Regulator Sebi is considering a new set of norms for auditors and other third-party fiduciaries in the securities market under which defaulters will face stringent penal actions, including ban on issuance of audit or valuation reports and disgorgement of unlawful gains and their fees.
The proposed move assumes significance as the role of auditors and valuers has come under scanner in a number of high-profile cases such as the Satyam and Kingfisher frauds, as also the PNB scam, WhatsApp leak and the Fortis matter in the recent past.
Sebi is looking to enhance the regulatory oversight to check such frauds in future with the new regulations for fiduciaries in the securities markets, which will require additional disclosure requirements and greater scrutiny of financial statements by auditors and other third party entities, a senior official said.
The Securities and Exchange Board of India (Sebi) has prepared a draft consultation paper for the proposed regulations, which is expected to be placed before its board at its next meeting on March 28, sources said.
The final regulations would be put in place after taking into account comments from all stakeholders on the consultation paper.
Asked about the rationale behind a new set of norms, a senior official said investor confidence is fundamental to the successful operation of securities market and it depends on investors having credible and reliable financial information when making decisions about capital allocation.
“One of the prime objectives of Sebi is to ensure that there should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decision,” he said, while pointing to alleged lapses at various levels in cases like WhatsApp leak of financial results, the PNB scam and the matters concerning Fortis and Satyam-PwC.
The official explained that the information which has gone through various third-party fiduciaries such as auditors, merchant bankers, rating agencies, cost accountants and valuers are often considered as “basis of most of the investment and financial decisions of the investors”, and these entities are seen as “principal gatekeepers or conscience keepers” and there must not be any lack of efforts in flagging lapses or potential risks.
While entities such as merchant bankers, rating agencies, custodians, debenture trustees and registrar to public issues are registered with the capital markets regulator under specific regulations, some other fiduciaries like practising chartered accountants and company secretaries, cost accountants, valuers and monitoring agencies are not registered with Sebi.
To fill this gap, a high-level panel on corporate governance, headed by eminent banker Uday Kotak, had also suggested that Sebi should have clear powers to act against auditors and other third-party fiduciaries with statutory duties in case of frauds as well as gross negligence.
Taking into consideration this recommendation, Sebi is planning this consultation paper, proposing a framework specifying obligations of such fiduciaries, fiduciary firms and the concerned partners, as also the possible penal actions that can be taken against defaulters.
The proposed regulations seek to regulate the activities of fiduciaries when they undertake any assignment under securities laws in respect of any listed or to-be-listed company, intermediary or investors, sources said.
These obligations for fiduciaries in securities market would be in addition to their obligations under the respective laws.
Under the proposed norms, these fiduciaries will have to “render high standards or service, exercise due care, skill and diligence” in issuance of due diligence, valuation, compliance or audit certificates.
They will also need to ensure that all such certificates and audit reports are “true in all material respect”. Besides, they will need to disclose any conflict of interest and restrain from taking up any assignment that may have a direct or indirect interest with possibility of impairing an independent professional judgement.
The new norms would also restrain the fiduciaries from signing or issuing any certificate without disclosing the material discrepancy, if any, while they would have to report any material violation of securities law by the client to the audit committee of the listed companies or to the compliance officer in case of other entities.
Under the new regulations, Sebi would have powers to issue warning, launch adjudication proceedings and initiate prosecution against the fiduciaries for any default.
Besides, Sebi can order disgorgement of wrongful gains, including the fees earned, with an interest of 12 per cent per annum from the date of default; ban the fiduciary from issuing any certificate or report; and refer the case to the Institute of Company Secretaries of India (ICSI) or the Institute of Chartered Accountants of India (ICAI), or any other authority for appropriate action.