The existing SEBI laws, inter alia, govern the conduct of participants in the securities market. The Kotak Committee Report, released in October 2017, had recommended that SEBI should be given the additional powers to impose duties and liabilities upon third party fiduciaries, such as chartered accountants, who have been entrusted with various statutory duties under the 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 get any traction until now.
On July 13, 2018 SEBI has issued another consultation paper aiming to regulate the conduct of fiduciaries such as, Chartered Accountants, Company Secretaries, Valuers, Appraisal Agencies, and Monitoring Agencies. The consultation paper proposes 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 for issuance of reports and certificates relating to 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 consultation 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 consultation 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 consultation 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 proposed to be extended to the fiduciaries who fail to follow the above stated provisions or provide a false certificate/report, in violation of the SEBI regulations. However, no specific amount of penalty or nature of directions have been proposed in the consultation paper.
While SEBI has initiated issuing orders against fiduciaries as per its powers under Section 11 of the SEBI Act, such as its order dated January 10, 2018 issued against PricewaterhouseCoopers in the Satyam Computers matter for issuing “false and misleading” audit report and defrauding the investors, the consultation paper has now been issued as an attempt to formalize SEBI’s powers and provide specific provisions to undertake such actions.
The consultation paper proposes that in case SEBI has reasons to believe that a false certificate/report has been submitted by a fiduciary or that the fiduciary has failed to comply with the provisions of the SEBI regulations, then SEBI may undertake appropriate inquiry / investigation and pass an order thereafter. Considering that adjudication of such matters will require specialized 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 wherein SEBI had sought external assistance for accounting and financial matters. One recent instance is the initiation of inquiries by SEBI in matters concerning shell companies, wherein a list of 331 listed companies was provided by the Ministry of Corporate Affairs to SEBI to check whether they are defunct/shell. SEBI has appointed external forensic auditors to look into the books of accounts of such companies. It will also be interesting to see the stance taken by other regulators and professional bodies on the recommendations of this consultation paper.
