ICAI Finds CAs Guilty of Professional Misconduct in NSEL Audit

The Disciplinary Committee of the Institute of Chartered Accountants of India (ICAI) found CAs Shrawan Bhagwati Jalan and Amit Kabra guilty of professional misconduct under Items (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. The complaint, filed by Shri Arun Dalmia of the NSEL Investor Forum, pertained to their audit of National Spot Exchange Limited (NSEL) for the financial year 2011-12. The CAs argued that their professional reputation had suffered due to the prolonged case, and that their audit opinion did not vitiate the true and fair view of the financial statements, as the company’s financial position was unaffected by alleged enhanced disclosures. They claimed they were unaware of regulatory show-cause notices against NSEL and believed they were victims of fraud or misinformation from the management. They also pointed out that issues leading to the withdrawal of audit reports for subsequent years by other auditors (M/s Mukesh P. Shah & Co. and Deloitte Haskins & Sells LLP for FY 2012-13) did not relate to FY 2011-12, and that another CA, Mukesh P. Shah, was largely exonerated despite auditing during a period when media reports about NSEL’s issues were public. They further argued that certain charges against them were either not in the initial prima facie opinion, or that another CA in similar circumstances was not charged.

The Disciplinary Committee addressed the CAs’ objections, stating that each disciplinary case is decided on its merits, making direct comparisons to other cases unwarranted. The Committee maintained that the Prima Facie Opinion, including “not guilty” opinions by the Director (Discipline) on some charges, is considered in its entirety, not piecemeal. It noted that the CAs had ample opportunity to defend themselves across 15 hearings. The Committee detailed specific findings of misconduct, including the CAs’ failure to confirm NSEL’s regulatory status, inadequate physical verification of third-party inventory, failure to report improper investment of the Settlement Guarantee Fund, insufficient assessment of business risks related to uninsured commodities, selection of inadequate audit sample size and failure to report internal control weaknesses, and non-disclosure of contingent liabilities related to ongoing regulatory proceedings against NSEL that predated their audit report. The Committee also dismissed the CAs’ request to defer punishment until the Appellate Authority was functional, citing a Delhi High Court order that did not stop disciplinary proceedings.

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)

PR-255/2013-DD/251/2013/DC/675/2017

[DISCIPLINARY COMMITTEE (BENCH-I (2024-2025)]
[Constituted under Section 21B of the Chartered Accountants Act, 1949]

ORDER UNDER SECTION 2113 (3) OF THE CHARTERED ACCOUNTANTS ACT, 1949 READ WITH RULE 19(1) OF THE CHARTERED ACCOUNTANTS (PROCEDURE OF INVESTIGATIONS OF PROFESSIONAL .AND OTHER MISCONDUCT AND CONDUCT OF CASES) RULES, 2007

[PR-255/2013-DD/251/2013/DC/675/2017]

In the matter of:
Shri Arun Dalmia,
…..Complainant

Versus

CA. Shrawan Bhagwati Jalan and
CA. Amit Kebra 
M/s S V Ghatelia avid Associetes ……Respondent(s)

Members Present:.
CA. Ranjeet Kurnar Agarwal, Presiding Officer (in person)
Mrs. Rani S. Nair, IRS (Retd.), Government Nominee (through VC)
Shri Arun Kumar, IAS (Retd.), Government Neminee (through VC)
CA. Sanjay Kumar Agarwal, Member (in person)
CA. Gotha S Srinivas, Member (in person)

Date of Hearing : 28th March 2024
Date of Order : 11th July 2024

1.That vide Findings under Rule 18(17) of the Chartered .Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, the Disciplinary Committee was, inter-alia, of the opinion that CA. Shrawan Bhagwati Jalan and CA. Arfnit Kabra (hereinafter referred to as the Respondent(s)’) are GUILTY of Professional Misconduct falling within the meaning of Item (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

2. That pursuant to the said Findings, an action under Section 2113(3) of the Chartered Accountants (Amendment) Act, 2006 was contemplated against the Respondent(s) and a communication was addressed to them thereby granting opportunity of being heard in person / through video conferencing and to make representation before the Committee on 28th March 2024.

3. The Committee noted that on the date of the hearing held on 28^thMarch 2024, the Respondent(s) were present in person and made their verbal representation on the Findings of the Disciplinary Committee, inter-alia, stating that, that their professional reputation and professional work has suffered a lot as the Case was going on ‘since long time, The true and fair view of the financial statements of the Company for FY 2011-12 was not actiially Vitiated because of the Audit Opinion. The finandial position of the Company was not affected by the alleged enhanced diScloSures. The regulatory Show cause notices were never brought to their notice. On being -asked in the meeting with the Management also, the Management gave representation that they did not receive any regulatory communication to that effect. To that extent, they were victims of fraud or wrong information given to them by the management. They had no reason to doubt the credibility of the CEO or CFO at that point in time. There were no complaints from any of the purchasers. There was nothing in the bye-laws of the Company which suggested that hoW the margin money should be invested. More importantly, none of the money which was held as margin money in respect of the Settlement Fund had gone missing. There was no financial loss.

3.1 The Committee also noted that the Respondent(s) in their written representation on the Findings of the Cpmmittee, inter-alia, stated as under:

a. In September 2013 i.e., 18 months after the end of the last year audited by the Respondent(s) and 15 months after the subject Audit report had been issued, the management of National Spot Exchange Limited (NSEL) itself identified issues pertaining to the subsequent year i.e. FY 2012-13, that led to the withdrawal of audit reports by the then statutory auditors of both National Spot Exchange Limited (NSEL) and Financial Technologies India Limited (FTIL) (i.e. the parent company of National Spot Exchange Limited), being M/s Mukesh P. Shah & Co, and Deloitte Haskins & Sells LLP respectively. As is clear from the audit report for the year ended 31st March 2014, which explains the circumstances leading up to the withdrawal of the audit reports of Financial Technologies India Limited (FTIL) and National Spot Exchange Limited (NSEL), none o. the issues identified related to the financial year ended^–31^th march 2012. In respect of FY 2011-12, the auditor’s report for Financial Technologies India Limited (FTIL) was not withdraw

b. The financial statements of FY 2012-13 (i.e. the year in respect of which financial irregularities were noticed by the Company, and accordingly the audit reports withdrawn) were audited by M/s MukeSh P. Shah & Co., who was earlier the internal auditor of NSEL and had issued a clean audit report. It was only when the Company issued letters in September 2013, regarding discrepancies in its financial statements for FY 2012-13, that CA. Mukesh P. Shah withdrew his report,

c. The Director (Discipline) in his Prima Fade Opinion and the Disciplinary Committee in its Findings have relied upon a media report which was published on 3rd OCtober 2012 The said media report is dated 5 months after the Respcifident CA. Amit Kabra signed the audit report (for FY 2011-12), and Within the period audited by CA Mukesh P Shah i.e. in FY 2012-13.Despite the media reports being in the public domain within the period audited by CA Mukesh P Shah, he expressed no apprehension in his audit report in respect of the financial statements internal coritrols, fraud reporting etc. Despite the stark difference in circumstances where CA Mukesh P. Shah actually had the-benefit of such Media Ireports within the year Which he:-.audited CA Mukesh P. Shah has been exonerated for 12 of 15 charges, wherea tlhe Respondent(s) have been held guilty in Many of such charges.

d. The Responderit(8) had also explained that they carried Out appropriate audit procedures subsequent :to the yearend (at paragraph 1:1.5 of submission dated 8 February 2023), which have been completely ignored in arriving at the Findings.

e. At no stage in the proceedings did the Disciplinary Committee ask the Respondent(s) to defend on the allegations other than those where Prima-facie guilty- Findings were made in the Prima Facie Opinion.

f. With respect to Charge 1 of the Findings, the Respondents) stated that this was not the charge in the Prima Facie Opinion. Accordingly, thiS was not argued against, nor did the Hon’ble Bench ask the. Respondent(s) to address this issue.

g. With respect to Charge 2 of the Findings, the Respondent(s) stated that CA. Mukesh P. Shah has not been charged with this allegation despite the facts and requirements of audit being^.. similat in the subsequent year as regards verification of third-party inventory. There is nothing that even remotely suggests or supports that there was a shortfall in the inventory in the F.Y. 2011-12. The Audit procedures carried out were also detailed in-the Written Submissions filed by the Respondent(s)t However, the Disciplinary Committee completely ignored all the submissions made end the audit procedures highlighted by the Respondent(s).

h. With respect^–td^–the specific Settlement Quarantee-Fund disclosure related allegations the Respohdent(s) stated that the Findings have failed to consider and address the detailed submissions of the Respondent(s).

i. With respect to Charge 4 of the Findings, the Disciplinary Committee did not provide an evidence or support to demonstrate how the failure to obtain insurance (beyond what the client had) created a reportable financial misstatement which the auditor failed to report upon. In the subsequent year (F.Y. 2012-13), the circumstances and the Company’s position regarding quantum of insurance taken in respect of goods owned by third parties was similar to the year in which the Responcleint(s) were the auditor (F.Y. 2011-12). Despite the similar circumstances in both the years, CA. Mukesh P. Shah has been exonerated in this matter, whereas, the Respondent(s) have been charged for the Company’s “under-insurance”. This Charge 4 has been made in the context of under insurance of the goods lying at the warehouses despite an express acknowledgment by the Director(Discipline) that “liabilities attached to ownership continued to be with buyer/seller of commodities as a result of which them were no contingent liabilitieS that we, required to be disclosed but were not disclosed’, which has not been controverted by: the bisciplinary Committee.

j. With reespect to Charge 5 of the Firidingd the Respondent(s) stated that under-insurance was never a :basie, for ‘the charge, nor was it raised during the proceedings. There being dno substantial changetin the internal Control system of:the Company betWeehl FY 20117,12 :and Pi’ 2012,13, this charge has not .been leVied on CA. Miikesh P. Shah.

k. With respect Charge 6. of the Findings the Respondent(s) stated that the Director (Discipline) had dropped the allegations in the complaint in respect of this matter and held that the Respondent(s) are not guilty. At the Hearing before this Disciplinary Committee, the Respondent(s) were held: not guilty in respect of this charge as the transcripts (page 33 of transcripts of hearingg dated.25 July 2023) tecords as follows:

“Presiding Officer Charge 7, whether you have been already discharged?
CounsAl for Respondent: Yes, your honour. Presiding Officer. Okay, charge 8.”

In fact, no further discussion on this charge occurred nor were any arguments sought by the Hon’ble Bench.

l. With respect to[Charge 6 of the Findings, the Respondent(s) also raised a plea mentioning about the violation of Rule 9(3) of the CA Rules 2007 stating that this matter has not been placed before the Board  of Discipline for their perusal and has instead been directly placed before the Disciplinary Committee by circumventing the authority and power of the Board of Discipline.

m. The Appellate Authority is currently not quorate and functional. There is no reason or basis not to defer the proceedings till such time that the Respondent(s) can avail their statutory remedies against any Order. passed under section 21B of the CA Act i.e seek the appellate remedy before the Appellate Authority. Such an approach would also be consistent with an Order passed by the Delhi High Court in similar circumstances. Thus, the Respondent requested the Committee not to pass any Orders till the Appellate Authority is functional, as they will not have the ability to pursue their statutory right of appeal provided in the Chartered Accountants Act 1949.

4. The Committee considered the reasoning as contained in the Findings holding the Respondent(s) Guilty of Professional Misconduct vis-a-vis written and verbal representation of the Respondent. On consideration of the representation of the Respondent(s), the Committee noted that the primary grudge of the Respondents) is with respect to the following four issues:

(a) They have been held guilty in respect of charges for which another member against whom disciplinary proceedings had been initiated in respect of the same entity for a different financial year has been held Not Guilty at Pritha Fade Opinion Stage itself (i.e. charge no. 2,4,5 and 7 of the Findings)

(b) They have been held guilty respect,of the charge for which the’Respondent had been held Not Guilty by the Director (Discipline) (i.e. Charge 6 of the Findings)

(c) They have peen held guilty for charges which.were not there in the Prima Facie Opinion.

(d) To defer the,consideration of their case for award of punishment since the Appellate Authority is_:non-functional.

5. Before deciding on the quantum of punishment to be awarded to the Respondent(s), the Committee considered the aforesaid four objections of the Respondent(s) and opined as under:

5.1 With resped to the first issue regarding comparing the instant case with an earlier decided case in respect of the same entity for a different financial year, the Committee opined that comparing two distinct disciplinary cases as ‘eye to eye’, is not warranted as  each case is decided on iner^Lits ^.on the basiS of due consideration of all the facts, document§ and submisSions on record.

5.2 As regard the second issue which is in respect to Charge 6 of the Findings (i.e. non-disclosure of outstanding contracts i.e. contingent liabilities and commitments), wherein the Disciplinary Committee did not agree with the not-guilty opinion of the Director(Discipline) and held the Respondent Guilty for the same, the Committee noted that the Director(Discipline) in his Prima Facie Opinion in respect of 8 allegations opined as under:

5.3 The Committee rioted that the Director (Discipline) in terms of Rule 9 of the Chartered Accountants (Procedure of investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, held the Respondent-0) Prima-facie Guilty of Professional Misconduct falling within the meaning of Item (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. Accordingly, in terms of the provisions of Rule 9(2)(a)(ii)) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 the Prima Facie Opinion of the Director(Discipline) was placed before the Disciplinary Committee. The Disciplinary Committee on consideration of the same opined as under:

 “The Committee on consideration of the same concurred with the reasons given against the charge (s) and thus, agreed with the prima facie opinion of the Director that the Respondent(s ) are Guilty of Professional Misconduct falling within the meaning of Clauses (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act 1949 except for the reasoning as regard the charge raised in para 1.7 of the complaint and dealt in para 17.21 to 17.28 of the said Prima facie opinion. It was viewed that the allegation dealt in the said paras pertains to the matter which was the very basis of NSEL Scam. Moreover, the Committee decided that the requirement of AS-29 vis-a-vis disclosures made in the extant case needs to be further investigated taking into consideration the nature of contracts entered into and stock taken against them together with the byelaws governing them. The Committee accordingly did not agree with the views of Dircctor (Discipline) that no disclosures were required and hence decided to refer the said Charge for further enquiry.”

5.4 Accordingly, the Committee decided to proceed further under Chapter V of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases;) Rules, 2007. Thus, the Committee noted that out of 8 allegations in the Prima Facie Opinion, the instant case had been referred for enquiry in respect of the following 7 charges:

5.2 The Committee further noted That the Respondent(e) in their Written submissions dated 12th January 2018 on the Prima Fade Opinion with respect lo the, instant charge of non-disclosure of outstanding contracts as contingent liability and commitment pointed out that the matter should have been dealt in terms of the provisions of Rule 9(3) of the aforesaid Rules which provides as under:

“Where the Director in of the prima facie opinion that the member or the firm is not guilty of any misconduct either under the First Schedule or the Second Schedule, he shall place the matter before the Board of Discipline, and the Board of Discipline-

(a)…..

(b) If it disagrees with such opinion of the Director, then it may either proceed under chapter IV of these rules, if the matter pertains to First Schedule, or refer the matter to the Committee. to proceed under Chapter V of these Rules, if the matter pertains to the Second Schedule or both the Schedules or may advise the Director to further investigate the natter.”

5.6 In this regard, the Committee noted that the (erstwhile) Disciplinary Committee had agreed with the substantial/majority charges/allegations of the Director(Discipline) wherein guilty opinion was given in the prime facte opinion and according, proceeded further under chapter V of the aforesaid Rules. While doing so, the not-guilty opinion of the Director (Discipline) in respect of one of the allegations was not accepted.

5.7 The Committee noted that it is the case of the Respondent(s) that in respect of ‘Not Guilty’ charges, it was only the Board of Discipline which had the power to consider the same. However, the Committee was of the view that the Chartered Accountants Act 1949 and the Rules framed thereunder provide for the consideration of the Prima Facie Opinion in toto and not on piecemeal charge-wise basis.

5.8 Further, there is sufficient documents/information available on record on the basis of which the Disciplinary Committee did not accept the not-guilty opinion of the Director (Discipline) in respect of one of the allegations and proceeded further in the matter. Detailed reasons, to this effect, were also provided to the Respondent(s) vide letter dated 17th November 2017 When the decision of the Disciplinary Committee oh the Prima Facie Opinion of the Director(Discipline) was communicated to Thoth. Further, the Respondent(s) in their written submissions dated 12th January 2018 on the Prima Facie Opinion also reiterated their response made vide their earlier written submission dated 14th January 2013 at the Prima Facie opinion stage in respect of the  said charge which had been duly considered by the Committee before arriving at its Findings in respect of the Said Charge as referred to in Para 30 of its findings .

5.9 The Committer also noted that the case was listed for hearing on 15 occasions. During The course of fifteenth end final hearing held on 25th July 2023, Respondent(s) were specifically asked by the Committee with respect to this charge as to whether they have been already  discharged to Whip1 the counsel for the Respondent(s) answered in affirmative. The Committee was of the view that it is incumbent upon the parties to the case to bring correct facts before the Committee and thus, it was upon the Respondent(s) also to specifically bring to the notice of the Committee that the said charge had been referred for enquiry.

5.9.1 The Committee also specifically informed the Respondent(s) during the said hearing that since one of their claim in earlier hearing was that they had not been given natural justice as without asking them anything, the Opinion had been given by the Director(Discipline), they were given the opportunity to submit the document in their defence by the Committee which were duly considered by the Committee.

5.10 Thus, the Committee was of the view that the Respondent(s) at a later stage is estopped from pleading that due opportunity to defend their case was not provided to them and that no prejudice was caused to them.

5.11 The Committee was also of the view that apart from this charge, even otherwise also, the Respondent(s) had been held Guilty for various other charges of Professional misconduct in the instant case by the Committee.

5.12 As regard the third issue, the Committee held that it has arrived at its Findings holding the Respondent(s) Guilty in respect of the charge alleged against them in Form ‘I’ only for which due opportunity to defend their case was provided to the Respondent(s) in 15 hearing(s) when the case was listed for enquiry before it.

5.13 As regards the fourth issue, the Committee noted that the Respondent(s) referred to a decision dated 14t^h March 2023 of the Hon’ble High Court of Delhi in Vijaykant Jagannath Kulkarni V.S. Disciplinary Committee, The ICAI and Ors. (W.P. (C) 1887 of 2023) as a basis of their request to defer the Committee’s decision to pass Orders under Section 216(3) of the Chartered Accountants Act 1949. The Committee referred to the following contents of the said Order: –

“17. The Disciplinary Committee has at this stage passed an order holding the Petitioner guilty of professional misconduct. However, the final decision as to what action needs lo be taken against the Petitioner is yet to be determined by the Disciplinary committee, Under Section 21B (5), the Disciplinary Committee is to afford a proper hearing to the Petitioner and only there after proceed to take action. such an order under Section 21B (5) is clearly appealable to the Authority…..

18….in the unique facts and circumstances of this case the following  directions are issued:-

i) The Petitioner shall appear before the Disciplinary Committee and make his submissions in respect of the action under Section 2113 (5).

ii) A final order passed by.the Disciplinary ComMittee shall be communicated to the Petitioner..

iii) The Petitioner would be entitled to approach the Appellate Authority under Section 22G both in respect of the Order dated 6th January, 2023 and the final Order to be passed by the Disciplinary Committee For a period of eight weeks, the final Order that may be passed would not be given effect to in order to enable the ‘Petitioner to approach the Appellate Authority Under Section 22G.(emphasis provided)”

5.14 Thus, the Committee held that even the Hon’ble Delhi High Court has not Stopped the Disciplinary Committee from continuing with its proceedings it the case, on the ground under consideration before it. Accordingly, the Committee was of the view that it is well within its right to consider the case of the Respondent(s) for award of punishment.

6. Thus, keeping in view the facts and Circumstances of the case, material oh record including verbal and written representation on the. Findings, the Committee in respect of the following view:

(a) First Charge: The Respondent(s) failed to bring on record documentary evidence to show that the Company (NSEL) was a regulated entity and had taken any permission to do the business of spot exchange from any Government Authority I Agency. The Company was dealing with various persons, including Stockbrokers, sub-brokers, Godown owners, bankers, and the general public, and taking margin money from them as well. Moreover, it was providing the service of spot exchange PAN India without involvement of any Government agency that can control the business activity of the Company to obtain robustness, safety and resilience in the activities conducted by them. The Respondent(s) gave the reference of notification issued by Department of Consumer Affairs (DCA) dated 6th February 2012 wherein Department of Consumer Affairs (DCA) appointed the Forward Markets Commission, Mumbai (FMC) as designated .agency to which all information or returns relating to the trade shall be provided. Hence, Forward Markets Commission, Mumbai (FMC) will be the regulator for all future commodity exchanges in India. Thus, it shows that the Department of Consumer Affairs (DCA) is regulating the NSEL and the same is also in the knowledge of the Respondent(s) as they themselves have informed about the same. Also, the date of issue of said Notification is before the date of signing of financial statement However  the Respondent(s) have not consideration the same.  (the misconduct on the part of the Respondent(S) has been dealt in details in 24.4 to para 25.6 of the finding date 7th February 2024 with respect to the first charge- page 42 to page 43 of the Finding )

(b) Second  Charge As per the Guidance Note on Audit of inventories an auditor is required to physically verify the inventory at Clients pike and should also obtain third party confinilations for whom the entity is holding significant amount of Stock. However, in the. instant base, the Respondent(s) have not verified the stocks lying at client’s place simply taking the excuse that the stock is of third party. The Respondent(s) relied on the management representation that the parties whose stocks are lying with NSEL has conducted their check and failed_.to provide any evidence that whether they performed any counter check on the said inventory. (The misconduct on the. part of We Respondent(s) has been dealt in detail in Para 26.2 of the Findings dated 7th February 2024 with respect to the second charge— page 44 to page 46 of the Findings)

(c) Third Charge: From the bye laws of NSEL, the Committee noted that it was clear that there is a requirement for maintaining a settlement Guarantee Fund In respect of different commodity segments of the Exchange for such purposes, as may be prescribed by the relevant Authority from time to time. Further, the amount of the deposit or contribution to be made by each member to the relevant Settlement Guarantee Fund is specified by the relevant Authority and the minimum amount in Settlement Guarantee Fund should not be less than Rs. 1 crore which may be increased.. However, the amount maintained in Settlement Guarantee Fund is less than the specified amount. The Company invested the amount of Rs. 360.60 crores (approx.) in loans and advances, procurement advances, etc. which is not allowed as per byelaws. Although, the Respondent(S) obtained the 100% confirmation from the parties to whom the advances were given but since it was against the provisions, hence it was the duty of the Respondent(s) to report the same in their Audit report, (The misconduct on the part of the  Respondent(s) has been dealt in detail in Para 27.2 of the Findings dated 7th February 2024 with respect to the third charge— page 47 to page 51 of the Findings)

(d) Fourth Charge: NSEL offered services like warehousing and collateral management services to market participants and market participants are doing transactions depending upon NSEL as they have confidence on them. The Committee further noted that NSEL has not taken insurance cover of the commodities lying at its warehouse amounting to Rs. 1000 crores to Rs. 1500 crores. However, the dependency of market participants casts responsibility on NSEL to take care of the goods of its clients and there should be an insurance cover upto a certain limit. On a combined reading of the requirement of para 11 of SA 315 with the defence provided by the Respondent(s), it is clear that the Respondent(s) have not spelt out whether any analysis of the  business risks was undertaken by then and so, their assessment of the same and its impact on the financial statement of the Company. (The misconduct on the part of the Respondent(s) has been dealt in detail in para. 28:2 of the Findings dated 7th February 2024 with respect to the fourth charge- page 52 to page 54 Of the Findings)

(e) Fifth charge the committee noted that the sample size selected by the Respondent(s) were not as per the relevant standard on adulting Also the sample by them were neither reprehensive of the characteristics of whole population nor sufficient to reduce the sampling risk to an acceptable low level. they failed to point out any discrepancies in the financial statements even after perusing the internal audit report wherein various discrepancies are pointed out and issued a clean audit report Looking into the irregularities points out by the internal Auditor  and NSEL investors Forum, the committee noted that the Respondent(s) selection of sample was not enough to cover the whole relevant population to point out any single discrepancies regarding the operations of the company.

(f) It was noted that if the Respondent(s) had employed appropriate procedures to obtain reasonable assurances about the sufficiency and efficiency of internal control system in place,. they would have come to know that internal control procedure/system was not commensurate with the size and nature of the business. Further, the Respondent(s) failed to obtain sufficient information necessary for expression of an opinion as per reporting requirement under Para 4 (iv) of Appendix-I of CARO, 2003. (The misconduct on the part of the Respondent(s) has been dealt in detail in Para 29.2, of the Findings dated 7th February 2024 with respect to the fifth charge-page 55 to page 59 of the Findings)

(g) Sixth Charge: The Committee noted that as per byelaws of NSEL, if on an investigation the exchange concludes that any transactions executed are found to be in a fraudulent manner, the relevant Authority of the exchange have absolute authority and discretion to withdraw itself as a legal Counter party to any transaction after giving an opportunity of being heard to all the parties affected by the deco on and NSEL is required to disclose as regards the value of contracts outstanding for which the exchange shall act as a legal counter party and the transactions which may be excluded from the purposes. However, it is  seen that no such disclosure is^–made etc Also the Respondent(s) have not denied that the NSEL is not a counter party to the transactions held.

(h) The Committee further noted that Department of Consumer Affairs (DCA) in exercise of powers conferred to it under section 27 of the FCRA vide notification no. S. 0. 906(E) dated 5th June 2007 had exempted all forward contracts of one day duration for the sale and purchase of commodities traded on the NSEL, from operation of the provisions of the said Act. However, after analyzing the trade data received from NSEL, the Forward Markets Commission(FMC) identified issues relating to contracts traded on NSEL and sought clarifications from NSEL on 22 February 2012. The FMC requested the DCA to take necessary action regarding the above violations. DCA vide its letter dated 27 April 2012 directed NSEL to explain as to why action should not be initiated against them for violation of the-conditions of the notification dated 5th June 2007.

(i) In response to the above, NSEL submitted a reply vide their letter dated 29 May, 2012 and after that DCA vide its letter dated 31st May, 2012, sought comments of the Commission on the NSEL letter dated; 29 May, 2012. Thus from the above it is seen that some initial proceedings were on going  against NSEL before the date  0f Signing’ of  financial rstatenients by the Respondent(s) icel 21st May, 2012 which is impacting the financial position of ‘the Company and has to be Ovine as contingent liability in financial statements as per paragraph 8.8.7 of the Guidance Mite on the revised Schedule VI. However, the Respondent(s) did not care to disclose the same -in their audit report for the period despite having knowledge of the same. (The misconduct on the part of the Resportdent(s) has been dealt in detail in Para 30:3 of The Findings dated 7th February 2024 With ‘respect to the sixth charger page 60 to page 63 of the Findings)

(j) Seventh Charge: On perusal of the DCA notification, the Committee observed that in early 2012, the FMC was appointed as ‘designated agency’ to collect data from NSEL and protect investors’ interest. On 27th April 2012, based on the data provided by the Forward Markets Commission (India), the Ministry of Consumer affairs issued a show cause notice to NSEL that it was violating the conditions of 2007 exemption like ‘no short sale’, ‘no stock verification mechanism’ and ‘ conducting trades beyond 11 days’. The newspapers reports are treated as hearsay  evidence, yet, looking into the fact that Show cause notice had been issued to NSEL as early as in April 2012 and the audit report had been signed by the Respondent(s) on 21st May, 2012 and the Respondent(s) have not brought on record any documentary evidence to show the checks carried out by them after the Balance Sheet date to counter such claims being made in the newspaper reports. Thus, there were sufficient reasons to raise suspicion in the mind of the Respondent(s) so as to thoroughly check/investigate into the affair’s of NSEL before signing their report for the Financial Year 2011-12. However, the Respondent(s) relied on management’s representation ‘letter that no fraud is noticed and chose not to report in their Audit report about the on-going fraud. (The misconduct on the part of the Respondent(s) has been dealt in detail in Para 31.2 of the Findings dated 7th February 2024 with respect to the seventh charge— page 65 to page 66 of -the Findings)

6.1 Accordingly, the Committee noted that in the extant case, the auditor has neither applied his professional judgment while giving his opinion on true and fair view of the financial statements of the Company nor complied with the requirements of the Standard on Auditing (SAs) including SA 240 wherein he must plan and perform his audit procedures to address the risk of material misstatement due to fraud as well as SA 500 which requires that the auditor should obtain sufficient appropriate evidence to able to draw reasonable conclusions on which the audit opinion is formed.

6.2 Hence, professional misconduct on the part of the Respondent(s) is clearly established as spelt out in the Committee’s Findings dated 7^th February 2024 which is to be read in consonance with the instant Order being passed in the case.

7. Accordingly, the Committee was of the view that ends of justice will be met if punishment is given to them in commensurate with their professional misconduct.

8. Thus, the Committee ordered that the name of Respondent(s) i.e. CA. Shrawan Bhagwati jalan and CA Amit Kabrabe removed from the Register of member for a period of 01 (one) year which shall run concurrently with the punishment awarded in case no. PR/281/2013-DD/273/2013-DC/273/2013-DC/437/2016

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(CA. RANJEET KUMAR AGARWAL)
PRESIDING OFFICER

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(MRS. RANI S. NAIR, IRS RETD.)
GOVERNMENT NOMINEE

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(SHRI ARUN KUMAR, IAS RETD.)
GOVERNMENT NOMINEE 

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(CA. SANJAY KUMAR AGARWAL)
MEMBER

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(CA. COTHA S SRINIVAS)
MEMBER