The seemingly minor tweaks that the Securities Exchange Board of India (SEBI) has made to different laws in its Board meeting this week, 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, while initiating 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.

This is a welcome move because the very 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 and 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, to do away with insider trading and stock price manipulation based on half-baked leaks from such reports. In the past, listed companies such as ICICI Bank and Infosys have seen sharp stock price volatility 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. Disclosing forensic audit reports to the public would remove all scope for selective interpretations and allow analysts and investors in a company to make up their mind for themselves. Placing forensic audit reports in the public domain will also prove instructive to investors and policymakers on the modus operandi used by fraudsters to divert public money. It was, after all, a forensic audit into IL&FS’ subsidiaries that unearthed evidence of top managers of the project lender maintaining cosy relationships with rating agencies, to secure and retain top-notch credit ratings. In the DHFL and PMC Bank cases, forensic investigations brought to light the multitudes of fictitious accounts used to channel depositor funds to related parties in the form of loan disbursals.

For better protection to bond and mutual fund investors, SEBI must extend the requirement on making forensic audit reports public not just to entities with listed shares, but also those with listed debentures and all entities dealing with public money in a fiduciary capacity — be it asset managers or rating agencies. In fact, given that they commission scores of forensic audits on their constituents each year, it would be a good practise for regulators such as SEBI and RBI to set a good example by publishing the findings of these reports, instead of keeping them a closely guarded secret.

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