Central government has recently
altered the existing Foreign Direct Investment (FDI) policy in relation to
audit firms with a directive that audit process of any transaction contemplated
between Indian entities and foreign investors for FDI to be conducted by
auditors of the parties’ joint selection, if the foreign party insists on a
particular audit firm of its choice from an international network.

The underlying intent of the directive
is to reinforce the corporate governance standards of the Indian firms
associated with foreign investor for FDI and to create a path for domestic
audit firms to get involved more in the audit of Indian firms associated with
foreign investors.

The directive certainly confines
foreign investors and Indian firms’ ability to engage auditor of their
selection to conduct audit except a joint audit with independent auditor(s).
The directive further ensures that joint audit will be conducted by
international audit firm and domestic audit firm.

The directive will certainly slow down
the dominance of big four firms (Deloitte, KPMG, Ernst & Young and
PricewaterCoopers) in the domestic circuit as it is highly improbably from
practical point of view to engage two auditors from big four firms for a
specific transaction as engagement of big four firms is quite expensive and
they are contemporaries in their line of business.

The provision of joint audit will
certainly boost the high probability of Indian audit firm’s involvement in the
audit process of any transaction contemplated by any Indian firm and foreign
investor.

Another dimension for the issuance of
the directive is to make stronger the corporate governance standards of Indian
Corporate system as audit will be joint activity of international firm and
Indian firm leaving no place for bias in audit process.

Experts welcomed the directive and
opinioned that it will certainly take the corporate governance standards to
different level by ensuring that companies employ good corporate governance
practices to sustain a transparent corporate system.

It is hoped that with the serious
implementation of the directive will make certain that the audit process will
be conducted by audit firms in a translucent way to reflect the existing
financial state of companies by ensuring audit firms won’t get influenced by
the financial benefits offered by bigger corporations – strengthen the
corporate governance standards in the country – set the stage for Indian audit
firms to build a brand and reputation of their own in international arena and
reduce the domination of Big four firms in Indian circuit.

Research inputs by Paruchuri Baswanth
Mohan

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About the author :

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at [email protected].