The Securities and Exchange Board of India (Sebi) has proposed amendments to tighten laws governing chartered accountants, company secretaries, valuers and other third-party individuals hired by listed companies for auditing financial results, among other things. The proposed amendment will enable the Sebi to take action against erring fiduciaries.
“There are certain fiduciaries such as practicing chartered accountants, company secretaries, cost accountants, valuers and monitoring agencies which are neither registered nor regulated by the Sebi,” Sebi said in a consultative paper on regulations for fiduciaries in the securities market. “As per the various SEBI Regulations, they are engaged by the issuers, intermediaries, pool investment vehicles, investor in the securities market, etc. to issue certificates or reports as required under the respective regulations,” Sebi said.
The Sebi move follows several cases of auditing issues and diversion of bank funds by listed companies. The regulator has no direct control over auditing lapses.
These fiduciaries play an important role in respect of intermediaries (listed companies), Sebi said. “These fiduciaries periodically conduct audit of the books of accounts and issue compliance certificates as to whether the intermediary has maintained the required net-worth, whether risk management systems are in place, whether the intermediary has a robust mechanism for redressal of investor grievances or maintain records as per the regulations etc,” Sebi said.
According to the Sebi paper, the draft regulations proposes to amend various regulations to provide that when a fiduciary undertakes any engagement or assignment under the securities laws or investors in securities and issues any certificate and report, such a fiduciary should ensure that it is true in all material respects. “The board, if after making or causing to be made an inquiry or investigation, is satisfied that the fiduciary has submitted false certificate or report or has violated any of the provisions of these regulations, the board may take appropriate action under the concerned securities laws against the fiduciary, its engagement partner or director,” it said.
Some of the fiduciaries such as merchant bankers, credit rating agencies, custodian, debenture trustees and registrar to an issue are registered and regulated by the Sebi under specific regulations notified for the said purpose, Sebi said. The regulations relating to the issue of capital mainly follow a disclosure-based regime and investors rely upon the offer documents and financial statements which are audited or examined or vetted by various fiduciaries such as chartered accountant, company secretary, valuer and also by various intermediaries in the securities market, the Sebi paper said.
The Committee on Corporate Governance headed by Uday Kotak, while considering measure to strengthening monitoring, oversight and enforcement related to accounting and audit related issues by the Sebi, recommended that the Sebi should have clear powers to act against auditors and other third party fiduciaries with statutory duties under securities law, subject to appropriate safeguards. This power ought to extend to act against the impugned individuals, as well as against the firm in question with respect to their functions concerning listed entities. This power should be provided in case of gross negligence as well, and not just in case of fraud/connivance, it had proposed.