Sebi may tighten norms for firms' audit committees

Topics Sebi

Capital markets regulator the Securities and Exchange Board of India (Sebi) is likely to tighten norms pertaining to constitution and functioning of the audit committees for listed companies. These committees act as independent oversight bodies responsible for transparency and accuracy in functioning of company and the board.

According to sources, the markets regulator plans to look at how India Inc is appointing members on the audit committee, their qualifications and whether they are discharging their duties, without undue influence of the promoters.

‘Proceedings of audit committee and reconstitution of the same’ is among the top agenda of the Sebi board meeting scheduled on September 18, said sources. Other agenda items include the surveillance action report on 331 suspected shell companies, changes to infrastructure investment trust (InvIT) norms and appointment of a chief economist at Sebi.

This move comes in the wake of recent instances that put the spotlight on the role of audit committee members. Sebi had received complaints pertaining to the role of independent directors on the boards of listed companies. The complaints were about conflict of interest and wrong declarations made in the audit committee report.

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According to the Companies Act, two-thirds of the audit committee of listed companies have to be made up of independent directors. Another third comprises non-executive directors. 

“The rules are structured to provide strong oversight over a company’s financial statement, related-party transactions, and inter-corporate loans. However, the view within Sebi is that audit committees in most companies are rubber stamps. They are not fulfilling the entrusted role and responsibilities,” said a person with knowledge of the development. 

The Sebi board is likely to deliberate ways to add more muscle to the audit committee, the person added.

Experts said Sebi should consider getting professionals on audit committees.

“The provisions related to role, responsibility and functioning of the audit committee is more of self-governance. It is time that a provision is made to appoint professionals who would be under obligation to report directly to the regulators rather than to the board,” said Rishabh Mastaram, founder, RGM Legal. Sources said Sebi might tighten audit committee compliance norms for big-ticket transactions. The regulator is particularly concerned over whether companies are following rules laid down for accountability and disclosure of inter-corporate loans. The mandate of the audit committee includes scrutiny of such loans and investments.

Besides, Sebi may also review the process followed in the reconstitution of audit committees. Experts believes that the reconstitution of the committee should have shareholders' approval. "It is important to ensure that appointment of new member or reconstitution should not be done by passing a simple board resolution. Besides, the directors have to be fair and independent and should be capable of decisions without being influenced by dominant shareholders. The independence should be both in letter and spirit and not just on paper," said proxy advisory firm InGovern MD Shriram Subramanian.  Sebi is also likely to apprise the board members on the recent action taken against 331 “suspected shell companies”. The regulator is also likely to ease the InvIT framework. InvIT issuances dried up after just two issuances.  

Also, Sebi, for the first time, is likely to create the position of a chief economist. The regulator is also likely to mull ways to ensure timely completion of pending investigations.


The Sebi board meeting is scheduled on September 18

Tweaking audit committee norms
  • Review of selection procedure of the committee
  • Checks on roles and responsibilities of independent directors
  • Ensure compliance while approving related-party transactions
  • Conditions for reconstitution of the committee  
Surveillance action report on 331 suspected shell companies
  • Take stock of action taken against the companies
  • Decide further course of action 
Changes to infrastructure investment trusts (InvIT) norms
  • Deliberate new ways to boost stalled InvIT market
  • Appointment of chief economist at Sebi
  • Position to be created for the first time 
Pending investigations
  • Review of interim order pending for final conclusion. Sebi had decided to complete investigation in one year

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