A fog of uncertainty has settled over roughly 75 listed companies including Tata Steel, United Spirits, Ashok Leyland, IDFC and drug-maker Sanofi India after market regulator Sebi's order on Wednesday barring PricewaterhouseCoopers from issuing audit certificates to them for two years from the start of the next financial year.
Although Sebi has said the "order will not impact audit assignments relating to the financial year 2017-18", corporate governance experts now expect several of these listed entities to start scouting for another auditor because they would not like to live in a climate of uncertainty and a judicial process whose outcome cannot be second-guessed.
Sources told The Telegraph that the 11 entities working under the PwC umbrella have a client base of 75 listed entities who may now look to seek audit services from the Big Three: EY, Deloitte and KPMG.
But this could create complications for PwC, which is mulling legal options to contest the order, including a stay, possibly from Bombay High Court, which had in August 2010 heard a PwC challenge to Sebi's jurisdiction to bar audit firms.
"These (listed) companies will need to seek some other auditors,'' said Shriram Subramanian, managing director of InGovern, a proxy advisory firm. He added that given the regulatory development, companies can appoint auditors and then seek shareholders' approval.
But there's a problem here: companies usually appoint an auditor for a period of five years, and it will be hard to persuade rivals to take on a two-year audit mandate.
Shareholders of Tata Steel, for example, had cleared the appointment of PwC at the company's 110th annual general meeting last August. The appointment was for five years, till 2022.
PwC has argued that chartered accountants are regulated by the Institute of Chartered Accountants of India, and Sebi, therefore, has no right to regulate or bar CA firms.
This line of argument came up in 2010 before Bombay High Court, which ruled: "By initiating the proceedings (against PwC), it cannot be said that Sebi is encroaching upon the rights of the institute or prohibiting a chartered accountant from practising as a chartered accountant."
The high court also ruled that Sebi had the duty to safeguard the interests of investors.
"It (Sebi) can take appropriate remedial steps which may include keeping a person including a chartered accountant at a safe distance from the securities market.... Exercising such powers, therefore, cannot be said to be in any way in conflict with the powers of the institute under the CA Act. If ultimately any decision is taken by debarring any particular person from auditing the books of a listed company, such direction can always be said to be within the powers of Sebi and that is in the aid of regulating the affairs in connection with the investors' interests and the interest of the securities market."
