Regulatory updates. debt securities such as listed nonconvertible

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1 19 Regulatory updates SEBI deferred disclosures of loan defaults from banks by listed entities The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) issued on 2 September 2015 required listed entities to disclose delay or default in payment of interest/principal on debt securities such as listed nonconvertible debentures, foreign currency convertible bonds, listed non-convertible redeemable preference shares, etc. The Listing Regulations do not require similar disclosures to be provided in case of loans from banks and financial institutions. In order to bridge this gap in the availability of information to investors and other stakeholders, the Securities and Exchange Board of India (SEBI) through its circular dated 4 August 2017 (the circular) required specified listed entities to provide disclosures to the stock exchanges in case of defaults in repayment of interest/instalment obligations on loans from banks and financial institutions, debt securities (including commercial paper), etc. The circular prescribed the following timelines for disclosures: Sr. no. Default Timing of disclosures 1. First instance of default A listed entity is required to make the disclosure of defaults within one working day from the date of default in the prescribed manner. 2. Outstanding amount under default as on the last day of the quarter A listed entity is required to report the outstanding amount under default within seven days from the end of the quarter. Additionally, the listed entities were required to separately disclose information pertaining to defaults to the concerned credit rating agencies in a timely manner. While the above mentioned circular was to be effective from 1 October 2017, SEBI through a press release dated 29 September 2017 decided to defer the implementation of the circular until further notice. (Source: SEBI press release PR No.: 59/2017 date 29 September 2017 and KPMG in India s First Notes dated 4 October 2017)

2 Accounting and Auditing Update - Issue no. 15/ SEBI revised eligibility conditions for exemptions to listed companies merging with unlisted companies A listed entity that desires to undertake a scheme of arrangement with an unlisted entity under the requirements of the Companies Act, 2013 (2013 Act) is required to obtain a no objection letter or an observation letter from the stock exchange. The stock exchange is required to forward the scheme and relevant documents to the Securities and Exchange Board of India (SEBI). Additionally, the stock exchange has to ensure that the draft scheme of arrangement is in compliance with securities laws. The Securities Contracts (Regulation) Rules, 1957 (SCRR), inter alia, lay down the rules for issuers for listing of securities on a recognised stock exchange. Specifically, Rule 19(2)(b)(1) of the SCRR provides requirements for minimum offer and allotment to public in terms of an initial public offer. It specifically requires that offer size should be 25 per cent of equity or debenture convertible into equity. A listed company under a scheme of arrangement with an unlisted company can get an exemption from Rule 19(2)(b) by applying to SEBI under Rule 19(7) of the SCRR. The SEBI s circular (relating to relaxation under Rule 19(7)) issued on 10 March 2017 provides detailed conditions that have to be fulfilled by a company for taking an exemption from Rule 19(2)(b). These conditions are specified in Clause III(A)(1) (of SEBI circular dated 10 March 2017) and are as follows: a. The equity shares sought to be listed are proposed to be allotted by the unlisted issuer (transferee entity) to the holders of securities of a listed entity (transferor entity) pursuant to a scheme of reconstruction or amalgamation (scheme) sanctioned by National Company Law Board (NCLT) under Section of the 2013 Act b. At least 25 per cent of the postscheme paid up share capital of the transferee entity shall comprise of shares allotted to the public shareholders in the transferor entity c. The transferee entity will not issue/reissue any shares, not covered under the draft scheme of arrangement d. As on date of application, there are no outstanding warrants/ instruments/agreements which give right to any person to take the equity shares in the transferee entity at any future date. If there are such instruments stipulated in the draft scheme, the percentage referred to in para (b) above shall be computed after giving effect to the consequent increase of capital on account of compulsory conversions outstanding as well as on the assumption that the options outstanding, if any, to subscribe for additional capital will be exercised and e. The shares of the transferee entity issued in lieu of the lockedin shares of the transferor entity will be subject to lock-in for the remaining period. (Emphasis added) The SEBI, through its circular dated 21 September 2017 revised Clause III (A)(1)(b) of the aforementioned requirement and has provided one year s time to increase the public shareholding to 25 per cent if a company meets certain conditions. The new requirement is as follows: At least 25 per cent of the postscheme paid up share capital of the transferee entity shall comprise of shares allotted to the public shareholders in the transferor entity: Provided that an entity which does not comply with the above requirement may satisfy the following conditions: The entity has a valuation in excess of INR1,600 crore as per the valuation report The value of post-scheme shareholding of public shareholders of the listed entity in the transferee entity is not less than INR400 crore At least ten per cent of the postscheme paid up share capital of the transferee entity comprises of shares allotted to the public shareholders of the transferor entity and The entity shall increase the public shareholding to at least 25 per cent within a period of one year from the date of listing of its securities and an undertaking to this effect is incorporated in the scheme. (Emphasis added) All other conditions given in the 10 March 2017 circular remain unchanged. (Source: SEBI circular CFD/DIL3/ CIR/2017/105 dated 21 September 2017 and KPMG in India s First Notes dated 3 October 2017)

3 21 ICAI issued exposure drafts of AS 23, Borrowing Costs and AS 24, Related Party Disclosures The Ministry of Corporate Affairs (MCA) through a notification dated 16 February 2015 issued the Companies (Indian Accounting Standards) Rules, 2015 (Ind AS Rules) which laid down a road map for entities (other than insurance entities, banking entities and Non- Banking Financial Companies (NBFCs)) (corporate road map) for implementation of Ind AS converged with International Financial Reporting Standard (IFRS) in a phased manner. For other class of companies not covered under the corporate road map (i.e. primarily unlisted entities having net worth less than INR250 crore, including non-corporate entities) Accounting Standards (AS), as notified under Companies (Accounting Standards) Rules, 2006 (AS Rules) continue to remain applicable. The MCA has also requested the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) to upgrade the AS with a view to bring them nearer to the requirements of Ind AS. In this context, the ICAI has recently issued exposure drafts of two new standards and has maintained consistency with the numbering of the Ind AS. On 5 October 2017, the ASB of the ICAI issued Exposure Drafts (EDs) of the following AS: AS 23, Borrowing Costs AS 24, Related Party Disclosures. With the issuance of EDs of AS 23 and AS 24, the ICAI has incorporated some of the key requirements of Ind AS into the standards applicable to smaller non-listed or non-corporate entities (to whom Ind AS is not applicable as per the corporate road map). Comments on the EDs may be submitted up to 31 October (Source: Exposure Draft AS 23, Borrowing Costs and AS 24, Related Party Disclosures issued by ICAI dated 5 October 2017) IASB provided guidance on making materiality judgements and proposes amendments to the definition of material International Accounting Standard (IAS) 1, Presentation of Financial Statements and IAS 8, Accounting Policies, Changes in Accounting Estimates define the term material as follows: Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. The International Accounting Standards Board (IASB) observed that entities face difficulties in making material judgements while preparing their financial statements. These difficulties were not only behavioural in nature but also relate to the existing definition of the term material. s Recently, IASB issued the following in relation to the definition of material and guidance on making materiality judgements: IFRS practice statement on making materiality judgements (practice statement): The practice statement is non-mandatory in nature and does not change or introduce any new requirement in IFRS. It provides guidance on the process that entities may follow to make materiality judgements when preparing their financial statements. The guidance provided in materiality statement includes basis of materiality judgements, four-step materiality process and additional guidance with respect to some of the common areas of judgement. Amendments to IAS 1 and IAS 8 by issuing an Exposure Draft ED/2017/6 Definition of Material (ED): The IASB proposed amendments to the definition of material in IAS 1 and IAS 8 separately through an ED. The proposed revised definition is as follows: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of a specific reporting entity s general purpose financial statements make on the basis of those financial statements. The ED highlighted that if any change is made to the definition of material in IAS 1 and IAS 8 as a result of the proposals, similar amendments would be made to the materiality practice statement and the forthcoming revised conceptual framework.

4 Accounting and Auditing Update - Issue no. 15/ Comments to the ED can be submitted up to 15 January Please refer KPMG in India s IFRS Notes dated 23 October 2017 for detailed overview of the practice statement and recent ED issued by IASB. (Source: IFRS Practice Statement Making Materiality Judgements Practice Statement 2 and ED/2017/6 Definition of Material issued by IASB in September 2017) SEBI amends IEPF (Accounting, Audit, Transfer and Refund), Rules 2016 Section 124(6) of the 2013 Act provides that all shares in respect of which dividend has not been paid or claimed for seven consecutive years or more should be transferred by the company in the name of Investor Education and Protection Fund (IEPF) along with a statement containing such details as may be prescribed. Rule 6 of the IEPF (Accounting, Audit, Transfer and Refund), Rules 2016 (IEPF Rules) provide that in cases where the period of seven years provided above has been completed or being completed during the period from 7 September 2016 to 31 May 2017, the due date of transfer of such shares should be deemed to be 31 May The MCA, on 13 October 2017 introduced IEPF (Accounting, Audit, Transfer and Refund), Second Amendment Rules The amendment rules amended the time period given above and requires that in cases where the period of seven years has been completed or being completed during the period from 7 September 2016 to 31 October 2017, the due date of transfer of such shares should be deemed to be 31 October Additionally, it provides that the transfer of shares by the companies to the fund should be deemed to be transmission of shares and the procedure to be followed for transmission of shares should be followed by the companies while transferring the shares to the fund. The Rules also prescribe the manner of effecting the shares held in physical form. (Source: MCA notification G.S.R. 1267(E). dated 13 October 2017) MCA notified section and rules relating to valuation by registered valuers The MCA on 18 October 2017, notified Section 247 of the 2013 Act and Companies (Registered Valuers and Valuation) Rules, Section 247 of the 2013 Act governs the provisions relating to the valuation by registered valuers under the 2013 Act. It requires that wherever valuation with respect to any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities is required to be made under the provisions of the 2013 Act, it should be valued by a person having such qualifications and experience and registered as a valuer in such a manner, on such terms and conditions as may be prescribed. Such a registered valuer should be appointed by the audit committee or by the Board of Directors (in the absence of audit committee) of that company. The registered valuer has been entrusted with various significant responsibilities under the 2013 Act. These are as follows: Make an impartial, true and fair valuation of assets Exercise due diligence while performing the functions as a valuer Conduct valuation in accordance with the Rules as may be prescribed Not to undertake valuation of any assets in which he/she has a direct or indirect interest or becomes so interested at any time during or after the valuation of assets. The Companies (Registered Valuers and Valuation) Rules, 2017 (Valuation Rules), provide detailed guidance on various aspects of a registered valuer. The Valuation Rules, inter alia, prescribe the norms of eligibility, qualifications and registration of valuers, recognition of registered valuers organisation and cancellation or suspension of certificate of registration or recognition. The Rules are effective from the date of its notification in the official gazette i.e. 18 October (Source: MCA notification S.O. 3393(E). and Companies (Registered Valuers and Valuation) Rules, 2017 dated 18 October 2017) MCA extended last date for filing of financial statements Rule 12(1) of the Companies (Accounts) Rules, 2014 requires that every company should file the financial statements with the Registrar of Companies (ROC) together with Form AOC 4 and the consolidated financial statement, if any, with Form AOC-4 CFS. Section 137 of the 2013 Act requires that every company should file such form with the ROC within 30 days of the date of the AGM. Further Rule 3 of Companies (Filing of Documents and Forms in Extensible Business Reporting Language (XBRL)) Rules, 2015 requires that every company having paid up capital of INR5 crore or above should file their financial statements and other documents under section 137 of the 2013 Act, with the ROC in e-form AOC-4 XBRL for the financial years commencing on or after 1 April 2014 using the XBRL taxonomy.

5 23 Therefore all the companies preparing their financial statements under Companies Indian Accounting Standard Rules, 2015 for the financial year are required to file their financial statements only in XBRL formats. The MCA through its notification dated 26 October 2017 has extended the last date for filing of AOC-4 XBRL for Ind AS complaint companies for the financial year without additional fees. The relaxation is provided in view of unavailability of tools necessary for deployment of the taxonomy for XBRL filing which is expected to be completed by 28 February The MCA further stated that filing should be made by companies when the Ind AS based XBRL taxonomy is deployed, for which separate intimation would be provided by MCA. Additionally, MCA through its circular dated 27 October 2017 also extended the last date for filing of e-forms AOC-4 and AOC-4 (XBRL non-ind AS) and the corresponding AOC-4 CFS for non-ind AS companies upto 28 November 2017 without additional fees. (Source: MCA issued circular no. 13/2017 dated 26 October 2017 and circular no. 14/2017 dated 27 October 2017) Recommendations on enhancing standards of corporate governance for listed entities in India The SEBI constituted a committee on corporate governance (the Committee) in June 2017 under the Chairmanship of Mr. Uday Kotak. The objective of this committee was to suggest measures for enhancing the standards of corporate governance of listed entities in India. It consisted of officials from the government, industry, professional bodies, stock exchanges, academicians, lawyers, advisors, etc. On 5 October 2017, the committee submitted the report on Corporate Governance (the Report) to SEBI. The Report sets out the recommendations of the Committee under the following broad heads: Composition and role of the board of directors (BoD) The institution of independent directors Board Committees Enhanced monitoring of group entities Promoters/controlling shareholders and Related Party Transactions (RPTs) Disclosures and transparency Accounting and audit related issues Investor participation in meetings of listed entities Governance aspects of public sector enterprise Leniency mechanism Capacity building in SEBI for enhancing corporate governance in listed entities. The recommendations of the Committee were also sent for comments of MCA and also the Ministry of Finance (MoF). The Report is also open for public comments and the last date for submission of comments is 4 November Approach followed by the Committee The focus of the Committee is improve standards of corporate governance in India, by highlighting immediate challenges and gaps in governance. The report also highlights various remedial steps to be taken over long term. According to the Committee, a well governed entity needed to fulfil two significant roles viz. to focus on long-term value creation and the other to protect interests of the shareholders by applying proper care, skills and diligence in business decisions. Therefore, the Committee opted for a balanced and measured approach for implementation of its recommendations so as to give time to companies for preparation for change for a smooth transition. This was necessary to avoid the risk of poor execution with damaging second order consequences. Accordingly, it recommended that a phased timetable for most initiatives to be executed between the years 2018 and This timeline is expected to allow companies time to adjust to the new governance demands. Overview of the Report of the Committee This section provides an overview of the key proposals given in the Report. Directors, board and its committees Quorum: The quorum for every meeting of the BOD of the listed entity should be one-third of its total strength or three directors, whichever is higher, and should include at least one independent director. These requirements would be subject to the requirements of the 2013 Act. Attendance at board meetings: Directors should attend minimum number of board meetings over a relevant period i.e. if a director does not attend at least half of the total number of board meetings held over the relevant period, then his/her continuance on the board would be subject to ratification by the shareholders at the next annual general meeting (notwithstanding the nature of directorship).

6 Accounting and Auditing Update - Issue no. 15/ Relevant period means a period of two consecutive financial years on a rolling basis, commencing from the financial year immediately succeeding the date of appointment. For existing directors, the relevant period would commence from 1 April Skills disclosure: A chart or a matrix setting out the skills/expertise/ competence of the BOD should be disclosed. The matrix should list core skills/expertise/competencies identified by BOD in relation to the business and names of directors with the relevant skills. Appointment of non-executive directors above certain age: Approval by special resolution would be required for appointment of nonexecutive directors of the age 75 years Separation of the roles of nonexecutive Chairperson and managing director/chief Executive Officer (CEO): Listed entities with public shareholding of 40 per cent or more at the beginning of a financial year should ensure that the Chairperson of the board of such listed entity would be a non-executive director. Additionally, this requirement would continue even if there is any subsequent reduction in public shareholding below 40 per cent. All other listed entities should ensure that the Chairperson of the board would be a non-executive director. (To be effective from 1 April 2022) Matrix reporting structure: The corporate governance report should include a confirmation that the board of directors have been responsible for the business and overall affairs of the listed entity in the relevant financial year and that the reporting structures of the listed entity, formal and informal, are consistent with the above. Non-executive director engagement with the management: The listed entity should, at least once every year, undertake a formal interaction between the non-executive directors and the senior management. Role of audit committee: The audit committee members should review the utilisation of loans and/ or advances from/ investment by the holding company in the subsidiary exceeding INR100 crore or 10 per cent of the asset size of the subsidiary, whichever is lower. Composition and role of Stakeholders Relationship Committee (SRC): The SRC of every listed entity should specifically look into various aspects of interest of shareholders, debenture holders and other security holders. Also the SRC should consist of at least three directors as members, with at least one being an independent director. Additionally, the Chairperson of the SRC should be present in the annual general meeting to answer queries of the security holders. Further, the role of the SRC has been widened to include power to resolve security holder grievances relating to issue of new/duplicate certificates, general meetings, to proactively communicate and engage with security holders including with the institutional shareholders at least once a year along with members of the committee/board/ Key Management Personnel (KMP), as may be required and identifying actionable points for implementation, etc. Wider role of nomination and remuneration committee: The nomination and remuneration committee should recommend all payments to be made to senior management. Minimum number of directors: A minimum of six directors should be appointed on the board of directors of any listed entity The maximum number of directorships capped: The maximum number of directorships in listed entities should be reduced to seven (irrespective of whether the person is appointed as an independent director or not). This change would be achieved in a staggered manner i.e. the maximum number of listed entity directorships held by a person be brought down to eight by 1 April 2019 and to seven by 1 April Additionally, any person who is serving as a whole-time director/ managing director in any listed entity would serve as an independent director in not more than three listed entities. Gender diversity: Every listed entity should appoint at least one independent woman director. Minimum number of board meetings: The BOD should meet at least five times a year, with a maximum time gap of 120 days between any two meetings. Additionally, at least once a year, the board should specifically discuss strategy, budgets, board evaluation, risk management, ESG (Environment, Sustainability and Governance) and succession planning. Membership and chairpersonship limit: A director of listed entity should not be a member in more than 10 committees or act as Chairperson of more than five committees across all listed entities in which he is a director. Additionally, for the purpose of determination of limit, chairpersonship and membership of the audit committee, Nomination and Remuneration Committee (NRC) and the SRC should be considered.

7 25 Minimum number of committee meetings: The audit committee should meet at least five times a year, with a maximum time gap of 120 days between any two meetings. Additionally, all other mandatory board committees (such as NRC, SRC and risk management committee) necessarily meet at least once in a year. Composition of nomination and remuneration committee: A minimum of two-third members of the nomination and remuneration committee should be independent directors. Quorum for committee meetings: The quorum for a meeting of the nomination and remuneration committee and SRC should be either two members or one-third of the members of the committee, whichever is greater, with at least one independent director. Applicability and role of risk management committee: The BOD should specify the role and responsibility of risk management committee and it should specifically include cyber security. Additionally, the requirement for constitution of a risk management committee should be applicable to top 500 listed entities determined on the basis of market capitalisation, as at the end of the immediate previous financial year. Institution of independent directors Eligibility criteria for independent directors: Eligibility criteria for a director to be an independent director would be as follows: a. Specifically exclude persons who constitute the promoter group of a listed entity b. Require an undertaking from the independent director that such a director is not aware of any circumstance or situation, which exists or may be reasonably anticipated, that could impair or impact his/her ability to discharge his/her duties with objective independent judgements and without any external influence c. The board of the listed entity to take on record the above undertaking after due assessment of the veracity of such undertaking. d. Exclude board inter-locks arising due to common non-independent directors on boards of listed entities (i.e. a non-independent director of a company on the board of which any nonindependent director of the listed entity is an independent director, cannot be an independent director on the board of the listed entity). For example, if Mr. A is an executive director on the board of company A (being a listed entity) and is also an independent director on the board of company B, then no non-independent director of company B can be an independent director on the board of company A. Additionally, BOD as a part of the board evaluation process may be required to certify every year that each of its independent directors fulfils the conditions specified in the Listing Regulations and is independent of the management Lead independent director in companies with non-independent Chairperson: All listed entities where the Chairperson is not independent to designate an independent director as the lead independent director. The lead independent director should be a member of nomination and remuneration committee. Directors and Officers (D&O) insurance for independent directors: It is recommended to make mandatory for top 500 companies by market capitalisation to undertake D&O insurance for its independent directors, with effect from 1 October This could be subsequently extended to all listed entities. The board of directors of the listed entity could determine the quantum and type of risks covered under such insurance. Minimum number of independent directors: Every listed entity, irrespective of whether the Chairperson is executive or nonexecutive, would be required to have at least half of its total number of directors as independent directors. This requirement has been proposed to be applicable to the top 500 listed companies by market capitalisation by 1 April 2019 and to the rest of listed companies by 1 April Induction and training of independent directors: A formal induction should be mandatory for every new independent director appointed to the board. Additionally, the report recommends a formal training, whether external/ internal, especially with respect to governance aspects, for every Independent Director once every five years. Alternate directors for independent directors: Appointment of an alternate director for independent directors should not be permitted. Disclosures on resignation of independent directors: Listed entities should be required to disclose detailed reasons for resignation of independent directors (as provided by such independent directors) along with the notification of their resignation to the stock exchanges, as well as subsequently as part of the corporate governance report. As part of such disclosure, the listed entity should include a confirmation as received from the director that there are no other material reasons other than those set out therein.

8 Accounting and Auditing Update - Issue no. 15/ Casual vacancy of office of independent director: Any appointment to fill a casual vacancy of office of any independent director should also be approved by the shareholders at the next general meeting. Monitoring group entities and related parties Group governance unit/committee and policy: The Committee did not recommend any amendment to the Listing Regulations. However, it has been recommended that SEBI should provide guidance in the following manner where a listed entity has a large number of unlisted subsidiaries: a. The listed entity may monitor their governance through a dedicated group governance unit or governance committee comprising the members of the board of the listed entity. b. A strong and effective group governance policy may be established by the entity. c. The decision of setting up of such a unit/committee or having such a group governance policy may be left to the board of the listed entity. Materiality policy: Clear threshold limits, as considered appropriate by the BOD would be required to be disclosed in the materiality policy. Such materiality policy should be reviewed and updated at least once every three years. Disclosure of RPTs: In order to strengthen transparency on RPTs, the following is recommended: a. Half yearly disclosure of RPTs on a consolidated basis, in the disclosure format required for RPT in the annual accounts as per the accounting standards, on the website of the listed entity within 30 days of publication of the halfyearly financial results. Copy of the same also to be submitted to the stock exchanges. b. Strict penalties may be imposed by SEBI for failing to make requisite disclosures of RPTs. c. All promoters/promoter group entities that hold 20 per cent or above in a listed company to be considered related parties for the purposes of the Listing Regulations. Disclosures of transactions with promoters/promoter group entities holding 10 per cent or more shareholding be made annually and on a half-yearly basis (even if not classified as related parties). Obligations on the board of the listed entity with respect to subsidiaries: The Committee made following three recommendations: a. Definition of material subsidiary: The definition of a material subsidiary should be revised to mean a subsidiary whose income or net worth exceeds 10 per cent (from the current 20 per cent) of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year, other than for requirement of appointment of independent directors on the board of material subsidiaries (where the threshold of 20 per cent would continue). b. Appointment of an independent director: At least one independent director on the BOD of the listed entity should be a director on the BOD of an unlisted material subsidiary, whether incorporated in India or not. Significant transaction or arrangement: The management of the unlisted subsidiary should periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by all unlisted subsidiary (currently the disclosure is required for material subsidiary). Approval of RPTs: Similar to the 2013 Act, the Listing Regulations to be amended to allow related parties to cast a negative vote, as such voting cannot be considered to be in conflict of interest. Relationship with promoters and controlling shareholders Sharing of information with controlling promoters/shareholders with nominee directors Regulatory framework should be amended to provide an enabling transparent framework regulating the information rights of certain promoters (including promoters of the promoter) and significant shareholders to reduce subjectivity and provide clarity for ease of business, along with appropriate and adequate checks and balances to prevent any abuse and unlawful exchange of UPSI i.e. to ensure information moves from one known safe container to another. Re-classification of promoters/ classification of entities as professionally managed If an entity becomes professionally managed and does not have any identifiable promoter then existing promoter(s) may be re-classified as public shareholders, on receipt of request in this regard from the promoter(s), subject to approval of the BOD and the shareholders in a general meeting in which the promoter, promoter group and persons acting in concert should not vote.

9 27 Any person/entity (specific promoter) which is a part of promoters, promoter group or persons acting in concert with them may be reclassified as public shareholders, on receipt of request in this regard from the specific promoter. An approval of the BOD and approval of the shareholders in a general meeting would be required, wherein the specific promoter(s), along with its promoter group and persons acting in concert should abstain from voting on such resolution placed before the shareholders for approval, and provided certain conditions are met. Accounting and audit related matters Audit qualifications: Quantification of audit qualifications to be made mandatory, with the exception being only for matters like going concern or sub-judice matters. In such an instance, the management will be required to provide reasons, which will be reviewed by the auditors and need to be reported accordingly. Independent external opinion by auditors: The Listing Regulations should be amended to provide a clear right to an auditor to independently obtain external opinions from experts. Group audits: For listed entities in India, the auditor of the holding company should be made responsible for the audit opinion of all material unlisted subsidiaries. Quarterly financial disclosures: The committee recommends the following in relation to periodic financial disclosures: a. Consolidated financial results: Disclosure of CFS should be made mandatory for all listed entities on a quarterly basis. Stand-alone results should continue to be required to be published. b. Cash flow statement: Publishing a cash flow statement on a half-yearly basis should be made mandatory for all listed entities. c. Audit/limited review of quarterly financial results: Financial information of the group, accounting for at least 80 per cent of each of the consolidated revenue, assets and profits, respectively, should have undergone limited review/audit for all listed entities, every quarter. d. Last quarter financial results: Any material adjustments made in the results of the last quarter which pertain to earlier periods should be disclosed by the listed entity as a note in the financial results. Internal financial controls: IFC reporting requirements to be made applicable to the entire operations of the group and not just to the Indian operations. This should initially be made applicable to the listed entities with net worth of INR1,000 crore and above. Governance aspects of Public Sector Enterprises (PSEs) The committee gave following guiding principles: a. Establish a transparent mandate for PSEs and disclose its objectives and obligations: The government, as owner, must set clear objectives and mandates for the PSEs, and, where there are non-commercial objectives, these should be clearly articulated, quantified and transparently disclosed to the shareholders on a regular basis so that investors can take informed investment decisions. b. Ensure independence of the PSEs from the administrative ministry: The government should aim at ensuring independence of the PSEs from the administrative ministry to ensure speedy decision making, functional and operational autonomy in pursuit of their stated objectives, for better commercial goals and to attract talent in a competitive market place. c. Consolidate the government stake in listed PSEs under holding entity structure(s): As a sustainable and optimal solution for minimizing conflicts arising from the ownership and regulatory dichotomy in PSEs, the government should consider consolidating its ownership and monitoring of PSEs into independent holding entity structure(s) by 1 April An independent board with diversified skill set of the holding entity(s) would also facilitate operationalising a consistent and high quality process on significant issues such as strategy, performance monitoring, mergers and acquisitions, and recruitment of best talent. The Committee recommended that the listed PSEs fully comply with the provisions of the Listing Regulations and the same be suitably enforced. Additionally, the government should assess and examine the broader issues referenced above, inter alia, concerning ownership structure for the government stake, removal of conflicts and creating a more autonomous environment for PSEs to function in the best interest of all stakeholders. The Committee believed that this will significantly enhance value of the national assets. This should be done in a time-bound manner.

10 Accounting and Auditing Update - Issue no. 15/ SEBI s monitoring and enforcement mechanisms SEBI s monitoring and enforcement mechanisms comprise leniency mechanism and capacity building in SEBI for enhancing corporate governance in listed entities. Leniency mechanism The SEBI Act, 1992 and the Securities Contracts (Regulation) Act, 1956 have the powers to grant immunity both from prosecution and imposition of penalty for alleged violation. However, there is no specific provision to empower SEBI to grant leniency. Therefore, SEBI may be empowered to grant leniency and offer protection against victimisation to whistleblowers in certain instances determined on a case by case basis. The Committee recommended that rules and regulations should be developed in relation to the conditions to be satisfied for getting benefits under the leniency programme and protection against victimisation, the procedure for the grant of lesser penalty or reduction in liability, the quantum of penalties that are waived when lenient treatment is meted out and protection of the whistle-blower. Capacity building in SEBI for enhancing corporate governance in listed entities The Committee believes that efficacy of recommendations significantly depends upon SEBI s detection and enforcement capabilities. Therefore, there is a need to enhance capacity of SEBI in line with global best practices by undertaking following steps: a. Enhance the number and skill-sets of its human resources b. Exploit the power of data science and technology and c. Strategically work with other agencies, especially for monitoring and enforcement.

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