Investment banks carrying out prelisting due diligence in many companies have told capital market regulator SEBI that auditors of these firms are holding back key information from them.

Several auditors have refused to provide tax benefit statements, documents supporting end-use of IPO proceeds, and project-funding details on the grounds that sharing such information is beyond their scope of assignment.

Since such crucial data can significantly influence investment decisions, the matter was discussed at a recent meeting of the SEBI Committee on Disclosures and Accounting Standards, said a person familiar with the development. The 17-member committee comprising senior professionals is headed by Ishaat Hussain, finance director at Tata Sons.

According to regulations, an investment banker is responsible for the information published in an IPO offer document even though the issuer also hires the services of legal advisors and auditors.

“But a legal advisor can claim that its views are based on what the company discloses. Similarly, auditors add qualifying statements while certifying financial statements so as to limit their responsibilities. But investment bankers can neither shrug off responsibility nor escape liability,” said Pavan Kumar Vijay, managing director at Corporate Professionals Capital, an investment banker.

It was discussed at the meeting that SEBI had come across instances where auditors had modified the language of their reports in such a manner that narrowed their scope of work and responsibilities with regard to restated financial information.

The regulator may constitute a smaller group to take a closer look at the issue and come out with standard regulations that will help investors, said another person with knowledge of the discussions.

Investment bankers verify financial information with audited financial reports of companies, and in case of a restatement, banks have to ensure that the reasons are spelt out in the auditor’s report.

“But auditors do not certify on sources and deployment of funds as the same is not prescribed to be given by statutory auditors either under the Companies Act or SEBI regulations,” said Uday Patil, director (investment banking) at Keynote Corporate Services.

There may be Conflict of Interest

According to Patil, there may be conflict of interest among merchant bankers, issuer companies and statutory auditors (who are not regulated by SEBI).

He felt that a standardised set of rules would go a long way in streamlining the disclosure of financial information in offer documents. The subject assumes significance with SEBI coming down heavily on several companies, merchant bankers and brokers for diversion of funds raised through IPOs. In its recent report on the IPO scam, SEBI has pulled up merchant bankers but is silent on the possible role and involvement of other professional entities.

“It’s difficult for a merchant bank to verify information on genuineness of debtors and creditors, contingent liabilities, fair valuation of plants and immovable properties, machinery installed at various locations, installed capacity, litigations and expected liabilities,” said another banker, requesting anonymity.

Auditors like Ashish J Jain, partner at Jain Ambavat & Associate, said given the importance placed on the auditor’s report in the offer document, merchant bankers should get involved at the initial stage, along with auditors and management, to satisfy themselves.

There is a growing view that SEBI in consultation with other authorities and regulators should make all professional entities associated in fundraising accountable. Most merchant banks and auditors refrain from carrying out detailed verification of financials in order to save cost and time. In a fiercely competitive market, they undercut each other to win mandates.

“Take the case of zero fees for government mandates and also auditors charging nominal fees. They cut corners, dilute standards. The solution lies in making fees transparent and encouraging the practice where fees are charged for verifying facts rather than putting everything together,” said Vijay.