Big 4 audit firms face checks under liberalised FDI policy

The government has quietly slipped in a swadeshi move while liberalising the foreign direct investment (FDI) rules by mandating that overseas auditors will have to undertake joint audit if an international investor insists on audit by a global firm, or its Indian affiliate. 

This marks a major shift in India's FDI regime, which was earlier silent on the issue and resulted in a situation where the shareholders' agreement between a foreign investor and its Indian partner contained a clause specifying audit by Big Four firms such as KPMG, Ernst & Young, Deloitte or PricewaterhouseCoopers or Indian firms that are part of their network. The clause has been inserted to prevent this kind of an arrangement and the belief is that one global firm will not agree to a joint audit with an international rival and this will open the doors for standalone Indian firms which have been complaining of being left out. The foreign firms control a majority of the audit work in listed entities as well as large Indian companies, causing a lot of heartburn. 

In fact, a group of Indian chartered accountants had lobbied hard with the government to insist on joint audit for all companies and had pitched for an amendment to the Companies Act. An expert committee headed by former finance secretary Ashok Chawla, however, rejected the proposal as it was seen to be adding to costs but recommended ways to strengthen Indian firms and work towards the development of some large Indian entities. 

"It is a very good move from a corporate governance point of view. Instead of promoting Indian firms, the existing system prevented them from becoming global brands. This government move will help Indian firms," said S Santhanakrishnan, an expert on corporate governance and law and an independent director on the boards of several large companies and banks. 

"This move will help create large Indian firms and once international players get a taste of Indian firms, they will find it more worthwhile to work with them," added Vinod Jain, president and founder of the All India Chartered Accountants Society. Sources, however, said that foreign investors can use another route to overcome the government directive. Instead of inserting a clause in the shareholders' agreement, they may now get a resolution passed at the annual general meeting, something that is provided under the Companies Act. Jain, however, said that this may be tough to do.