Why in news?
The Securities Exchange Board of India (SEBI) has made minor tweaks to different laws.
What has been changed?
- These tweaks could go a long way in strengthening the safeguards for public investors in listed shares and bonds.
- The most important of these is the requirement for all listed entities to make compulsory disclosures to the stock exchanges.
- It initiated any forensic audits into their books along with the reasons for commissioning them.
- On completion, the final audit reports along with management comments need to be filed with the exchanges too.
What does this move mean?
- This is a welcome move because the initiation of a forensic investigation and an explanation on whether it was initiated by the regulator or the company’s own Board, is price-sensitive information.
- It has a bearing on one’s decision to invest in a stock.
- Making full public disclosures of forensic audit reports as soon as they are submitted is essential too.
- This would do away with insider trading and stock price manipulation based on half-baked leaks from such reports.
What happened in the past?
- In the past, listed companies such as ICICI Bank and Infosys have seen sharp stock price volatility.
- This happened after whistle-blowers accused their top managers of governance infractions.
- Their Boards, after initiating internal forensic audits, claimed that the auditors had unearthed no irregularities citing selective extracts.
- DHFL, after a sting operation by a media outlet, commissioned a forensic study by an auditor who promptly gave it a clean chit.
- A subsequent audit commissioned by the regulator unearthed evidence of widespread diversion of loan funds.
What is the significance of public disclosure?
- Disclosing forensic audit reports to the public would remove all scope for selective interpretations.
- It allows analysts and investors in a company to make up their mind for themselves.
- Disclosing will prove instructive to investors and policymakers on the modus operandi used by fraudsters to divert public money.
What could be done?
- For better protection to bond and mutual fund investors, SEBI must extend the requirement on making forensic audit reports public to,
- Entities with listed shares,
- Entities with listed debentures and
- Entities dealing with public money in a fiduciary capacity — be it asset managers or rating agencies.
- The regulators such as SEBI and RBI should set an example by publishing the findings of these reports.
Source: Business Line
