Pre-listing certificates - An overview - Part II

Koushik D C , Last updated: 30 December 2016
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In the article “Pre-Listing Certificates-An Overview” dated December 10th, 2016, I have explained the certificates which are required for the purpose of listing of securities in a recognised stock exchange(s). Based on the queries which I have received, I understand that there is a need more explanation for better understanding of the chapter. So I have explained the following and I hope it clarifies!

Whether all the certificates mentioned are required to be issued under the statute?

No. Some certificates are issued as per the statutory requirement and others are issued as per BRLMs requirement.

Why BRLMs requires the certificate from Chartered Accountant when the same is not required under the statue?

The BRLMs, have to certify that the disclosures made in the draft red herring Prospectus are generally adequate and are in conformity with SEBI (issue of capital and disclosure requirements) Regulations, 2009 in force for the time being. This requirement is to facilitate investors to take an informed decision for making an Investment in the proposed issue.

Company is primarily responsible for the correctness, adequacy and disclosure of all relevant information in the draft red herring prospectus. The BRLMs are expected to exercise due diligence to ensure that the company discharges its responsibility adequately in this behalf and towards this purpose, the BRLMs have to furnish to SEBI, a due diligence certificate.

Hence, to be on safer side and to protect itself from the risk, they take the certificates [also known as Comfort Letter] from the Chartered Accountant. However, it may be noted that taking the comfort letter is not a substitute for BRLM’s due diligence. [Concept is similar to management representation, where even after carrying out substantive procedure and analytical procedure, auditor is required to take management representation on certain matters as per SA-580 - “Written Representations”, but such representation is not a substitute for audit procedures as mentioned.]

Who approaches the Chartered Accountant to issue such comfort letter(s)?

Company may approach the Chartered Accountant to provide comfort letter(s) on the certain information of the company to the BRLMs. Scope of such letter(s) are agreed with BRLMs. It may be noted that issuance of comfort letter(s) is in the nature of an assurance engagement.

To whom the comfort letters are to be addressed?

Usually, it will be addressed to BRLMs. [However it may be addressed to both to company and BRLMs]

Which are the auditing standards applicable in this regard?

Applicable auditing standards include the following:

Standard on Auditing	Context of Applicability
Standard on Auditing (SA) 700, “Forming An Opinion and Reporting on Financial Statements”.	Report should be signed by the member along with membership number and firm registration number.
Standard on Auditing (SA) 720, “The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements”.	The auditor should read the other information in the prospectus because the credibility of the audited financial statements may be undermined by material inconsistencies between the audited financial statements and other information in the prospectus.
Standard on Auditing (SA) 705, “Modifications To The Opinion In The Independent Auditor’s Report”.	Any qualification should be dealt with in the report appropriately.
Standard on Auditing (SA) 600, “Using the Work of Another Auditor”.	When financial statements audited by other auditors have been relied upon for reporting in the prospectus.
Standard on Auditing (SA) 210, “Agreeing the Terms of Audit Engagements”.	An engagement letter needs to be taken to avoid any misunderstandings with respect to the engagement.
Standard on Auditing (SA) 580, “Written Representations”.	The auditor should obtain representations from management, as considered appropriate.
SAE 3400 ‘The Examination of Prospective Financial Information’	While certifying on prospective financial information under the certificate of working capital requirement of the company.
Standard on Auditing 299, “Responsibility of Joint Auditors”.	In case joint auditors are appointed.

Which are the Laws and Regulations primarily governs the reporting?

Disclaimer: Views expressed herein are not necessarily the views of any relevant statutes. Author is not responsible for the correctness or otherwise of the contents published herein. If any errors or omissions are noticed, the same may be brought to the attention of the author.

Author is an Independent Accounting/Tax Professional and can also be reached at Koushik.d.c@gmail.com.