SEBI penalizes statutory auditors Rs.5 lakh for enabling fraudulent accounting practices at CG Power despite knowing irregularities

SEBI imposed penalty of Rs.5,00,000 on statutory auditors for facilitating fraudulent accounting practices at CG Power despite being aware of irregularities and misstatements in financial statements for 2016-17 and 2017-18. The adjudicating officer rejected arguments regarding inordinate delay in issuing show cause notice and non-provision of documents, holding that SEBI Act prescribes no time limit for initiating proceedings and principles of natural justice were satisfied. Auditors violated sections 12A(a), (b), (c) of SEBI Act and PFUTP Regulations by acting against fiduciary capacity and enabling book cleaning scheme.

---

---

Issues Involved:

1. Whether Noticee No. 1 and 2 have violated provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003Rs.
2. Does the violation, if any, on part of the Noticees attract penalty under Section 15HA of the SEBI ActRs.
3. If so, how much penalty should be imposed on the Noticees taking into consideration the factors mentioned in Section 15J of the SEBI ActRs.

Summary of Judgment:

Issue I: Violation of SEBI Act and PFUTP Regulations

The investigation revealed that CG Power and Industrial Solutions Ltd. understated its liabilities and advances to related and unrelated parties significantly in its financial statements for FY 2016-17 and FY 2017-18. SEBI's examination found that the statutory auditors, M/s Chaturvedi & Shah (CAS) and M/s K. K. Mankeshwar & Co. (KKM), facilitated these misstatements. CAS, despite being aware of irregularities, certified the financial statements as true and fair. KKM, appointed immediately after CAS's resignation, also failed to report these misstatements in its audit report for FY 2017-18. Both auditors were found to have acted against their fiduciary capacity, aiding CG Power in disseminating false information, thus violating Sections 12A(a), (b), and (c) of the SEBI Act and Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the PFUTP Regulations, 2003.

Issue II: Penalty under Section 15HA of SEBI Act

Given the established violations, the Noticees are liable for monetary penalties under Section 15HA of the SEBI Act.

Issue III: Quantum of Penalty

Considering the factors under Section 15J of the SEBI Act, including the lack of quantified disproportionate gain or investor loss and the need to maintain market integrity, a penalty of Rs. 5,00,000/- (Rupees Five Lakh Only) was imposed on each Noticee.

Order:

M/s Chaturvedi & Shah and M/s K. K. Mankeshwar & Co. are each fined Rs. 5,00,000/- for violating Sections 12A(a), (b), and (c) of the SEBI Act, 1992, and Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the PFUTP Regulations, 2003. The penalties must be paid within 45 days of the order. Failure to pay may result in recovery proceedings under Section 28A of the SEBI Act.

---