Article. Analysis of the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2016

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1 Article Analysis of the SEBI (Listing Obligations and Disclosure Requirements) Arundhuthi Bose Corporate Law Services Group 27 th May, 2016 As updated on 1 st June, 2016 Check at: for more write ups. Copyright: This document is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This document is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

2 Brief of the notification SEBI, on the May 25, 2016 came up with a host of changes in many of its Regulations, emphasizing on wilful defaulters. Apart from that another change which SEBI brought in vide the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, amends the SEBI (Listing Obligations and Disclosure Requirement), ( Listing Regulations ). SEBI, in furtherance to the notification dated 25 th May, 2016, came up with another circular May 27, , removing ambiguity on various points from the former notification. The rationale behind SEBI bringing in the change as per the said circular is to make listed entities disseminate the cumulative impact of all the audit qualifications in a separate format, simultaneously, while submitting the annual audited financial results to the stock exchanges. This according to SEBI would help in ensuring timely dissemination of information to the investors. This would also help entities in having to file a single statement in place of two forms. The change relates to amending the requirement of submitting Form A / Form B (for audit report with unmodified/modified opinion respectively). The changes impact Regulation 33, 34, 52, 53, 95, Schedule IV and Schedule VII of the Listing Regulations which contains obligations and disclosures to be made with regard to financial results, by listed entities and stock exchange(s). The Regulations affected have been tabulated below for basic understanding. Regulation No. Pertaining to (category of Sub-classification listed entity) 33 Obligations of listed entity Financial Results 34 which has listed its specified securities Annual Report 52 Obligations of listed entity Financial Results 53 which has listed its non- Annual Report convertible debt securities or non-convertible redeemable preference shares or both 95 Duties and obligations of the recognised stock exchange(s) Form B accompanying Annual Audit Report Now reads as Statement on Impact of Audit Qualifications accompanying Annual Audit Report Schedule IV Disclosures in financial results -- Schedule VII Manner of reviewing Form B accompanying annual audited results -- Effective date: The notification is effective from April 01,

3 Amendments at a glance 1. Submissions to be made to the stock exchange of audit report with modified opinion Regulation No. Regulation Amended regulation 33(3)(d) The listed entity shall submit audited standalone financial results for the financial year, within sixty days from the end of the financial year along with the audit report and either Form A (for audit report with unmodified opinion) or Form B (for audit report with modified opinion): Provided that if the listed entity has subsidiaries, it shall, while submitting annual audited standalone financial results also submit annual audited consolidated financial results along with the audit report and either Form A (for audit report with unmodified opinion) or Form B (for audit report with modified opinion). The listed entity shall submit annual audited standalone financial results for the financial year, within sixty days from the end of the financial year along with the audit report and (Statement on Impact of Audit Qualifications (applicable only for audit report with modified opinion): Provided that if the listed entity has subsidiaries, it shall, while submitting annual audited standalone financial results also submit annual audited consolidated financial results along with the audit report and Statement on Impact of Audit Qualifications (applicable only for audit report with modified opinion); Provided further that, in case of audit reports with unmodified opinion(s), the listed entity shall furnish a declaration to that effect to the Stock Exchange(s) while publishing the annual audited financial results.

4 52(3)(a) The annual audited financial results shall be submitted along with the annual audit report and either Form A for audit report with unmodified opinion, or Form B for audit report with modified opinion. The annual audited financial results shall be submitted along with the annual audit report and Statement on Impact of Audit Qualifications(applicable only for audit report with modified opinion): Through the notification, SEBI has removed the requirement of submitting Form A and Form B, which related to submission of audit report with modified and/or unmodified opinion. Changing the requirement from submitting audited standalone financial results for the financial year to submitting annual audited standalone financial results for the financial year ; the Listing Regulations now require the listed entity to submit a Statement on impact of Audit Qualifications, if it has any modified opinion. The amendment also holds good for entities having subsidiaries, i.e. for entities which were submitting consolidated financial results earlier will now have to submit annual audited consolidated financial results along with the audit report and Statement on impact of Audit Qualifications, if it has any modified opinions. 2. Audit reports with unmodified opinion Regulation No. Regulation Amended regulation 33(3)(d) -- New insertion of proviso:- Provided further that, in case of audit reports with unmodified opinion(s), the listed entity shall furnish a declaration to that effect to the Stock Exchange(s) while publishing the annual audited financial results. 52(3)(a) -- New insertion of proviso:- Provided that, in case of audit reports with unmodified

5 opinion, the listed entity shall furnish a declaration to that effect to the Stock Exchange(s) while publishing the annual audited financial results. In case the entity has audit reports with unmodified opinion, the listed entity shall furnish a declaration to that effect to the Stock Exchange(s) while publishing the annual audited financial results. This requirement has been substituted with the requirement of Form A (which was required to be filed by entities having audit reports with unmodified opinion). Thus, the listed entity is required to submit Statement on impact of Audit Qualifications, if it has any modified opinion. If unmodified, the listed entity shall furnish a declaration to that effect to the Stock Exchange(s) while publishing the annual audited financial results. There is no format prescribed for the declaration and therefore the same can be either by way of the cover letter itself or a separate declaration altogether. Such declaration should be signed by the CEO/ the managing director/ CFO/ Audit Committee Chairman; as notified by NSE in its circular dated June 01, Applicable format of the statement Regulation No. Regulation Amended regulation 33(4) The applicable formats of the financial results and either Form A (for audit report with unmodified opinion) or Form B (for audit report with modified opinion) shall be in the manner as specified by the Board from time to time. 52(3)(d) The applicable formats of Form A and Form B shall be specified by the Board from time to time. The applicable formats of the financial results and Statement on Impact of Audit Qualifications (for audit report with modified opinion shall be in the manner as specified by the Board. The applicable format for Statement on Impact of Audit Qualifications (for audit report with modified opinion) shall be specified by the Board from time to time. The format has been prescribed SEBI vide the circular dated May 27, 2016.

6 Accordingly, what transpires is that the format has been prescribed only for the Statement on impact of Audit Qualifications and not for giving of declaration in case of unmodified opinions. Thus, as discussed above, the same may be either by way of a declaration in the cover letter being forwarded to the exchange for submission of annual audited results or by way of separate declaration. 4. Review by the stock exchange Regulation No. Regulation Amended regulation 33(6) The Form B and the accompanying annual audit report submitted in terms of clause (d) of subregulation (3) shall be reviewed by the stock exchange(s) and Qualified Audit Report Review Committee in manner as specified in Schedule 52(3)(b) VIII. The Form B and the accompanying annual audit report submitted in terms of clause (a) shall be reviewed by the stock exchange(s) and the Qualified Audit Report Review Committee in the manner specified in Schedule VIII. The Statement on Impact of Audit Qualifications (for audit report with modified opinion) and the accompanying annual audit report submitted in terms of clause (d) of sub-regulation (3) shall be reviewed by the stock exchange(s). The Statement on Impact of Audit Qualifications (for audit report with modified opinion) and the accompanying annual audit report submitted in terms of clause (a) shall be reviewed by the stock exchange(s). The Statement on impact of Audit Qualifications shall now be reviewed only by the stock exchange. The significant change is that in case of modified opinion, the review was to be done both by the stock exchange as well as by the Qualified Audit Report Review Committee and the review would have been in manner as specified in Schedule VIII. The amendment excludes the review by Qualified Audit Report Review Committee. The said committee was a committee formed by the board comprising of representatives from Institute of Chartered Accountants of India, stock exchange(s), Ministry of Corporate Affairs etc.

7 5. Deletion of Schedule VIII Schedule VIII, pertaining to Manner of reviewing Form B accompanying annual audited results, has been deleted from the regulations. This means that the basis for reviewing the Statement on Impact of Audit Qualifications (for audit report with modified opinion) and the accompanying annual audit report submitted in terms of clause (d) of sub-regulation (3) has been removed altogether. Schedule VIII mainly gave a framework on whose basis Form B ought to be reviewed by the stock exchange(s). The guidelines pertained to preliminary scrutiny of the Form B, the parameter to determine materiality of the modified opinion. There was also the requirement of display the list of listed entities which have filed their audit reports along with Form B by the stock exchange(s). The issue here is, Schedule VIII also required the formation of Qualified Audit Report Review Committee to review the qualified opinions of the entities forwarded by the stock exchange(s); and the removal of Schedule VIII implies dispensing with the Qualified Audit Report Review Committee. This committee was formed for the very purpose of reviewing the modified reports. The lingering question is whether at all the stock exchanges alone can shoulder the reviewing of reviewing the statement without any base framework. 6. Contents of annual report to now include the statement on impact of audit qualifications Regulation No. Regulation Amended regulation 34(2)(a) audited financial statements annual audited financial i.e. balance sheets, profit and loss accounts etc; statements i.e. balance sheets, profit and loss accounts etc. and Statement on Impact of Audit Qualifications as stipulated in regulation 33(3)(d), if applicable 53(3) audited financial statements i.e. balance sheets, profit and loss accounts etc; audited financial statements i.e. balance sheets, profit and loss accounts etc. and Statement on Impact of Audit Qualifications as stipulated in regulation 52(3)(a), if applicable

8 The annual report, besides containing audited financial statements, shall now additionally also include Statement on Impact of Audit Qualifications as stipulated in regulation 33(3) (d). There was no requirement to include Form A earlier. Since, the circular clarifies that the amendment is effective for all the companies whose financial results have been prepared for the period ending on or after March 31, 2016, this would pose difficulty for companies who have already gone ahead with printing of the annual reports, in case of modified opinions as: a. The company must have submitted Form A instead of the statement b. The annual report will not be containing the statement as now required for modified opinion. 7. Regulation 95 Obligations of stock exchange(s) Regulation 95 which earlier read Form B accompanying Annual Audit Report now reads as Statement on Impact of Audit Qualifications accompanying Annual Audit Report. The stock exchange(s), which were earlier required to review Form B and the accompanying annual audit report, submitted in terms of clause (d) of sub-regulation (3) of Regulation 33 and clause (a) of sub-regulation (3) of Regulation 52 are now required to review the Statement of Impact of Audit Qualifications (for audit report with modified opinion). 8. Changes in Schedule IV Disclosures in financial results Schedule IV Regulations Amendments Part A Clause B If the auditor has expressed any modified opinion(s) or other reservation(s) in respect of audited financial results submitted or published under this para, the listed entity shall disclose such modified opinion(s) or other reservation(s) and cumulative impact of the same on profit or loss, net worth, total assets, turnover/total income, earning per share or any other financial item(s) which may be impacted due to modified opinion(s) or other reservation(s), while publishing or submitting such results. If the auditor has expressed any modified opinion(s) in respect of audited financial results submitted or published under this para, the listed entity shall disclose such modified opinion(s) and cumulative impact of the same on profit or loss, net worth, total assets, turnover/total income, earning per share, total expenditure, total liabilities, or any other financial item(s) which may be impacted due to modified opinion(s), while publishing or submitting such results.

9 Clause BA -- New insertion:- If the auditor has expressed any modified opinion(s), the management of the listed entity has the option to explain its views on the audit qualifications and the same shall be included in the Statement on Impact of Audit Qualifications (for audit report with modified opinion). Clause BB -- New insertion:- With respect to audit qualifications where the impact of the qualification is not quantifiable: i. The management shall make an estimate and the auditor shall review the same and report accordingly; or ii. If the management is unable to make an estimate, it shall provide the reasons and the auditor shall review the same and report accordingly. The above shall be included in the statement on impact of audit qualifications (for audit report with modified opinion). The listed entity is now required to disclose cumulative impact of the modified opinion(s) on the total expenditure and total liabilities, in addition to impact on profit or loss, net worth, total assets, turnover/total income, earning per share or any other financial item(s) which may be impacted due to modified opinion(s), while publishing or submitting such results. Further, a new clause, BA has been inserted stating that if the auditor has expressed any modified opinion(s), the management of the listed entity has the option to explain its views on the audit qualifications and the same shall be included in the Statement on Impact of Audit Qualifications (for audit report with modified opinion). With respect to audit qualifications where the impact of the qualification is not quantifiable, clause BB has been inserted. This clause requires the management to make an estimate and the

10 auditor to review the same and report the accordingly. In case the management is unable to estimate, it shall provide the reasons and the auditor shall review the same and report accordingly. This too shall form a part of the Statement on impact of audit qualifications (for audit report with modified opinion). The same have been provided by way of format of the Statement on impact of audit qualifications as prescribed by way of the Circular. 9. Contents of the statement on impact of audit qualifications in comparison to Form B (fresh insertions have been highlighted in red) The statement on impact of audit qualification is more detailed as compared to Form B. The statement gives a bird s eye view of the modified opinions and their impacts at a glance. The statement is an extension of Form B if one may say so. Item No. I II Statement on impact of audit qualifications in comparison to Form B Adjusted figures before and after adjusting qualifications on the following:- Turnover / Total income Total Expenditure Net Profit/ (Loss) Earnings per Share Total Assets Total Liabilities Net Worth Any other financial item(s) (as felt appropriate by the management) Audit Qualification (each audit qualification separately) a. Details of Audit Qualification b. Type of Audit Qualification c. Frequency of qualification d. For Audit Qualification(s) where the impact is quantified by the auditor, Management's Views e. For Audit Qualification(s) where the impact is not quantified by the auditor i. Management's estimation on the impact of audit qualification ii. If management is unable to estimate the impact, reasons for the same Form B Name of the company Annual financial statements for the year ended

11 III IV V Conclusion iii. Auditors' Comments on (i) or (ii) above Signatories: CEO/Managing Director CFO Audit Committee Chairman Statutory Auditor Type of Audit qualification Frequency of qualification Relevant notes in the annual financial statements and management response to the qualification in the directors report Additional comments from the board/audit committee chair o May relate to nature of the qualification including materiality, agreement/disagreeme nt on the qualification, steps taken to resolve the qualification, etc. To be signed by- CEO/Managing Director CFO Audit Committee Chairman Statutory Auditor Though the intent of SEBI introducing such amendments may have been with some bona fide intent, but it has been brought at such an hour when most of the companies have almost finalized their financial results and are at the verge of placing or have already placed it at their board meetings. What is not understood is that why such a change was needed at the very last hour when it could have been introduced well within time to ensure that no loopholes are there in compliances by companies. For instance, a company which must have already approved its audited financial results in the month of April, 2016 and already gone ahead with printing of its annual report, how will it ensure adherence to the change in Regulation 34, if such company has a modified opinion.

12 As an answer to this, National Stock Exchange (NSE) came up with a circular Ref No: NSE/CML/2016/09 1 on June 01, 2016, clarifying the ambiguity on the status of the entities who have already filed their audited financial results. The operational guidelines for these entities would be such that the entities which have filed Form A, for the period ended March 31, 2016 shall be considered to be in sufficient compliance. The entities who have not filed Form A yet, shall be required to submit the declaration as mentioned in SEBI Circular CIR/CFD/CMD/56/2016, within 30 days from June 01, 2016, signed by either the CEO / Managing Director / CFO / Audit Committee Chairman. All the listed entities (irrespective of having submitted Form B or not in case of modified opinion (s)) for the period ended March 31, 2016 shall be required to submit the Statement on Impact of Audit Qualifications within 60 days from 1 st of June, 2016 in the format specified. The effective date as provided in the gazette notification is April 01, 2016 and is applicable for all annual audited standalone /consolidated financial results, as applicable, submitted by the listed entities for the period ending on or after March 31, 2016; as clarified by way of circulars dated March 27, 2016 and June 01, The statement on Impact of Audit Qualifications accompanying Annual Audit Report has been notified through the circular dated March 27, Consequently there shall be an inclusion in the annual report as well pursuant to the proposed change in Regulation 34 (2) (a) and Regulation 53 (a). To read more on the Listing Regulations click here To read our other resources click here 1