MUMBAI: The Securities and Exchange Board of India (Sebi) may ask for a compulsory audit of the accounts of important overseas subsidiaries of Indian companies as fears of inflated profits and unreliable accounts grow in the wake of recent corporate scandals.

The capital markets regulator may make auditing of overseas accounts mandatory in cases where a subsidiary contributes more than 20% to the listed Indian company’s consolidated turnover or net worth, two people familiar with the discussions said.

The regulator may tweak the listing agreement to provide for the proposed changes, they added. The changes are still being discussed and it may soon ask the committee on accounting and disclosure standards to give feedback.

“This may not be an issue with companies that have large operations overseas since Indian auditors (parent company auditors) do not rely on any numbers at the face value without proper audit reports in case these companies have any meaningful operation,” says Avinash Gupta, head financial advisory, Deloitte.

“The impact would be felt by small companies that have operations outside that show substantial turnover from overseas and the accounts are not audited. Many companies report turnover from tax havens where the compliance rules are not that strict,” Gupta added.

The move reflects Sebi’s concerns over widespread systemic impact if unreliable financial statements and fraud due to inflated profits affect a company’s financials and pull down its shares. Software firm Satyam Computer Services had to restate accounts after its promoter admitted to inflating financials in 2009.

The stock price tanked after the restatement, wiping out millions of dollars of investor equity. Recently, global footwear giant Adidas lowered its 2015 sales target for Reebok to 2 billion euros from 3 billion euros and took a charge of 200 million euros due to fraud at Reebok’s India unit.

In both cases, high-profile auditors were involved in scrutinising the balance sheets but could not detect the fraud. Some countries like the US, for instance, do not provide for mandatory audit of unlisted companies.

Others such as United Arab Emirates, Saudi Arabia, Isle of Man, Cayman Islands do not stipulate any audit at all. Companies with subsidiaries in these markets rely on a management certificate provided by their own managers. Sebi wants to put an end to all that.

“Sebi’s plan is to ensure independent accountability for all information in respect of its overseas subsidiaries or associate companies for the inclusion of consolidated assets in India,” says KH Viswanathan, director, RSM Astute Consulting International.

“All information received from overseas companies has to be certified by an independent auditor before being included in consolidated account of the parent in India.” Several Indian companies have foreign subsidiaries contributing a significant chunk to their revenue.

Foreign operations contributed 73.55% to Tata Steel’s net sales in 2011/12, and 67.33% to Tata Motors’. The figure was 76.14% for Hindalco and 63% for Suzlon Energy.