CAs ought to maintain highest level of ethics and integrity: Delhi HC

Council Of ICAI Vs. Ashok Kumar & Anr. (Delhi High Court)

Issue No. 1: Irregular allotment of 1,17,200 shares of BFSL involving irregular subscription for 2 7,00,000 shares with an application money of Rs.2. 7 crores by way of stock invests issued by Sangli Bank, Karol Bagh, New Delhi.

23. On this issue, the investigation of SEBI had revealed that there were 27 applications for 1 lakh to 1.2 lakh shares each, involving the application money of Rs. 10 to 12 lakh each. These applications were accompanied by stock invests issued by Sangli Bank, Karol Bagh, New Delhi and were allotted 4,000-4,8 00 shares each. The public issue of BFSL had closed on ₅th October, 1995, but the stock invests were issued on 23^rd November, 1995. The stock invests were 10 times more than what they were issued for namely, they were meant for 10,000 to 12,000 shares each involving share application money of 1 lakh to 1.20 lakh but were irregularly converted into higher stock invests i.e. 10 times more, resulting in allotment of 4000 to 4800 shares each. The findings of SEBI are contained in the investigation report and the conclusions therein. SEBI’s report was forwarded to the ICAI which conducted its own inquiry and the Disciplinary Committee of ICAI had arrived at the same conclusion. The conclusions of the DC are also summarized above.

24. The respondent’s submission that he was not involved in the tampering of the stock invest on the ground that he had handed over the blank forms to Sh. S.K. Gupta and his staff members, should be disbelieved in light of the evidence and material. Even if one were to believe that the applications and stock invests were tampered with by Sh. S.K. Gupta, there is no reason whatsoever as to why the respondent, a CA by profession, ought to have handed over applications and blank monetary instruments to anyone, so as to enable such a person to not only tamper with the date, but also the number of shares and the amount of share application money. The finding of SEBI is that the respondent connived with Sh. S.K. Gupta. Even the DC of the ICAI categorically records that the respondent had connived with Sh. S.K. Gupta, which finding reads as under:

“8.3 The Committee had perused the documents on record, the written submissions filed by the Respondent and also heard the Respondent and his Counsel in person. It was observed by the Committee that the Respondent had admitted that he was in association with Mr. S.K. Gupta for arranging the finance. It was observed by the Committee that the Respondent was to receive consideration of 6% on the investment. Since, the Respondent did not receive the consideration, he got the applications withdrawn vide withdrawal notices dated 01.12.1995 sent to BFSL. The BFSL vide letters dated 14.12.1995 returned the original stock invests. The Respondent also admitted that these stock invests were returned to him. However, the letters of BFSL show that the stock invests were addressed to the applicants. The returning of stock invests to the Respondent instead of the applicants clearly shows, the association of the Respondent with Mr. S.K. Gupta and establishes his connivance with him.”

25. The DC further notes that when the letter of withdrawal was sent to the company, the stock invests were actually returned to him instead of the investors and this is a clear evidence of connivance between the respondent with Sh. S.K. Gupta by using the names of the applicants.

26. The most glaring fact that completely belies the case of the respondent is that the fixed deposits which were given as security for issuance of the stock invests belonged to the respondent. This is clear from both SEBI’s investigation as also the statement recorded by the DC of the ICAI. The respondent admitted that the fixed deposits that were given as security for the issuance of stock invests. Thus there can be no doubt that the respondent was guilty of the misconduct and has failed in his professional duty of maintaining a distance between him and the promoter. His conduct leading upto the irregular allotment of shares is blameworthy and at fault. The conduct clearly constitutes `misconduct’.

Issue No. 2: Allotment of 7,000 shares against applications accompanied by ante-dated stock invests issued by Sangli Bank.

27. On this issue there was a clear finding of SEBI that 80-90 stock invests of Rs. 10,000/- each were issued to Mr. Ashok Chawla by Sangli Bank, Karol Bagh after the closing of public issue by BFSL. The respondent had also admitted before SEBI that 7000 shares allotted against these applicants were sold through Mr. Gautam Rohatagi, member of Delhi Stock Exchange. The respondent, in his statement recorded on 5^th September, 1997 before SEBI, had admitted that he had obtained ante-dated stock invests. Through these irregular investments he earned profit of Rs. 40,000/-by conniving with Mr. S. K. Gupta and indulging in ante-dating. He also deprived the general investing public from investing in BFSL. The findings of SEBI are not challenged by the respondent.

28. The DC, on perusal of the documents and written statement of the respondent and after duly hearing the counsel for the respondent, came to the conclusion that the stock invests were issued on 23^rd November, 1995. The entire chain of events as recorded in the DC’s report points to the respondent being the center piece or fulcrum of the transactions. The said chain of events and facts are –

(i) the respondent had arranged the investors;

(ii) FDs to secure stock invests were belonging to the respondent;

(iii) the respondent obtained blank forms and submitted it to BFSL and Mr. Gupta;

(iv) Irregularities were committed in the forms by inflating the number of shares and the application money.

(v) The stock invests were returned to the respondent after letter of withdrawal was sent.

All these point clearly to the fact that it was none else but the respondent who was conducting all the dealings leading up to the issuance of the stock invests and allotment of the shares – though the applications for allotment of shares were allegedly withdrawn subsequently.

29. Thus, it can be seen that both SEBI and ICAI have found him guilty after following due process. Statement of the respondent has been recorded before both the authorities. He has candidly admitted in his statement that he was to be paid 6% commission on these transactions and that he did not appeal against the order of SEBI, debarring him for 5 years after holding him guilty. Even the DC held him guilty and the ICAI Council of ICAI, in it its meeting on 2^nd June, 2013, directed his removal from the register of members of ICAI for a period of one year.

30. This recommendation of the ICAI having been made on 2^nd June, 2013, this Court notes that events which relate to the case date back to 1995. More than 22 years have passed since the events have transpired. Though this Court may have been inclined to increase the nature of punishment to the respondent, owing to the long delay, it is directed that the respondent shall be debarred for a period of one year as recommended by the DC.

31. This Court would like to observe that CAs ought to maintain the highest level of ethics and integrity, not only in the interest of their clients but also to ensure that probity and sanctity are not compromised in any manner as CAs are not merely professionals engaged by their clients, but are protectors and guardians of financial markets on which a nation depends. In the present case, after the report of the DC, the respondent made a representation to the ICAI Council to the following effect:

“In view of the above it is submitted that the order of the DC suffers from serious errors on facts and consequently on judgment. The only role that I played in BFSL public issue was a finance  facilitator and it cannot be treated as an act of misconduct, because it was just for my survival. Kindly absolve me from all charges and oblige.”

(emphasis supplied)

This clearly proves that the respondent was well aware of the misconduct in which he had indulged and was praying for sympathy from the ICAI Council.

32. The reference is accordingly accepted and in exercise of powers under Section 2 1(6) of the Act, it is directed that the respondent shall be suspended from the membership of the ICAI for a period of one year. During this period, the respondent is restrained from rendering any services as a CA as recognized by the Chartered Accountants Act, 1949.