Sebi allows bourses to conduct forensic audit

Sources say this is a sequel to the discussion between Sebi's surveillance dept and the exchanges, on ways to curb such manipulation

The Securities and Exchange Board of India (Sebi) has empowered stock exchanges to conduct forensic audits on listed companies which seem dubious, being suspected of use as conduits for illicit fund flow.

An authorisation letter in this regard has been issued to the bourses. The latter may take action in this regard on their own initiative. Sources say this is a sequel to the discussion between Sebi's surveillance department and the exchanges, on ways to curb such manipulation.

The regulator wants exchanges to review suspect companies on a weekly basis and select those for forensic audit. Till now, the exchanges did not have the authority to order this type of audit on their own.

A forensic audit is similar to a regular audit of a company's financial statement. However, the mode of examination or evaluation of the details are more specific. The attempt is to capture all related trails and transactions of a specific period when a fraud is suspected to have taken place.

The plan as approved is for an exchange to direct a company to send the auditor's certificate, with a list of disclosures. These include annual income tax returns for three years and description of pending tax disputes, if any. Further, status reports on compliance with the Companies Act and Sebi's listing regulations.

The exchange would then review their business models - whether or not it was doing well. Along with bank statements of the specific period when a possible fraud took place and the annual returns of three years.

"The details will be provided to the forensic auditors and accordingly they would scrutinise the data," said an exchange official. "Typically, exchanges have no say in the daily operation of listed companies. It comes to our notice when regulators raise red flags against such cases. So far, our action has been limited to coordination with the regulator."

 

The official added that it would be challenging for them to fulfil the new obligation. The move comes after Sebi was criticised for barring 331 "suspected shell companies" without conducting detailed background checks. At present, the exchanges are in the process of appointing experts to conduct forensic audits on at least 90 of this list of 331. The latter's list was provided by the ministry of corporate affairs in early August.

Sebi had barred all these companies from daily trading, though some got partial relief from the Securities and Appellate Tribunal. The action on these 331 companies was taken after a spike in trade was found during demonetisation. Many were reported to have been found to be violating the regulatory and income tax rules.