Nasscom opposes forensic audit disclosure rule

Mumbai: Leading information technology companies are pushing back against the Securities and Exchange Board of India’s (Sebi’s) new disclosure norms regarding forensic audits in a rare show of opposition to a regulatory diktat. The National Association of Software and Service Companies (Nasscom), the lobby group for IT companies, shot a letter to the market regulator earlier this week saying that the rules are ‘unprecedented’. It will have “an unintended effect of harming” companies without any corresponding public benefit.Last week, Sebi made it mandatory for listed companies to disclose details of forensic audits immediately after initiation. Once the audit is finished companies are also required to disclose the comments of management on these reports. The move is intended to improve transparency after the regulator observed that companies were not disclosing such information proactively. This, according to Sebi, has created an information asymmetry between company insiders and public shareholders. Several companies have already submitted their own representations to Sebi on this matter.Nasscom represents Indian IT firms such as Infosys, TCS, Wipro and HCL Technologies, among others.Nasscom Flags Market RisksIt has reasoned that “premature disclosures” related to forensic audits could impact the reputation when investigations show no fraud/wrongdoing. It has also said that news of such audits could “mislead investors” and lead to market capital erosion or cause fluctuation in price or trading patterns in the shares of the company.“Disclosing forensic audits, however immaterial, upon its initiation may result in the creation of a false market in the securities of the company as investors may panic at the first sight of potential trouble,” said Tomu Francis, partner, Khaitan & Co. "The requirement, albeit well intentioned, may be counterproductive and detrimental to the market giving the impression that Sebi may not have considered several unintended consequences and operational challenges that befall listed companies due to the change.”In its recommendations, Nasscom has said that disclosures related to ordering of forensic audit should be limited to audits initiated by the Indian regulatory agencies.It also recommended that for the sake of privacy of individuals and company data, a company should withhold personally identifiable information including names and titles of those who may be named in disclosures. Confidential and business sensitive information should also be withheld, it said.Lawyers have said that this recommendation could be spurred by fears that the US SEC could act on such disclosures. Many IT companies have extensive US presence and are also listed in US markets. “It is mainly due to the fact that already since SEC reviews are so extensive, they don’t want that information to be made public to Indian investors,” said Salman Waris, managing partner at technology law firm TechLegis Advocates and Solicitors.“Companies will need to track the domino disclosures that may get triggered in overseas markets and across relevant regulatory licences etc, for both the entity and its key managerial personnel, based on the nature of the core business,” said Shruti Rajan, partner, Trilegal. “We should bear in mind that these reports often contain confidential/sensitive information or findings about individuals within the organization.”Representatives of Indian technology companies which have a sizeable presence in the US and Europe in terms of business and employee strength called the Sebi move unprecedented. A Nasscom official speaking to ET on condition of anonymity said, “Technology companies from India deal with regulators across the world. A majority of the revenue of the large players comes from the US and Europe and most companies have a global footprint, but there is a sense that this kind of disclosure is actually unprecedented.”78838909Market participants say the wording of the law is ambiguous and open to interpretation. This would only create confusion amongst the companies. Also, there is no clear definition of what would qualify as a forensic audit under the law. “Keeping in mind the concerns raised by the industry and complexities involved, Sebi should consider rolling back the provisions,” Francis added.

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