Recent changes to Indian law have resulted in a decreased number of auditor ratification (and audit fee ratification) proposals being submitted to shareholders during the 2018 proxy season – just as accounting scandals have shareholders paying closer attention than ever to audit oversight at Indian companies.

The Companies (Amendment) Act, 2017 (the “Amendment Act”), was released in early January and went into effect May 7. Notably, the Amendment Act removes the prior requirement, under Section 139(1) of the Companies Act, 2013, for annual shareholder ratification of the external auditor.

Boards have been quick to respond. Some companies have gone on with business as usual, seeking to ratify their auditor for the current year, to be renewed in 2019. However, many others have sought to ratify their auditor for multiple years, with renewal set to coincide with the expiry of the auditor’s term of appointment (which in India is separate from shareholder ratification, lasting up to five years per term). Some other companies have simply omitted any auditor ratification proposal from their meeting agenda, apparently on the basis that an auditor was ratified at the 2017 AGM.

Separate from auditor ratification, Indian law also requires companies to have the auditor’s fees ratified at a general meeting. In the past, fees were generally ratified each year, along with the auditor appointment – however, there is no requirement that the fees be fixed on an annual basis, and this year some companies have sought the power to determine the fees payable to auditors in future financial years until the auditor’s term has been completed.

With no year-to-year checks in place, shareholders’ ability to weigh in on audit issues has been significantly reduced. For companies that started an audit term in 2017, it could be four more years before shareholders get another chance to vote on the auditor or their fees.

Removing the requirement for annual auditor ratification is a curious move given the overall climate. Auditor oversight has become a significant issue in India, particularly after the ban issued against PwC by the Securities and Exchange Board of India (“SEBI”). That decision appears to have increased the level of scrutiny applied to auditors – and the wariness of the audit firms themselves when reviewing their clients’ books. Thus far in 2018, 32 auditors have resigned, in many cases reportedly due to concerns about the adequacy of financial information disclosed by the company.

Moreover, the change comes amongst a wave of corporate governance reforms, including the newly amended Listing Obligations and Disclosure Requirements (“LODR”). Released in May 2018 based on the Uday Kotak Committee’s recommendations, the amended LODR will require companies to provide the auditors’ fees for the Company and its group members, which previously was only required on a standalone basis only. The expanded disclosure will allow shareholders to understand the services provided by auditors on a group basis, which has been largely absent in this market. Moreover, companies seldom disclosed whether fees paid to auditors were paid to their statutory auditor, or to other auditors. The improved fee disclosure will help to illuminate how auditors, including network firms conduct business with companies, which has been standard practice in markets like Singapore, Thailand and even in Sri Lanka.

In this context, the audit changes under the Amendment Act seem like an outlier — and a step backwards. As it stands, accountability to investors has been significantly reduced at companies which have moved away from annual auditor ratification. With no opportunity to vote against the auditor themselves, it will be interesting to see whether concerned shareholders instead direct their opposition towards the members of the board, and particularly of the audit committee, who took ratification out of their hands.

Jeff is a manager covering the Indian market.