The government is planning to link up the databases of various tax and regulatory authorities to spot signs of growing stress before they blow up like in the case of Infrastructure Finance and Leasing Services Ltd (IL&FS), a government official said.
According to the plan, the databases of income tax department, goods and services tax (GST) Network, Central Board of Indirect Taxes and Customs, Financial Intelligence Unit, Registrars of Companies, the Reserve Bank of India and the Securities and Exchange Board of India will be linked through an application programming interface (API), the official cited above said on condition of anonymity. API is a software interface that facilitates communication among various databases.
The profiling of corporate behaviour in systemically important enterprises is part of a review of corporate governance framework mooted by the ministry of corporate affairs. The idea is to correctly interpret early warning signals from various regulators and connect the dots to identify and pre-empt potential failures of businesses that can hurt the markets and the economy, explained the official.
The move is triggered by the fact that the build-up of stress in IL&FS group companies went undetected by the current system. “The standard of corporate governance in India will be reviewed thoroughly. The failings of a group, that has been one of the leaders in channelizing private investments into the infrastructure sector, is scary, to say the least," said the official cited above. Excessive diversification, lack of risk management and expansion far beyond capacity are seen by the government as reasons for the infrastructure lender’s failure.
Communication among regulatory databases is expected to help in real-time comparison and corroboration of facts for authorities to step in where potential fraud or mismanagement is detected. Experts said that data analytics and deeper due diligence are catching on not just among regulators, but in the corporate sector too.
“Data analytics is a tool that companies are increasingly using to identify anomalies, trends or deviations from standard procedures and to highlight areas of financial stress. While not all instances of things going wrong may be on account of mismanagement or fraud, data analytics can be used to provide early warning signals on which corrective action can be taken by the management," said Nikhil Bedi, partner and leader (forensic), Deloitte India. Extensive data analysis after the November 2016 demonetization of high-value currency notes had helped the government increase the number of income tax return filers by 21% to 54.3 million in FY18 from a year ago.
The latest steps come on top of recent measures to tighten disclosures relating to directors on the board of companies as well as beneficial ownership of shares and limiting the layers of step-down subsidiaries that companies can have to two.
The latest review of the corporate governance framework will examine the roles of independent directors, board of directors as a whole, auditors and rating agencies. However, auditors and rating agencies are of the view that their mandate is limited and that they cannot double up as detectives.
“We go by the audited financial statements of the companies and our discussions with the management for rating. We are not super auditors," said an executive from a rating agency, who asked not to be named. Rating agencies follow an ‘issuer-pays model’ in which the entity the securities of which are rated, pays for the rating service.