The Institute of Chartered Accountants of India has restricted Indian audit firms from tying up with foreign management consultants that offer audit services abroad under the same brand.

This will immediately affect the Big Four consulting firms like KPMG, Ernst & Young, PricewaterhouseCoopers and Deloitte Touche & Tohmatsu, which have Indian audit firms as affiliates. KPMG's affiliate in India is Bharat S Raut.

Similarly, Ernst & Young is associated with SR Batliboi & Co, Deloitte Touche & Tohmatsu with SB Billimoria, Deloitte Haskins & Sells, CC Choksey and Fraser & Ross, and PricewaterhouseCoopers with Price Waterhouse and Lovelock & Lewes.

The ICAI central council decision, taken on Tuesday, will essentially require the Big Four to either change their names in India or sever their ties with Indian audit firms.

ICAI President R Bupathy could not be contacted since he was in Dubai. When contacted, Vice-President Satish Goyal said the central council had, in fact, recommended that Indian chartered accountants should be encouraged to enter into global alliances. He, however, did not comment on the implications of Tuesday's decision.

The council has decided that such alliances will require annual registration with the institute. All entities in the alliance, including the multinational players, will be required to submit details of their ownership structure.

They will have to stick to the code of ethics of ICAI in letter and spirit and further undertake that they would not participate directly or indirectly in any Indian firm that results in their "commercial presence" in India.

India does not allow foreign investment in accounting, auditing and bookkeeping services.

The policy not only bars foreign audit firms from operating in India (Mode 3 of WTO's General Agreement on Trade and Services) but also prohibits foreign nationals from practising in the country (Mode 4).

The central council's decision was based on the recommendations of a seven-member study group headed by Jayant Gokhale and constituted in February 2002. Besides other issues, it looked into the right of the multinational accounting firms to operate in India.

When contacted, sources in Indian accounting firms that are affiliated to the Big Four, said the proposal was impractical and unworkable.

"Even if we tie up with a consulting firm which does not undertake accounting work at present, it is difficult to guarantee that it won't do so in the future," said a functionary in one such accounting firm.

"It is impossible to expect any of the Big Four to change its name in India, though this could address the issue of accounting firms riding piggyback on multinational accounting firms as the pure consultancy firms have no interest in accounting," another source said.

How the pot boiled

• A committee was set up in April 1995 to study issues relating to foreign bodies or firms.
• Jayant Gokhale study group constituted in February 2002.
• S Gurumurthy's white paper makes a strong case for a level-playing field for domestic CA firms vis-à-vis multinational accounting firms.
• Gokhale study group submits report to ICAI central council in September.