Synopsis–Holding companies of large corporate entities are now categorised as “deemed” Non Banking Finance Companies (NBFCs) even if they have not borrowed a single penny or are not into the business of lending.
Statutory auditors to holding companies of some of the largest Indian corporate groups are analysing the risk and economic impact of recent RBI regulations related to auditors and exploring options—including walking away—to deal with the new guidelines.
The interplay of two Reserve Bank of India (RBI) regulations has led to new complexities in auditing Core Investment Companies (CICs).
Holding companies of large corporate entities are now categorised as “deemed” Non Banking Finance Companies (NBFCs) even if they have not borrowed a single penny or are not into the business of lending.
Separately, RBI on April 27 announced stricter regulations for auditors of commercial banks, NBFCs and housing finance companies that included cap limits, a cooling off period, non audit restrictions and a 3 year tenure in a bid to bring greater transparency and raise audit quality.
But this regulation juxtaposed with another one— where RBI categorises every holding company of any corporate as an NBFC— means the new audit regulations will also apply to holding companies so the audit firms after analysing the risk and economic impact on their portfolio have to either walk away from some audits, drop some non audit work in other, start talks with parent companies to rejig their work based on new regulations.
But what’s making auditors sweat is that they will have to opine on holding companies alone, with no access or comfort towards underlying assets or financials of group companies courtesy RBI regulations which only allow firms to audit one NBFC or bank within a group.
“Holding company entities of several large groups are now deemed NBFCs which also means that they may be impacted by the RBI circular. The problem is that a new statutory auditor of these holding companies or CICs may have to audit them, but the underlying entities are audited by other auditors. Auditors of CICs may not be comfortable with this arrangement as there could be risks involved in giving an opinion without looking at underlying entities. In turn, this may result in duplication of efforts and additional costs for companies,” said Jamil Khatri, Partner, BSR & Co, one of the largest audit firms in the country.
“The auditor has to review the work done by the auditor of subsidiaries too for all-round coverage. So how many audits will the auditor end up doing— CIC or subsidiaries and then to check work papers for all. It will become unwieldy.” added another CEO of an audit firm.
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