Proper monitoring of end use of funds even at the last level of corporate structure is important to avoid instances like IL&FS, said Ajay Tyagi, Chairman, Securities and Exchange Board of India (SEBI).
While speaking at a seminar organised by Crisil on developing the debt market, the SEBI chief highlighted the recent regulatory diktat that made such audit mandatory for listed firms and suggested that similar framework should be made for unlisted companies.
Referring to the imbroglio at IL&FS, he said, “One of the issues that this episode has brought out is the inter-connectedness arising as a result of complex corporate subsidiary structures and how the maze of subsidiaries facilitate masking the end use of funds.”
“Recently, SEBI has mandated that the statutory auditor of a listed entity shall undertake a limited review of the audit of all the entities/ companies whose accounts are to be consolidated with the listed entity. Similar provision needs to be made applicable even for unlisted holding companies,” he added.
IL&FS, which is in the midst of a liquidity crisis, is an unlisted entity with as many as 348 subsidiaries and debts totalling nearly ₹90,000 crore.
Earlier this month, the National Company Law Tribunal ordered the reconstitution of the board of directors of IL&FS after the government highlighted concerns of a “catastrophic” impact on the financial markets if IL&FS defaulted on its future payment obligations and the high leverage levels of the company.
Fillip for bond market
The SEBI chief also said that the corporate bond market could get a fillip if sectoral regulators of pension funds, provident funds and insurance firms could allow their regulated entities higher exposure in the segment.
“Institutional investors such as pension funds, provident funds and insurance companies can generate far higher demand for longer dated corporate issuances.
“They are, however, guided by investment norms prescribed by respective sectoral regulators,” he said, adding that relaxation of norms to allow higher allocation to the corporate bond market would help earn incremental returns and generate demand for corporate bonds.
More importantly, he said that since these institutions are long-term investors and typically hold investments till maturity, they can act as ideal counter parties to infrastructure firms that require funding through longer-dated instruments.