SEBI proposes wide powers for penal actions against auditors, company secretaries, valuers, etc.

SEBI has released a consultation paper on 13th July 2018 proposing amendments to 30+ of its Regulations. The amendments provide for duties and liabilities of Chartered Accountant/auditors, Company Secretaries, valuers, etc. This is in respect of the certification and reporting work they carry out for listed companies, various intermediaries and other persons associated with the capital market. In case they default in their specified duties, these persons, who are termed as “fiduciaries”, will be subject to penal and other consequences.

The persons to whom these duties will apply are Chartered Accountants including statutory auditors, company secretaries, valuers, monitoring agencies, cost accountants and appraising/appraisal agencies. These are professionals or firms/LLPs of such professionals who undertake assignments under various SEBI Regulations.

In respect of various certificates/reports, etc. provided by them under the respective regulations, the proposed provisions require them to:

“(a) exercise due care, skill and diligence and ensure proper care with respect to all processes involved in the issuance of such a certificate or report;

(b) ensure that such a certificate or report issued by it, is true in all material respect; and

(c) report in writing to the Audit Committee of the company, any material violation of securities laws, noticed while undertaking such an assignment.”

If they violate these requirements, then SEBI may take appropriate action against the fiduciary, its engagement partner or director, as the case may be. This action could expectedly include levy of monetary penalty, debarment from providing services to entities associated with capital markets, disgorgement of fees and even prosecution.

It may be recollected that Bombay High Court had affirmed the jurisdiction and powers of SEBI in Price Waterhouse & Co. vs. SEBI (((2010) 103 SCL 96 (Bom.) to act against auditors in cases where they were complicit in fraud. The Kotak Committee on corporate governance had recently issued its report where it had recommended even wider powers for SEBI. It said “This power should be provided in case of gross negligence as well, and not just in case of fraud/connivance”. As can be seen, the proposed amendments to various SEBI Regulations go beyond even the recommendations of the Kotak Committee.

Scams and frauds do happen and are often followed by outrage and questions are raised as to whether persons like statutory auditors, company secretaries, etc. did or not do their job and whether there are adequate penal provisions. At the same time, fact also is that many of such ‘fiduciaries’ are already subject to several regulators/laws for their defaults of commission and omission. This includes their parent body (ICAI, ICSI, etc.), bodies under the Companies Act, 2013, and even police and other bodies. SEBI would thus be yet another body providing for duties that are similar to those provided by others and for punishment for defaults that are also similar to those provided by others.

Curiously, the proposed amendments do not provide for more powers to such ‘fiduciaries’. Question may arise whether present laws provide for enough powers to such fiduciaries to do work of such a level as to satisfy these widely worded and comprehensive obligations and even perceptions. Whether, for example, it would be fair to expect auditors and other fiduciaries to uncover all material frauds including highly sophisticated ones.

Question would also be whether costs of audit/certification will rise prohibitively. And, above all, whether SEBI has powers to regulate to such an extent auditors and other fiduciaries.

Comments giving feedback on this consultation paper are to be sent to SEBI by 12th August 2018.

My article on this topic in Firstpost is here.

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CA Jayant Thakur

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