Case Law Details
Mani Oommen Vs SEBI (Securities Appellate Tribunal)
SAT held that once the appellant is not found responsible for the preparation of the financials of the company merely because he was not cautious or did not carry out due diligence properly will not suggest that the appellant colluded with the promoters and the directors of the company. This finding of conclusion, in our opinion, is based on surmises and conjectures and is against the specific finding given by the WTM, namely, that the understatement was specifically designed and carried out by the promoters and the directors of the company.
In our opinion, in order to give a finding on collusion, there must be some material which could lead to an inference of collusion. Once a finding is given that the appellant was not involved in the fabrication and fudging of the books of accounts and the balance sheet and if the appellant had no intention or knowledge of such understatement being shown in the financials, the charge of fraud or collusion or connivance with the directors and promoters of the company cannot be levied, only on the ground that he was not diligent or cautious or did not check the outstanding loan details from the banks and through other sources. Lack of due diligence can only lead to professional negligence which would amount to a misconduct which could be taken up only by ICAI.
FULL TEXT OF THE ORDER OF SECURITIES APPELLATE TRIBUNAL, MUMBAI
1. The present appeal has been filed against the order dated December 31, 2019 passed by the Whole Time Member (hereinafter referred to as ‘WTM’) of Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) whereby the appellant who is a statutory auditor / chartered accountant has been prohibited from issuing any certificate of audit and has been restrained from rendering any other auditing services to any listed companies and intermediaries for a period of one year.
2. The facts leading to the filing of the present appeal is, that pursuant to an investigation a common show cause notice was issued to Deccan Chronicle Holdings Ltd. (hereinafter referred to as ‘DCHL’), its promoters, directors and to the appellant who is a chartered accountant and a partner in M/s. C. B. Moulli & Associates, statutory auditor of the company in which it was alleged that the company had understated its outstanding loans to the tune of Rs. 1339.17 crores in the year 2008-09 and had also wrongly disclosed the difference between the actual and reported outstanding loans for the financial years 2009-10 and 2010-11. It was also alleged that the company had manipulated its financials and failed to make necessary disclosure and that the promoters of DCHL who are also the owner of the Deccan Chronicle Marketers (hereinafter referred to as ‘DCM’) had wrongly transferred loans on the last day of the financial year and reverting it on the first day of the financial year, thus, giving misleading financial information i.e. the understatement of the outstanding loans and interest and financial changes in the annual report for the financial years 2008-09, 2009-10 and 2010-11. On this basis, the show cause notice alleged that the appellant had violated Section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) read with Regulation 3(a), (b), (c) and (d) and Regulation 4(1), 4(2)(f), (k) and (r) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as ‘PFUTP Regulations’).
3. The WTM after considering the material evidence of record and after considering the submission of the company and its directors as well as of the appellant came to a conclusion that the company had made wrong misleading or inadequate disclosures to the stock exchange and had understated the outstanding loans and interest and financial changes in the annual returns of 2008-09, 2009-10 and 2010-11 and had violated Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations. The WTM, on the issue of the company diverting a substantial portion of the loan liability from the books of company to the books of DCM on the last date of each of the pre-financial year, held and concluded in paragraph no. 16A(6) as under :-
“…. By not disclosing such private and discreet arrangement between DCHL and DCM, to which only the promoters / directors of the DCHL were privy, have kept the shareholders in dark about the understatement of such huge amounts of loans and liabilities in the annual accounts of the DCHL.”
4. A specific finding was a given by the WTM that the promoters and the directors of the company was privy to the private and discreet arrangement made between the DCHL and DCM which they were privy too and made the understatement of the loans and liabilities in the annual accounts of the DCHL thereby keeping shareholders in dark.
5. The WTM after giving the aforesaid finding went on to hold that the appellant under Sections 224 and 227 of the Companies Act, 1956 (hereinafter referred to as ‘Companies Act’) owes an obligation towards the shareholders to report true and correct facts about the financials of the company and audit is cause to report correctly and faithfully under Section 227 of the Companies Act. The WTM held that the appellant overlooked the reporting of the outstanding loans and that he was not diligent and cautious and that it was his obligation to check the outstanding loans details from the bank and through other independent sources which he failed to do so and thereby did not adhere to the Auditing and Assurance Standard (AAS) prescribed by Institute of Chartered Accountants of India (hereinafter referred to as ‘ICAI’) and, consequently, blindly allowed the fudging of the books of accounts by the company which suggests that the appellant colluded with the other noticees i.e. the company and its promoters and directors.
6. We have heard Mr. Chetan Kapadia, the learned counsel with Mr. Rahul Sarda, Mr. KRCV Seshachalam, Ms. Sabeena Mahadik, Mr. Aayush Kothari, Mr. Sagar Hate, the learned counsel for the appellant and Mr. Pradeep Sancheti, the learned senior counsel with Mr. Abhiraj Arora, Mr. Karthik Narayan, Mr. Harshvardhan Nankani, Mr. Shourya Tanay, the learned counsel for the respondent through video conference.
7. The stand of the appellant is, that the preparation and presentation of the financial statement and the job to ensure that they are free from material misstatement whether due to fraud or error is the responsibility of the management. The appellant as a statutory auditor was responsible to express an opinion on the financial statement based on the internal audit and was not involved in the preparation of the books of accounts of the company or the misstatement in the balance sheet by the company. The appellant further stated that the accounting adjustment, namely, non-disclosure of the loans by transferring the same to the another entity was brought to the notice for the first time during audit of the books of accounts of the company for the financial year 2011-12 in the month of October / November 2012.
8. Having heard the learned counsel for the parties, we are of the opinion that the impugned order in so far as it relates to the appellant cannot be sustained for the following reasons.
9. In Writ Petition no. 5249/2010 Price Waterhouse Co. Vs SEBI decided by the Bombay High Court on 13.08.2010, the question raised was whether SEBI has power to issue a show cause notice to the Charted Accountants in connection with the work which they have undertaken for a listed company in a matter of maintaining accounts and balance sheets. It was urged that SEBI had no jurisdiction to proceed against the Charted Accountants who are members of the C.A. Institute and therefore SEBI lacked inherent jurisdiction to inquire into the conduct of the C.A.s who are professionals.
10. The Bombay High Court held that in view of the various provisions contained in the SEBI Act and Regulations it is the duty of the Board to protect the interest of investors in securities and to promote the development and to regulate the securities marked by such measures as it thinks fit. The Bombay High Court held that while exercising the powers under the SEBI Act, it is not open to SEBI to encroach upon the powers vested with the Institute under the Chartered Accountant Act, 1949. However, in a given case, if there is material against the C.A. to the effect that he was instrumental in preparing false and fabricated accounts in connivance, then SEBI is entitled to pass appropriate orders under section 11(4) of the SEBI Act in the interest of the investors or securities market and is entitled to take measures as prescribed in the said section. Further, appropriate directions can be given under section 11-B.
11. The Bombay High Court further held that if on conclusion of enquiry if no evidence is available regarding fabrication and falsification of accounts, then SEBI cannot give any direction in any manner. The Bombay High Court held that SEBI has jurisdiction to inquire into and investigate the matter in connection with manipulating and fabricating the books of account and balance sheet of the company. If it finds that the C.A. had no intention and knowledge to fabricate and fudge the books of account and there was only some omission without any mens rea or connivance with anyone then on such evidence SEBI cannot give any further directions.
12. In Price Waterhouse Co. Vs. SEBI in appeal no. 6 of 2018 decided on 09.09.2019, this Tribunal while considering the role of the appellant as a firm of the C.A.s and after considering the judgment of the Bombay High Court (supra) found that the scope of the enquiry was only restricted to the charge of conspiracy and involvement in the fraud and not to any charge of professional negligence since the C.A. / C.A. firm were not dealing directly in the securities. This Tribunal held that in absence of inducement, fraud was not proved nor there was connivance or collusion by the C.A.s and therefore, the provision of section 12 (A) of SEBI Act and Regulation 3 & 4 of PFUTP Regulations are not applicable. This Tribunal held that gross negligence or recklessness in adhering to the accounting norms in the course of auditing can only point out to the professional negligence which would amount to a misconduct to be taken up only by ICAI.
13. In the instant case, the show cause notice alleged that the company did not utilize the IPO proceeds and that it was diverted to different entities in the guise of making payments towards the objects stated in the prospectus. The focus in the show cause notice was to examine the role of the appellant as the statutory auditor with regard to due diligence done by it by certifying the expenditure incurred by the company towards the IPO expenses out of the IPO proceeds. The appellants certified the amount was utilized as per the prospectus. The A.O. however found that there were lapses on the part of the appellant and due diligence was not carried out by them while certifying that the IPO proceeds were utilized for the objects stated in the prospectus.
14. We find that the A.O. has only found that due diligence was not carried out by the appellant. There is no finding that the appellants were instrumental in preparing false and fabricated accounts or have connived in preparation or falsification of the books of account. There is no finding that the appellants had manipulated the books of accounts with knowledge and intention, in the absence of which, there is no deceit or inducement by the appellants. In the absence of any inducement, the question of fraud committed by the appellants does not arise. This Tribunal in Price Waterhouse (supra) has categorically held that a C.A. can be proceeded against them if they are instrumental in preparing false and fabricated accounts otherwise SEBI has no power to proceed against them.
15. Section 12A(a) & (b) of the SEBI Act is obviously not applicable to the appellant as they are not dealing in the securities. Similarly, Section 12(c) cannot be made applicable because no fraud has been carried out by the appellant. Further, in the absence of connivance, deceit, or manipulation Regulation 3 & 4 of the PFUTP Regulations cannot be made applicable.
16. In view of the aforesaid, when a specific finding has been given by the WTM in the impugned order that the promoters and the directors of the DCHL had a private and discreet arrangement between the company and DCM which was only known to the promoters and directors of the DCHL with regard to the understatement of loans and liabilities in the annual accounts of DCHL, it is clear that the appellant as a statutory auditor was not responsible for the preparation and falsification of the books of accounts, the financials of the company and the balance sheet of the company.
17. We are further of the opinion that once the appellant is not found responsible for the preparation of the financials of the company merely because he was not cautious or did not carry out due diligence properly will not suggest that the appellant colluded with the promoters and the directors of the company. This finding of conclusion, in our opinion, is based on surmises and conjectures and is against the specific finding given by the WTM, namely, that the understatement was specifically designed and carried out by the promoters and the directors of the company.
18. In our opinion, in order to give a finding on collusion, there must be some material which could lead to an inference of collusion. Once a finding is given that the appellant was not involved in the fabrication and fudging of the books of accounts and the balance sheet and if the appellant had no intention or knowledge of such understatement being shown in the financials, the charge of fraud or collusion or connivance with the directors and promoters of the company cannot be levied, only on the ground that he was not diligent or cautious or did not check the outstanding loan details from the banks and through other sources. Lack of due diligence can only lead to professional negligence which would amount to a misconduct which could be taken up only by ICAI.
19. Similar reasonings have been given by this Tribunal in the matter of Price Waterhouse & Co. & Ors. vs. SEBI Appeal No. 6 of 2018 decided on September 9, 2019 and in the matter of V. Damania & Co. vs. SEBI Appeal no. 335 of 2020 decided on January 17, 2022.
20. Thus, for the reasons stated aforesaid, the impugned order in so far as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed with no order as to costs.
21. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the Registry. In these circumstances, this order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally signed copy sent by fax and/or email.
