A Compliance Officer’s role in corporate governance is critical in order to ensure organizational adherence to regulatory frameworks. The Securities and Exchange Board of India (“SEBI”) Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015 provided guidelines on the positioning and responsibilities of Compliance Officers in listed entities. The requirement for placing a compliance officer “one level below” the Board of Directors raised practical questions about organizational structuring and reporting lines. Following which SEBI released a series of notifications clarifying on the position of the compliance officer.

The Regulatory Framework: Understanding SEBI’s Mandate

According to Regulation 6(1) of the SEBI LODR Regulations, 2015, “a listed entity shall appoint a qualified Company Secretary as the Compliance Officer”. Regulation 6(2) further clarifies that “the Compliance Officer of the listed entity shall be responsible for ensuring conformity with the regulatory provisions… and for ensuring that correct procedures have been followed that would result in the accuracy, authenticity and comprehensiveness of the information, statements and reports filed by the listed entity.”
Compliance Officers must be positioned appropriately within the organizational hierarchy to execute these responsibilities effectively.

The “One Level Below” Requirement: Decoding the Hierarchy

“One Level Below” meaning directly below the Managing Director (MD) or Whole-Time Directors. SEBI clarified that “A Compliance Officer shall report to the Board of Directors, or the person authorized by the Board.” This enhances the role and establishes a direct reporting relationship between the Compliance Officer and the highest governing body, ensuring that the compliance-related concerns reach the decision-making apex without filtration. In case a listed entity does not have a MD or a Whole-Time Director(s), then a compliance officer shall not be more than one-level below the Chief Executive Officer/Manager or any other person heading the day-to-day affairs of a listed entity.

Practical Implementation: Organizational Structure Considerations

In practical terms, positioning a Compliance Officer “one level below” the Board typically means:
1. Direct Reporting Line: The Compliance Officer should report directly to the Board, or a designated Director (often the Managing Director or CEO).
2. Senior Management Status: The Officer should hold a position equivalent to other senior management personnel, such as the Chief Financial Officer (CFO) or Chief Operating Officer (COO) and should be designated as Key Managerial Personnel (KMP).
3. Access and Authority: They must have unrestricted access to the company’s information and sufficient authority to implement organizational compliance measures.
SEBI has emphasized the importance of proper positioning through its enforcement actions. In an order dated August 6, 2020, SEBI imposed penalties on a listed entity partly due to governance lapses, including inadequate empowerment of its compliance function.

Why Hierarchical Positioning Matters?

The strategic positioning of Compliance Officers serves multiple governance objectives. Independence is a critical factor, as a top hierarchical position helps insulate the compliance function from operational pressures that might compromise with the regulatory adherence. Proper positioning also grants necessary authority, and empowers Compliance Officers to implement required measures without encountering resistance from operational departments.
Moreover, being positioned towards the top ensures Compliance Officers access to unrestricted information and receive timely, unfiltered information about corporate activities essential for their role. Also, the direct reporting structure promotes Board awareness by ensuring compliance concerns being promptly brought to the Board’s attention, preventing information asymmetry that could lead to governance failures.

Common Misconceptions and Challenges

Misconceptions that persisted regarding the “one level below” requirement:
1. Designation Equals Position: Some organizations mistakenly equate designations with appropriate hierarchical positioning. However, through the circular dated April 1, 2025 SEBI clarified that the focus should be on actual reporting relationships and authority, and not job title.
2. Dual Reporting is Sufficient: Creating a dotted-line reporting relationship with the Board while maintaining a primary reporting line with someone else may not satisfy SEBI’s requirements.
3. Multiple Hat Syndrome: In many mid-sized listed entities, the Company Secretary doubles as the Compliance Officer. This dual role can create conflicts unless positioned correctly in the hierarchy.

Best Practices for Listed Entities

To ensure compliance with SEBI’s hierarchical requirements:
1. Clear Reporting Structure: Document and implement a clear reporting structure showing the Compliance Officer’s direct to the board or authorized director.
2. Board Charter: The Board Charter should include the Compliance Officer’s position and reporting relationship.
3. Regular Board Access: Establish mechanisms for regular, unfiltered communication between the Compliance Officer and the Board.
4. Compliance Committee: Consider establishing a Board-level compliance committee to oversee compliances, especially in larger organizations.
5. Performance Evaluation: Ensure the Compliance Officer’s performance is being evaluated by the Board or its designated committee, but not operational management.

Conclusion

The “one level below” requirement for Compliance Officers is not merely a technical check box but a fundamental governance principle that enables effective regulatory oversight. By properly positioning Compliance Officers in the Organizational hierarchy, Listed entities not only comply with SEBI requirements but also strengthen their governance framework.
As regulatory scrutiny intensifies and compliances becomes increasingly complex, the strategic positioning of Compliance Officers remains critical in determining the effectiveness of corporate governance mechanism. Getting this aspect right is not just about regulatory compliance but also about building a sustainable governance structure that protects stakeholder interests.