The Hindu Business Line : 'SEC could haul up Indian issuers for non-compliance'

DOMESTIC corporate issuers targeting foreign institutional investors, qualified institutional buyers (QIBs) and even non-resident Indians domiciled in the US, beware! Uncle Sam is watching!

Under the regulations of the US Securities and Exchange Commission (SEC), domestic corporates with more than 300 US investors automatically come under its jurisdiction, according to Mr Alexander F. Cohen, securities partner with the international law firm Latham & Watkins. That would mean several large domestic corporates, including some of the public sector companies, planning equity dilutions would come within the purview of the SEC.

In fact, SEC's cross-border jurisdiction would extend even to corporates where the holdings were indirect, through emerging market funds, floated by foreign institutional investors.

Speaking to Business Line, Mr Cohen said, "Even if the institutional investors used special purpose vehicles, they will still come within the purview of the SEC, in the event of litigation."

Therefore, he said, Indian entities soliciting investors in the US, either retail or wholesale, would be expected to be compliant with some of the provisions of the SEC relating to disclosures and accounting standards. Compliance, though, does not necessarily imply that Indian companies would have to automatically comply with the US GAAP (Generally Accepted Accounting Standards). Only NYSE/Nasdaq-listed companies were expected to comply with the US GAAP.

What has extended the reach of the SEC is the Sarbanes Oxley Act (SOA) of 2002 and subsequent amendments made in 2003. Till 2002, only corporates listed on the US exchanges or issuers of American Depository Receipts/Shares were expected to comply with US regulations.

However, under the SOA, any foreign private issuer that has issued securities in the US, whether or not listed, is subject to its provisions. The provisions in the SOA make certification of the issuers' annual report separately by the Chief Executive Officer and the Chief Financial Officer mandatory. The CEO and CFO would be responsible for establishing and maintaining disclosure controls and procedures over financial reporting under the provisions of the Act.

Under Section 404 of SOA, the SEC is empowered to prescribe standards on internal controls over financial reporting. Internal controls under the SOA statute is defined as "Process under the supervision of the issuer's CEO/CFO and effected by issuer's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles." The reports in turn would have to be certified by the issuer's independent auditor, under statute.

Mr Cohen said that the provision of the American statute would apply to even unlisted companies in India, so long as they solicited investments from American public/institutions either in the form of debt or in the form equity. This would now imply that even NRIs in the US would be in a position to seek SEC intervention against Indian companies in the event of non-compliance, he added.

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