In a bid to crack down on closely-guarded corporate frauds in early stages, the ministry of corporate affairs has kick-started its early warning system on company frauds, with initially about 50 companies coming under the governments radar.
The early warning system, which has been set up through the use of a sophisticated computer network and involves the functioning of multiple regulators including SEBI and various departments under the corporate affairs ministry, has been started off on a pilot project basis, before being extended to cover all companies operating in the country.
The initiative, which was mulled early last year, gained speed after after the emergence of the multi-crore financial fraud in the erstwhile Satyam Computer Services. The scam went untraced for seven years before its promoter B Ramalinga Raju decided to confess of wrongdoings in the company.
Senior officials in the ministry said that the initial list of 50 companies has been prepared in consultation with other regulators including the SEBI, and includes companies which are presently under some form of scrutiny at the governments end.
The early warning system involves active participation of capital markets regulator SEBI, and will keep round-the-clock watch on activities of companies. The aim is to crack the whip on any suspicious corporate activity as and when it is found, thus reducing the extent of damage it may cause if it is allowed to reach an uncontrollable level.
Once it tracks any suspected malfunctioning, the government will attempt to rectify the malaise through regulatory action.
We have worked out a model of the early warning system. We are already running a pilot project... with 50 companies, corporate affairs minister Salman Khurshid said, while declining to name the companies which have initially come under the cover of the new system.
The experience gained during the operation of the pilot project will be used to fine tune the system and give it a final shape, Mr Khurshid said. The pilot project aims at finding out the limits up to which the government can seek information from companies that have suspected area of operation.
With the new system in place, the government will look for unusual developments in a companys financial operations and decision making process by scrutinising quarterly results of companies, their public announcements, filings with stock exchanges, tax returns and media reports. Even as the ministry mulled the setting up of an early warning system on corporate frauds last year, the project gained speed.