Relevance of Auditor's Certificate : Infrastructure Development Finance Co.Limited

IDFC is issuing Compulsorily Convertible Cumulative Preference Shares (CCCPS) to specific investors. In terms of Chapter VII of the SEBI ICDR (Issue of Capital and Disclosure Requirements) Regulations, the company has to disclose the details of investors to the shareholders while issuing the shares on preferential basis. IDFC has accordingly sought shareholders' approval as required under the provisions of Sec 81(1A) of the Companies Act and Chapter VII of SEBI ICDR Regulations. The Postal Ballot Notice issued to the shareholders mentions that the Conversion Price for CCCPS is fixed at Rs.176/-

The Notice also mentions that "It is proposed to obtain a certificate from Deloitte Haskins & Sells, Statutory Auditors of the Company, certifying that the price for conversion of CCCPS into equity shares is calculated in accordance with requirements of SEBI Regulations." This prima facie gives the impression that obtention of Auditor's Certificate is treated more as a formality to fulfil SEBI requirements and that the auditors would perforce issue the compliance certificate. This is indicative of perfunctory adherence to SEBI guidelines and scant regard for relevance of auditor's certificate.

This was taken up with IDFC as follows:

"Your statement that "it is proposed to obtain a certificate from DH&S certifying that the price for conversion of CCCPS into equity shares is calculated in accordance with requirements of SEBI Regulations" has converted the certification process into a mere formality and also belittles the auditor in the process. You will agree that it is not a good corporate practice to take its auditors for granted and to consider SEBI Regulations as just a procedural requirement whose sequence is of little importance. The certificate should be at hand before issue of the notice."

IDFC was kind enough to respond as under:

"IDFC believes and always follows the high standards of corporate governance in all its activities. In this case, in terms of provisions of Section 192A of the Companies Act, 1956 read with Postal Ballot Regulations, the Company is required to provide a period of 30 days to its shareholders to cast their votes. At the same time, in terms of SEBI ICDR Regulations, the price of the security to be issued and allotted on preferential basis is required to be arrived by taking into consideration the average of the weekly high and low of the closing prices of the equity shares quoted on a recognized stock exchange during the two weeks preceding the Relevant Date which is 30 days prior to the date of declaration of the results of postal ballot. Hence, it was difficult to print and dispatch the notices to ~ 3.05 lakh shareholders after getting auditors certificate. DH&S has issued the certificate and the same is available with the Company.

I hope I have answered the questions."

IDFC is taking refuge under apparent logistical problems whereas the real issue relates to constructive non-adherence to well-intentioned SEBI regulations and the proclivity to consider auditor's certificate as a mechanical formality.