Why Sebi’s latest accounting diktat has sparked an uproar

Market


Investment banks and auditors have asked the markets regulator to relax a recent advisory that requires IPO-bound companies to re-audit financial statements that were not prepared under the latest Indian Accounting Standard (Ind AS).

According to three investment bankers, the Securities and Exchange Board of India’s (Sebi’s) move will impact smaller companies that have not transitioned to Ind AS and continue to use the two-decade-old IGAAP accounting standard. Companies that have prepared audited financial statements under IGAAP then convert them to Ind AS when filing IPO documents. Currently, the converted financial statements are not separately audited.

“Just before Diwali, Sebi asked all merchant banks to ensure that companies that have filed their draft prospectus with financial statements converted to Ind AS now go back and re-audit those statements. This is a big problem for smaller companies for whom Ind AS was not applicable in the years prior to going public. The bigger companies are already on Ind AS, so they will not have a problem with this. Most of the companies in today’s IPO pipeline are Ind AS-compliant, so there should not be a major disruption due to this move, but many smaller companies will face problems,” one of the bankers said, requesting anonymity.

Ind AS norms were introduced in FY16 and have been implemented in a phased manner. Companies that are unlisted and have a net worth of less than 250 crore as of FY14 end or the first audited period ending after that date can remain on IGAAP.

“The major issue with this diktat from Sebi is that going back and auditing the financials of the last one to three years again can end up consuming two-odd months. So, companies that have filed their draft prospectus and are awaiting their chance to hit the market can lose out on a good window of opportunity to launch their deal. We have also seen an apprehension from audit firms to go back and re-audit numbers of previous financial years,” he added.

The Sebi move has come when Indian companies are set to raise a record-setting 1 trillion through initial share sales.

Investment banks and audit firms want a complete revocation of this move or a partial relaxation, said the second of the three people cited above.

“Representations have been made to the regulator to either not implement this or to grandfather DRHPs that have already been filed,” he said.

“There is also confusion on the applicability of this diktat. The regulator has not put this out as an official notification but rather as an advisory or guidance to bankers,” he added.

An email sent to Sebi did not elicit a response till press time.

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