ICAI's Role in Strengthening Capital Markets: A Pathway to Economic Growth and Investor Protection

Dear Professional Colleagues,

In the dynamic landscape of global finance, Capital markets play an indispensable role in the economic development and progress of a nation, serving as the lifeblood of a nation's financial system. They facilitate the efficient allocation of capital by connecting investors and businesses, enabling companies to raise funds for growth and innovation while providing individuals and Institutions with the opportunities to build wealth.By channelling resources into productive ventures, capital markets foster job creation, infrastructure development and technological advancements, contributing significantly to a country's GDP growth. Capital markets are instrumental in transforming entrepreneurial visions into reality, driving technological advancements, and enhancing overall economic progress.

As we navigate this landscape, it is imperative that we, as professionals with our skills and expertise thoroughly comprehend capital market and support measures that ensure stability, protect investor's interests and contribute to the long-term health of capital markets.

Capital Market: An Integral Component of Economic Growth

As India leapfrog into the big league of growing economies, India's capital market have witnessed remarkable growth, evolving into a dynamic and robust ecosystem. With a strong regulatory framework, increasing participation from domestic and international investors and rapid technological advancements, capital markets have emerged as key drivers of economic transformation. The capital market in India has evolved as the world's fourth largest capital market globally. With a focus on improving market access, broadening asset classes and ensuring robust cybersecurity and compliance, India is positioning itself for sustained growth in the global capital markets.

In India, capital markets have become vital for driving growth across multiple sectors, from infrastructure development to startup funding and MSME support. By enabling businesses, especially MSMEs, to access funds through equity or debt, capital markets help unlock their growth potential, create jobs and contribute significantly to the nation's GDP. However, there remains vast potential to further deepen these markets by expanding access, strengthening transparency, revamping the mechanisms and fostering trust among participants.

Building Stronger and Transparent Capital Market Ecosystem

India's stock market reform journey has been marked by significant strides in investor protection, corporate governance, market transparency and financial literacy. From the establishment of the Securities and Exchange Board of India (SEBI) in 1992, the foundation of regulatory frameworks was laid. In the late 1990s, the introduction of dematerialization, market infrastructure development, corporate governance norms, and retail investor protections, each phase of reform aimed to create a safer, more efficient and a transparent market ecosystem. It has also revolutionized the Indian stock market by eliminating physical certificates, minimizing risks like theft and fraud, and improving efficiency.Modern trading platforms or Exchanges have further enhanced liquidity, transparency and trading systems. Since 2015, SEBI has implemented stringent corporate governance norms, such as the LODR (Listing Obligations and Disclosure Requirements) and independent board structures, strengthening market integrity and credibility. These measures, combined with investor's education, grievance redressal systems and regulatory safeguards, have attracted both domestic and foreign investments, empowering Indian markets.In recent years, SEBI has embraced digital transformation, introduced T+1 settlements, and apart from that in a historic move, SEBI has come up with T+0 settlement for 25 scrips initially and further planning to expand to top 500 companies by market capitalisation in a phased manner. Further, going with eKYC, and financial literacy initiatives, aligning India's markets with global standards. Sustainability has emerged as a central priority, highlighted by the introduction of the BRSR (Business Responsibility and Sustainability Reporting) framework and green bonds, which are inclined toward environmentally friendly initiatives, establishing India as a prominent force in the global financial arena.Going ahead, the regulatory bodies and institutions with continued innovation, regulatory enhancements and focus on inclusivity will ensure that India's capital market remain enablers of sustainable economic growth.

Investor Education and Financial Literacy: The Need of the Hour

While the capital market has evolved, investor's participation remains relatively low compared to the size of the economy. A large portion of the population still lacks a basic understanding of how financial markets work. As Chartered Accountants, we are in a unique position to help bridge this knowledge gap. The importance of financial literacy cannot be overstated, as it equips investors with the knowledge to make informed investment decisions, assess risk and take advantage of the diverse opportunities available in the market. To facilitate this, the Institute of Chartered Accountants of India (ICAI) is playing an active role in promoting financial education among professionals, students and the public.

The Institute, through its Committee on Financial Markets and Investors' Protection advances nation-building through financial literacy and investor protection. With over 8,828 Investor Awareness Programs (IAPs) benefiting 4,42,000 participants, including women, youth and armed forces, the Committee of ICAI empowers individuals to make informed decisions. Further, ICAI through the Financial and Tax Literacy Directorate (FTLD) partnered with Capacity Building Commission to develop an e-learning course, aimed at providing financial education to State and Central government officials. The event of 'Vitiyagyan Mela 2024' was held across the 63 branches of ICAI, promoting financial education among the common people.

The Role of Profession in Capital Market Development

As Chartered Accountants, we have an important role to play in capitalizing on the opportunities within the capital market. One of the most effective ways we can contribute to the market is by supporting the development of MSMEs (Micro, Small, and Medium Enterprises), which are the backbone of the economy but face challenges in accessing capital.Through a combination of financial reporting, advisory services and compliance management, Chartered Accountants are helping MSMEs understand the regulatory landscape, improve their financial statements, and access financing through the capital markets. The growing emphasis on startups and venture capital financing has opened new avenues for MSMEs to raise funds. As professionals, we must ensure that these entities adhere to proper financial practices, enhance their governance, and increase their credibility to attract investors. It is the growing need to provide access to funds to SMEs that there is a dedicated platform for SMEs in the stock market. It was in 2012 that both Bombay Stock Exchange and National Stock Exchange launched the SME platform owing to this need and it was in the period of 10 years that is in 2022 the BSE SME achieved the milestone of 400 listed companies. This shows the importance of SMEs wider participation in the Capital Markets of the country.In the case of startups, the emergence of new-age financing mechanisms such Private Equity (PE), and Venture Capital (VC) has created a significant opportunity for entrepreneurs. The role of Chartered Accountants is crucial in these areas, especially when it comes to due diligence, business valuation and structuring investment deals. Additionally, the profession can guide startups funding mechanisms, helping them navigate the complexities of regulatory compliance, financial disclosures and investor communications.

Corporate Bond Market: A Critical Avenue for Growth

While the equity market garners much of the attention in public discourse, the corporate bond market in India has been growing steadily and holds immense potential for raising long-term capital. In the year 2024, India's corporate bond market has witnessed a phenomenal year, recording an all-time high of Rs 9,97,804 crore (approximately $1.2 trillion) mobilized through private placements in fiscal 2024.Despite its growth, India's corporate bond market remains relatively underdeveloped compared to global standards. This is largely due to factors such as low investor participation, a lack of liquidity, and insufficient understanding of the benefits of bond investments. As Chartered Accountants, we can help bridge these gaps by educating both businesses and investors on the advantages of the corporate bond market.

Green Finance and Sustainable Investments: The Future of Capital Markets

An emerging and increasingly significant area in capital markets is green finance. As the world faces the challenges of climate change and environmental degradation, there is a growing shift towards sustainable investment. Green finance refers to investments in projects or businesses that have a positive environmental impact. This includes funding for renewable energy projects, sustainable infrastructure and initiatives aimed at reducing carbon emissions.The Indian government, alongside global regulatory bodies, is working to develop frameworks for green bonds. In 2023, the Government of India joined the Sovereign Green Bonds Club when the Ministry of Finance priced an INR 80 billion (USD 1 billion) two tranche deal split equally between five- and ten-year tenures. Further, in March 2023, NSE launched India's first sovereign green bond indices. The indices are the Nifty India Sovereign Green Bond Jan 2028 Index and Nifty India Sovereign Green Bond Jan 2033 Index. As per USAID report, after China, India has the second largest market for green bonds. These statistics show that sustainable investment funds, and environmentally friendly financial products have gained momentum.As environmental, social, and governance (ESG) criteria become more important for investors, Chartered Accountants can play a crucial role in assisting organizations in green bond issuance, carbon accounting, and sustainability reporting, ensuring that these financial instruments meet regulatory requirements and are attractive to investors.

Auditing Standards Practice in India

The ICAI constituted the Auditing Practices Committee (APC) as an independent full-fledged Technical Committee in September, 1982 which later on became Auditing and Assurance Standards Board in 2002 pursuant to the constitution of the International Auditing Practices Committee (Currently known as "International Auditing and Assurance Standards Board"- IAASB) by the International Federation of Accountants (IFAC). The objectives of APC included, inter alia, development of Statements on Standard Auditing Practices (SAPs) which later became Auditing and Assurance Standards (AAS) and then Standards on Auditing (SA), Guidance Notes on Auditing, Statements on Auditing so that these may be issued under the authority of the Council of ICAI. Till 2007, AASB issued 35 SAs under the authority of the Council of ICAI.In July 2007, AASB issued the "Revised Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services" which is effective from April 1, 2008.Pursuant to the issuance of Revised Preface, the entire structure of formulation of auditing standards by AASB has undergone a complete change in line with the structure adopted by the IAASB. The nomenclature "Auditing and Assurance Standards" has been changed to "Engagement and Quality Control Standards".

Engagement and Quality Control Standards

These standards comprise (1) Engagement Standards and (2) Standards on Quality Control.

During the year 2010, AASB issued 35 new/revised Standards on Auditing (SAs) and completed convergence with the International Standards issued by the IAASB.During convergence, AASB issued all standards corresponding to IAASB's standards except one standard i.e. ISA 600, Special Considerations Audits of Group Financial Statements (Including the Work of Component Auditors). The Council while considering ISA 600 had observed that keeping in view the auditing practices and conditions prevailing in India, it would not be possible to adopt ISA 600 in India. Accordingly, the Council had decided that ISA 600 cannot be adopted in India.It may be noted that ICAI has also issued two Standards on Quality Management (SQM) i.e., SQM 1 and SQM 2 on 14th October, 2024. SQM 1 and SQM 2 are proposed to be implemented from April 1, 2025 (Recommendatory) and April 1, 2026 (Mandatory). SQC 1 will be replaced by SQM 1 and SQM 2 when these standards become effective.

SA 299 (Responsibility of Joint Auditor)

This Standard on Auditing becomes operative in respect of all audits relating to accounting periods beginning on or after April 1, 1996.This Standard talks about sharing of responsibility of Joint Auditors in case an entity appoint more than one auditor. There is no such reference Standard issues by IAASB (International Auditing and Assurance Standard Board) as ICAI has framed this Standards to define the responsibility of Joint Auditors. There are 55 Jurisdictions globally where concept of Joint Audit is there and every jurisdiction has defined the responsibility of the joint auditors as per their jurisdictional requirement and necessity, as Internationally there is no any reference standards for Joint Audit as in the case of all other standards as mentioned above.As on date all these Standards issued by ICAI are fully align with International Best Practices (except SA 600) and are in force in India and mandatory for Auditors to be complied with.

Companies Act,2013

Importance of compliance with Auditing Standards has been recognized in the Companies Act 2013. Section 143(9) of the Companies Act, 2013 has made it mandatory for statutory auditors of companies to comply with the auditing standards.Section 143(10): "The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority:Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards."

NFRA and ICAI Developments

ICAI has recommended following to NFRA based on the initiative being taken by MCA to notify these Auditing Standards as per Section 143(10) of the Companies Act, 2013.

• All 35 Auditing Standards in which NFRA has accepted 33 Standards as recommended by ICAI but made major changes in 2 Standards (SA 600 and SA 299 which is being not agreed by ICAI).
• SQM 1 and 2 (Earlier SQC 1) being referred by NFRA for notifying as Auditing Standards under Section 143(10) of the Companies Act,2013 which ICAI believe are not Auditing Standards.
• 3 Standards on 800 Series of Audit of Specialised Area also being referred by NFRA for notifying as Auditing Standards under Section 143(10) of the Companies Act,2013 which ICAI believe are not Auditing Standards
• As per Section 34A of the LLP Act 2008 all these Standards will be applicable to LLP as mutatis mutandis which ICAI also agreed with reservations as above.

ICAI's Concerns regarding SA 600 (Revised) and SA 299 (Revised) approved by NFRA for recommending them to the Central Govt for Audits of Companies:

• In Current SA 600 there is sharing of responsibility between Holding & Subsidiary Company Auditor. Holding Company Auditor rely on the report of the subsidiary company auditor while consolidating the group balance sheet. Whereas in International ISA 600, Holding Company Auditor takes the full responsibility of entire group balance sheet.
• RBI and C&AG resisted implementing these standards in entities under their jurisdiction. RBI vide its Circular dated 27th April 2021 has issued "Guidelines for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs)". These Guidelines provide that one CA firm can do audit of only one RBI regulated entity in a group where there are numerous RBI regulated entities in a group, for example, numerous NBFCs in a business group. This will require separate auditors for all NBFCs & Bank but for consolidation, the lead auditor will have to do lot of additional work under ISA 600. This will lead to not only additional time & cost for the Company but also substantial additional efforts and not just duplicity but multiplicity of work.
• The largest economy and developed Country i.e. USA provide an option for reliance on component auditor. China too does not have a direct implantation of International Standards (ISA 600)
• ISA 600 requires group auditor to make assessment of professional competence of component auditors. In some countries, there are multiple professional bodies and hence assessment of professional competence may be required unlike India where all auditors are members of same professional body (ICAI) and are subject to the same education and training requirements. The component auditors in India are not appointed by Group Auditors but they are appointed by Regulators like CAG, RBI, by shareholders of the company at the recommendation of its Board/audit committee. Hence, group auditors cannot be held responsible to verify the competency of component auditors.Competence of component auditors is assessed by audit committees and a revalidation has no additional benefits.
• Adoption of this standard will result in an unwarranted situation of the concentration of audit work with few large firms and will be very detrimental to India's growth as it will adversely impact 98% of Small and Medium Size Firms (SMPs).
• Current Standards does have power to review the work of component Auditor. NFRA recent cases where Auditors were held guilty are based on current Standards which are in force today. Therefore in recent findings of NFRA where auditors were held guilty are the failure of the persons and not of Standards.
• In some foreign jurisdictions, components are often not required to be audited. Indian auditing practices differ from international norms, with requirement that all components should be audited in India. Moreover, in India apart from Auditing standards, there are robust regulatory oversight by Companies Act, SEBI(LODR) Regulations, CAG & RBI Act. India should follow the international auditing standards only after considering its unique circumstances. In fact, all SAs in India have been converged with ISAs issued by IAASB except ISA 600.
• Implementation of ISA 600(Revised) will lead to challenges for Indian audit firms conducting audit of Indian companies having large subsidiaries abroad. In such situations, Indian audit firms will be at disadvantage compared to multinational accounting firms. Further, there will be challenge as to whether management of Indian Companies will be willing to allow Indian audit firms to duplicate the time and costs for audit of foreign components, if a foreign country auditor is also required to be appointed for foreign components as per their laws.
• Maker Checker Approach is foundation to an Audit. Indian entities are well regulated for different Principal and component auditors having checks and balances on each other work.
• Instead of concentrating dependency at single point group auditor to judge competency of component auditors, component auditors should be made more accountable to report in terms of enhanced reporting requirement to enable group auditor use their reports more effectively.
• In 10 years, we moved from 10th to 5th and are going to be 3rd largest economy based on current Standards. Concentration of Audit work and ignoring time-tested consultation process with professional accounting body will not be good for realising the vision of Viksit Bharat.
• Adoption of new Standards which cast joint and several responsibilities on joint auditors will considerably enhance the cost and will go against the age old and time-tested model successfully implemented in PSU and PSB.
• ICAI is already at the forefront augmenting audit quality with the establishment of Centre of Audit Quality and release of Audit Quality Maturity Model (AQMM) and it can further enhance with proper dialogue and engagement.

Moreover, the Provisions of Section 129(3) of the Companies Act,2013 is also very important to ponder over here in this regard;

Section 129(3): "Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):"

The World Forum of Accountants - 2025

The World Forum of Accountants (WOFA) aspires to be a visionary and futuristic conclave, charting the future of the accounting profession in a rapidly evolving global landscape. Bringing together global accounting leaders, innovators, policy makers, and thought leaders, the forum will not only reflect on current trends but will build a blueprint for what lies ahead in the world of finance, technology, and sustainability.The WOFA envisions championing the accountant's role in addressing global challenges. The forum will also delve into the future of education and skills, spotlighting the integration of emerging fields like Ethics, AI, and Sustainability into the accounting curriculum. It envisions a profession equipped not only to adapt to change but to lead it.Be part of this visionary forum and expand your global network to connect, collaborate and shape the future.

ICAI Election 2024

The elections for the 26th Central Council and 25th Regional Council are scheduled to be held on 6th and 7th December, 2024. A total of 81 candidates are contesting for 32 seats in the Central Council, while 158 candidates are contesting for 64 positions in the Regional Councils. The elections are going to take place at 925 booths across India, catering to over 4,03,619 registered voters.Elections are not just a procedural activity; they are the cornerstone of our profession's governance and vision for the future. Your vote is your voice, and it holds the power to shape the Institute's direction. I urge members to actively participate and cast vote with a sense of commitment and responsibility towards the profession.

CA. Ranjeet Kumar Agarwal
President, ICAI, New Delhi