2011 (10) TMI 517 - HC - Indian Laws

Reserve Bank of India's Auditor Discontinuation Ruled Illegal, Petitioner's Future Empanelment Assured

Gupta & Gupta Chartered Accountants Versus Reserve Bank of India

The Court held that the Reserve Bank of India's decision to discontinue the Petitioner as a Statutory Central Auditor for the limited period ending June ... Banking Regulation Act, 1949 - Audit of public sector banks – discontinuance of Statutory Central Auditors ('SCAs') on complaint filed by Bank - involvement of RBI in appointment and discontinuance of a Statutory Central Auditor (SCA) in public sector banks is meant to ensure a degree of protection to SCA, which is expected to discharge its professional duty fearlessly and independently – Held that:- RBI could not have arrived at the decision without some kind of an inquiry - Allegations concerning the competence and integrity of an SCA, selected by the RBI through a fairly rigorous process, cannot be permitted to be made lightly and equally accepted on face value without some probe by the RBI. Otherwise it might be easy for a bank to have an inconvenient SCA discontinued - Considering that the accounts of public sector banks are to be audited by employing the best possible standards, the RBI was under a statutory obligation to ensure that the discontinuance of the Petitioner, on a complaint about its professional competence, was preceded by a proper procedure comporting with the principles of natural justice - decision of the RBI, as communicated in its letter dated 24th June 2009 to the PNB, to discontinue the Petitioner as an SCA, even for the limited extended period ending 30th June 2009, was violative of the principles of natural justice and was, therefore, illegal Issues Involved:1. Discontinuance of the Petitioner as Statutory Central Auditor (SCA) by the Reserve Bank of India (RBI) and Punjab National Bank (PNB).2. Alleged irregularities and professional misconduct by the Petitioner.3. Principles of natural justice in the discontinuance process.4. Impact of discontinuance on the Petitioner's future empanelment as SCA.Issue-wise Detailed Analysis:1. Discontinuance of the Petitioner as Statutory Central Auditor (SCA) by the Reserve Bank of India (RBI) and Punjab National Bank (PNB):The Petitioner, a firm of chartered accountants, was aggrieved by the RBI's decision communicated to PNB advising that PNB may carry out the quarterly review for the quarter ending 30th June 2009 with the five existing SCAs, excluding the Petitioner firm. The Petitioner was appointed as a Joint SCA by PNB and continued on a year-to-year basis from 2005-2006 to 2008-2009. The Petitioner expected to continue as an SCA for the limited review for the quarter ending June 2009 but was discontinued without prior notice or formal communication.2. Alleged irregularities and professional misconduct by the Petitioner:The Petitioner alleged that its discontinuance was due to its reports pointing out irregularities committed by PNB, including granting loans to real estate companies with insufficient security. The Petitioner claimed that the then CMD of PNB, Respondent No. 3, tried to coerce the Petitioner to withdraw its qualified report, which the Petitioner refused. PNB alleged that the Petitioner was uncooperative, delayed audits, and made unsubstantiated allegations of fraudulent transactions. The RBI, in its counter affidavit, stated that the Petitioner had delayed the finalization of branch audits and made unsubstantiated allegations, leading to its discontinuance.3. Principles of natural justice in the discontinuance process:The Petitioner contended that its discontinuance without prior show cause notice was violative of the principles of natural justice. The RBI did not seek the Petitioner's comments on PNB's letter dated 27th May 2009, which contained serious allegations against the Petitioner. The Court noted that the discontinuance of an SCA selected through a rigorous process could have adverse consequences for its reputation and goodwill. The RBI was under a statutory obligation to ensure that the discontinuance of the Petitioner was preceded by a proper procedure comporting with the principles of natural justice.4. Impact of discontinuance on the Petitioner's future empanelment as SCA:The Court held that the impugned decision of the RBI to discontinue the Petitioner as an SCA for the limited extended period ending 30th June 2009 was violative of the principles of natural justice and, therefore, illegal. However, since the period in question was over, no consequential relief could be granted except to clarify that the decision would not come in the way of the Petitioner being hereafter appointed as an SCA in accordance with the norms devised by the RBI. The RBI and PNB both stated that the discontinuance should not be viewed as a stigma on the Petitioner and that the Petitioner could be considered for empanelment in the future.Conclusion:The writ petition was disposed of with the Court holding that the discontinuance of the Petitioner as an SCA was violative of the principles of natural justice. The decision would not affect the Petitioner's future empanelment as an SCA. The petition was disposed of with no order as to costs.