More companies reporting frauds as retail participation in markets going up, says SEBI’s SK Mohanty

By: |
October 07, 2021 3:54 PM

The markets regulator is also clearing a slew of initial public offerings (IPO) by companies lately and each of the instances, insisting on companies to disclose more.

SEBI 01Corporate frauds are typically decided at the top and there is an entire army of people executing the same. (File)

The surge in companies reporting frauds amid an uptick in retail investors’ interest in equities is a dangerous trend and efforts need to be mounted to curtail them, Sebi’s whole-time member SK Mohanty said on Thursday.

Citing findings of a recent survey, Mohanty said 65 per cent of the companies have reported incidences of fraud this year. At the same time, we have over 1.5 crore new retail investors in capital markets, who are willing to be patient with their investments.

“So, what kind of situation we are finding ourselves in is very very dangerous. Therefore, this is the right time for sensitisation, awareness, and education,” Mohanty said, speaking at a conference organised by industry lobby CII.

He said frauds impact investors’ confidence and also dent the value of their investments, as the value of a particular share comes down, and hence, it is essential to address this problem.

Mohanty said the same survey conducted by Kroll points out to 12 per cent of those companies having experienced frauds, attributing the occurrence to unauthorised access to sensitive information and termed the same as “worrisome”.

“If people who have got access to sensitive data, they will encash it for the advantage of their related parties,” he said, forecasting that such incidents will only increase going ahead.

While the fraudsters are always one step ahead, Sebi is also tightening its practices, Mohanty said, citing the changes to the related party transactions (RPT) which expand the scope of related parties as one such measure.

Acknowledging criticism like Sebi exceeding its brief or hurting ease of doing business agenda, Mohanty made it clear that for the regulator, it is very important to curb frauds and added that it is the reputational risk of the regulator and also the government which is on the line if a mishap happens.

With the growth in the number of frauds, the Sebi carved out a separate corporate fraud investigations department from the general investigation department last year, he said.

Commenting on the changes brought about by the work from home culture, Mohanty said the shift to residences has increased incidents of fraud as people can gain access to sensitive data and also helped increase the retail investor participation in the markets as there are higher savings while working from home.

Sebi has reposed its faith in the independent directors to prevent frauds, Mohanty said, adding that no one can legislate the independent directors.

Speaking at the same event earlier, Serious Frauds Investigation Office (SFIO) director Keshav Chandra rued that the independent directors do not take a critical view of things, as they are supposed to be doing despite their reputations as persons of eminence and also fees that they earn.

Corporate frauds are typically decided at the top and there is an entire army of people executing the same, Chandra said, pointing out to the body’s experience of dealing with 99 frauds in the recent past.

He also pointed out a recent report from the RBI, which said it takes an average of 57 months to report fraud in a loan account of over Rs 100 crore and expressed disappointment about the same, wondering how does one reach the original perpetrator five years after an offence.

Mohanty said every audit firm has a forensic practice in place but was not too sure about the results that they produce and added that frauds happen because key personnel like the chief financial officer, managing director and compliance officer are hand-in-glove with the board.

The markets regulator is also clearing a slew of initial public offerings (IPO) by companies lately and each of the instances, insisting on companies to disclose more, which can help reduce the incidence of frauds, he said.

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