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Auditors role widened to check misuse of public issue funds
April, 13th 2011

The ministry of corporate affairs is planning to ask auditors to comment on disclosures made by companies on the use of proceeds from rights issue and qualified institutional placements (QIPs) in addition to initial public offerings (IPOs).

To broaden the scope of vigil on public issues and safeguard investor interests, the ministry is also keen that auditors comment and verify on the actual deviation of the use of proceeds from the objects as stated in the offer document.

Sources in the ministry said that, at present, the auditor is required to only comment and verify the managements disclosure of the use of proceeds. They said the ministry may also consider creating a special cell for keeping record of companies launching IPOs.

Accordingly, the ministry has written to the Institute of Chartered Accountants of India asking it to incorporate these changes in The Companies (Auditors Report) Order, (CARO) 2003, so that all monies raised by a company, regardless of the type of issue, can be brought under its sweep, the source told The Indian Express. This will serve as an additional market mechanism to verify management disclosures.

The Companies (Auditors Report) Order stipulates that every audit firm, in its report, has to comment whether the management has disclosed the end use of money raised in public issues and if the same has been verified. In case the auditor is unable to determine the end use, it has to state so. However, rights issue and QIPs, which also envisage a large public interest, do not fall under the Companies (Auditors Report) Order.

The MCA has also written to stock exchanges to define material deviation, and provide a format for disclosing it. It has proposed that such disclosures be continued till the entire issue proceeds are utilised.

In fact, in case of such deviations, the MCA has said the company should inform the exchanges along with an explanation. It should also state if approvals for making the variation were obtained from its members. This should also be stated in the directors report and annual financial reports.

Currently, clause 43A(1) of the listing agreement requires a company to furnish quarterly statement indicating material deviations in the use of issue proceeds from the offer document with the exchanges. However, the deviation has not been defined by the stock exchanges nor is there a standard format for disclosing the same.

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