After banks and
auditors opposed the introduction of joint audit norms, it’s the turn of the
Securities and Exchange Board of India‘s recent rules on due diligence by alternative investment funds that are causing consternation.
The market regulator’s recent rules require alternative investment funds to conduct in-depth due diligence of their portfolio companies. According to the Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2021, which came into effect on May 5, the regulator has mandated that fund managers conduct this due diligence to make sure their house is in order.
The regulations mainly impact the private equity and venture capital funds that are registered under the Alternative Investment Funds Categories 1 & 2 and hedge funds registered under the AIF Category 3 in India.
The fund managers and trustees will have to ensure that detailed policies and procedures are in place for investments and that provisions over confidentiality, conflict of interest, Prevention of Money Laundering Act (PMLA) and addressing investor complaints are complied with.
The PPM (private placement memorandum) will be required to check on the detailed policy and procedures as well as the compliance with the code of conduct prescribed under the newly added fourth schedule. The format for reporting requirements to Sebi and trustees could also undergo a change. The new regulations would likely require funds to share the report or the procedures with the auditors.
The due diligence will have to be undertaken at the fund level as well as the investment level.
Fund managers will also have to realign investments to comply with the new regulations, as Sebi has put a threshold on the money a fund can invest in a company or another investment vehicle.
The RBI regulations
On April 27, the RBI released new guidelines for statutory auditors of financial entities to enhance the independence of auditors and tackle concentration issues. The guidelines require mandatory rotation of auditors after three years with a six-year cooling-off period, and appointment of joint auditors in entities having asset size of Rs 15,000 crore and above.
The regulations ran into opposition from bankers and auditors who wanted it to be deferred citing less time to appoint auditors and crunch. The new guidelines have come in at the end of April. We have to evaluate how we can sort of look at appointing new auditors so quickly.
Because the RBI guidelines say that existing auditors cannot continue (auditing) if they have done three years. I think in the case of most companies (non-bank lenders), the auditors would have already done more than three years, probably done four years… So, I hope that RBI defers this applicability by year or so because the year has already started, and a lot of them would have to start looking around for new audit firms,” Keki Mistry, MD and Vice Chairman Keki Mistry had told ETCFO.
“Many challenges here if implemented from FY22. Some bank auditors have already finished three years — they will only have weeks to make a new selection. The pool available to choose from will be limited for FY22 and many potential suitors would be conflicted under the new one-year cooling-off period having done such non-audit services in FY21,” Grant Thornton Bharat CEO Vishesh Chandiok had said.
Audit trail software
Earlier this year, the Ministry of Corporate Affairs had to defer by a year amendments to the companies accounts rules requiring firms to use accounting software that include features that can record the audit trail of each transaction.
Companies and auditors had cited little time left for the fiscal to end for them to shift to another software.
The second amendment to the Companies Accounts Rules, 2014, made the previous changes effective from April 1, 2022, according to the notification. The ministry had made the changes, to be effective from the start of the current fiscal, with the objective of curbing backdated entries by firms in the books of accounts.
“…for the financial year commencing on or after the 1st day of April 2021, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled,” the amendment made on March 25 had said.