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Sebi plans forensic audit for some listed companies

October 25, 2018 09:50 IST

Sebi's surveillance department has red-flagged unusual trading patterns in some stocks.
Shares of some companies were seen going up ahead of a sharp sell-off.
Shrimi Choudhary reports.
Illustration: Uttam Ghosh/

Companies that have seen a sharp erosion in their share prices have come under the regulator's glare.

According to a source, the Securities and Exchange Board of India has identified half a dozen such companies and will soon conduct a forensic audit on them.

The audit will be conducted by a firm that the regulator has recently empanelled, said a person privy to the development.

"The forensic audit is to check whether the assets and liabilities are properly stated in the books. Also, execution of bank loans, collateral and profit and loss accounts of these firms will be analysed," the person said.


Sebi has empanelled nine audit firms, including Ernst & Young, KPMG and Deloitte Touche Tohmatsu, to vet the financial statements of the listed companies and identify the potential fraud.

Sebi's surveillance department has red-flagged unusual trading patterns in some stocks.

Shares of some companies were seen going up ahead of a sharp sell-off.

The Nifty Midcap 100 and Smallcap 100 indices dropped 15 per cent and 20 per cent, respectively, in the past one month.

Dewan Housing Finance, IndiaBulls Housing Finance and Infibeam Avenues are companies whose shares have seen huge decline in recent weeks.

"A thorough examination of the financial statement is essential to find out potential discrepancies in the books. The audit would cover business links with group subsidiaries and third-party transactions. Moreover, it will also focus on abuse of tax and securities laws," said the source.

Sebi suspects that some of these firms have indulged in off-market business dealings which are never disclosed on the books.

The audit will also look into the books of the last three years, said another person.

The shortlisting of these firms has been done based on the price movement since September 20, said the source.

Sebi, the source said, has zeroed-in on some of the high-net worth individuals who have transacted in these stocks.

The regulator in July had floated a tender inviting an application from chartered accountant firms for 'empanelment to take up assignments relating to forensic audit of listed companies'.

The move followed after financial irregularities surfaced at Fortis Healthcare.

The Serious Fraud Investigation Office flagged the irregularities in its investigation report.

Sources said Sebi's auditor panel would also conduct forensic audit of some firms where the company's statuary auditors have resigned prematurely.

About 30 auditors had resigned mid-term citing reasons such as inadequate information provided on things like the firm's business, revenues, tax obligations and so on, in the last one year.

Vakrangee and Manpasand Beverages are among the companies whose auditors had quit, citing lack of disclosures.

"It would never be possible for any regulator to establish the actual reason for erosion of the share prices. However, the regulator can list the key reasons which are company-specific," said JN Gupta, managing director, Stakeholder Empowerment Services, a proxy firm.

"The forensic audit is the way to establish if there was any malafide intension," Gupta added, "Accordingly, Sebi can decide on enforcing action against the concerned market manipulator."

Shrimi Choudhary
Source: source image