 

The regulator clarified that subsidiaries whose accounts are consolidated with the listed holding company would be exempt from RPT approval requirements. Sebi may also require audit committees to review the qualifications and experience of statutory auditors’ signing partners to ensure they match the scale of the listed company.

 

“In recent times, allegations have surfaced that the financials of some large listed companies have been audited by individuals or firms with little to no experience,” Sebi said, stressing the importance of auditor expertise given the involvement of public funds.

 

While industry experts acknowledged Sebi’s rationale, they flagged other considerations.

 

“The signing partner may leave the firm, and the team’s overall quality may not always reflect the competence of the signing partner. Some companies, such as banks or insurers, also require domain-specific expertise, making years of experience less relevant,” said Ketan Dalal, managing director of Katalyst Advisors.

 

Sebi has also detailed the minimum disclosures required before appointing a statutory auditor. These include any past links with promoters, names of other listed firms or group companies they audit, years of experience, and any regulatory orders against them. Companies will also need to disclose the total fees paid to the secretarial auditor on a consolidated basis.

 

The regulator has called for updates to the secretarial audit and compliance report, citing the need for revisions in light of regulatory changes over the past two years. This includes identifying instances of non-compliance.

 

Sebi has proposed making the Annual Secretarial Compliance Report a mandatory disclosure in the annual report, arguing that it is critical for shareholders as it highlights compliance with securities laws.

 

While industry players support stronger disclosures to protect minority shareholders, some have raised concerns about the risk of potential “data dump” or technical non-compliance due to overly prescriptive regulations.