The existing laws of capital markets regulator Sebi govern conduct of securities market and regulate the participants in the market.
The Kotak Committee Report (dated October 5, 2017), formed under the chairmanship of Uday Kotak for relooking into the corporate governance norms in the securities market, had recommended that Sebi should also be allowed to impose duties and liabilities upon third party fiduciaries, such as chartered accountant, who have been entrusted with various statutory duties under securities laws.
A clear policy in this regard was proposed to be formulated. However, this idea of regulating chartered accountants by Sebi was highly opposed by the Institute of Chartered Accountants of India and other bodies, due to which the proposal did not see the light of the day.
On July 13, Sebi issued another consultation paper aiming to regulate the conduct of fiduciaries such as chartered accountants, company secretaries, valuers, appraisal agencies and monitoring agencies. It has proposed to amend all Sebi regulations dealing with issue of capital, pooling of funds, acquisitions and takeovers of listed entities and conduct of Sebi-registered intermediaries to insert appropriate norms in this regard.
The assumption behind the proposals is that the investors have reposed their confidence in the report/certificate issued by such fiduciaries while taking their investment decisions and therefore, the fiduciary should be held liable for providing an erroneous report / certificate.
The consultation paper provides an inclusive definition of ‘fiduciary’ and states that the fiduciary is a professional or a firm of professionals who undertake various projects under the respective Sebi Regulations to issue reports and certificates related with accounting, finances, valuation, etc. An ‘engagement partner’ is defined as a partner or person from such professional firm who is responsible for a particular assignment or for issuance of a report / certificate.
The paper further prescribes the duties of such persons and provides that the fiduciaries should exercise due care, skill and diligence while issuing their reports, and such report should be true in all ‘material’ respects. Further, the paper recommends that the fiduciaries should be required to report any material violation of securities laws, should they come across any such violation while performing their functions. However, the paper is silent on whether these professionals will be required to undergo any sort of training/certification to acquire the requisite knowledge of securities law in order to identify such violations.
Lastly, Sebi’s powers to conduct an inquiry/investigation and impose liability are intended to be extended to the fiduciaries who fail to follow the above stated provisions or provide a false certificate/report, in violation of Sebi regulations. However, no specific amount of penalty or nature of directions have been proposed in the paper.
Although in the Satyam Computers matter, in its order dated January 10, 2018 while exercising the powers under Section 11 of the Sebi Act, 1992, the regulator has already held PricewaterhouseCoopers along with its partners liable for issuing “false and misleading” audit report and hence defrauding the investors, this paper is now issued as an attempt to formalise its powers and provide specific provisions to undertake such actions.
The paper proposes that in case Sebi has reasons to believe that a false certificate/report has been submitted by a fiduciary or that if the fiduciary has failed to comply with the provisions of Sebi regulations, then the regulator may undertake appropriate inquiry/investigation and pass an order thereafter. Considering that adjudication of such matters will require specialised skills such as that of accounting, finance, etc, it will be interesting to see as to how Sebi will conduct such investigations.
In the past, we have seen various cases where Sebi has sought external assistance for accounting and financial matters. One recent instance is initiation of inquiries by Sebi in the matter related with shell companies wherein a list of 331 listed companies was provided to it by the corporate affairs ministry to check whether they are defunct/shell. Sebi has appointed external forensic auditors to look into the books of accounts of such companies that prima facie looked like a shell company. It will also be noteworthy to see the stance taken by other regulators and professional bodies on the recommendations under this paper.
Sandeep Parekh is the managing partner and Deepika Goyal is an associate at
Finsec Law Advisors.