BCAS wants CA firms to monitor use of IPO proceeds

The Bombay Chartered Accountants' Society (BCAS) has recommended that certain chartered accounting firms, meeting specific criteria, be permitted to serve as monitoring agencies for companies seeking funds, as the Securities and Exchange Board of India (SEBI) plans to extend this mandate to all public issue types, regardless of size.

In response to SEBI's proposal, BCAS highlighted that requiring such firms, holding a valid peer review certificate from the Institute of Chartered Accountants of India (ICAI), would help alleviate the workload of monitoring agencies. Currently, only credit rating agencies registered with SEBI can perform this task. BCAS argued that allowing CA firms with this certificate to act as monitoring agencies, at least for smaller issue sizes, would help expand their capacity.

These firms are already subject to auditing standards, quality control measures, and ICAI's disciplinary jurisdiction, and possess experience in verifying fund applications. In October, SEBI proposed that a monitoring agency must be appointed for all public issue fund utilization, with agencies required to submit their reports directly to stock exchanges, and that penalties be imposed on companies failing to cooperate.

BCAS also pointed out inconsistencies in existing monitoring reports, including cases where agencies only recorded fund utilization without offering their own assessment. For instance, in one report, about 59% of IPO proceeds were recorded as utilized for purposes other than those stated, without any observation from the monitoring agency.

Another report noted that agencies recorded an issuer's explanation that certain fund uses were included in the offer document's stated objects, despite the offer document not mentioning such usage. BCAS suggested that agencies should clearly state whether fund utilization falls outside the offer document's stated objects and whether any variation is prejudicial to shareholders' interests.

This additional analysis, BCAS argued, would make the report more valuable to investors. The society also requested that agencies report every payment made from issue proceeds to a related party, along with the nature of the payment. For unutilized funds deposited with scheduled commercial banks, agencies should verify that no lien or charge has been imposed on the deposits or that the funds were used as security for group entities' borrowings.

BCAS has called for a clear definition of non-cooperation, including failure to provide information or supporting documents within specified timeframes, refusal to permit verification, and submission of incorrect information. The society also sought clarification on how fines are calculated, recommending higher penalties for repeated defaults across consecutive reporting periods.

Comments must be written in English, as full sentences, without being abusive or personal. BCAS has sought a clear definition of the term "instance" to determine penalty amounts, suggesting individual penalties for each reporting period if non-cooperation persists for two or more consecutive periods.