Auditor cleared of IPO fund diversion charges due to lack of fraud evidence

The Securities Appellate Tribunal, Mumbai allowed the appeal of a statutory auditor/chartered accountant against SEBI action regarding IPO proceeds misutilization. The company had diverted IPO funds to different entities under the guise of stated prospectus objects. The Tribunal found that while the auditor failed to carry out due diligence in certifying IPO expenses, there was no evidence of the auditor being instrumental in preparing false accounts, conniving in falsification, or manipulating books with knowledge and intention. Without such findings, no deceit, inducement, or fraud by the auditor was established. Following the Price Waterhouse precedent, SEBI lacks power to proceed against chartered accountants unless they are instrumental in preparing false accounts. Sections 12A and 12(c) of SEBI Act and PFUTP Regulations were inapplicable without fraud or connivance.

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Issues Involved:
1. Delay in launching proceedings.
2. Applicability of PFUTP Regulations.
3. Alleged lapses in auditing by the appellants.
4. Jurisdiction of SEBI over Chartered Accountants.
5. Determination of fraud and due diligence.

Detailed Analysis:

1. Delay in Launching Proceedings:
The appellants argued that the delay in launching proceedings caused prejudice. They conducted the audit in 2012, but the show cause notice was issued in December 2019. The tribunal found that despite the delay, no prejudice was shown to have been caused to the appellants. The facts were admitted, and only the explanation that reasonable care was taken was forwarded before the Learned AO. Therefore, the delay did not cause any prejudice to the appellants.

2. Applicability of PFUTP Regulations:
The appellants contended that the provisions of PFUTP Regulations were not applicable as no fraud was alleged against them. The tribunal examined Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations, which prohibit manipulative, deceptive, and fraudulent practices in securities. The tribunal concluded that the appellants were not dealing in securities, and there was no finding of fraud, deceit, or manipulation by the appellants. Therefore, Section 12A and Regulations 3 and 4 of the PFUTP Regulations were not applicable to the appellants.

3. Alleged Lapses in Auditing by the Appellants:
The tribunal noted several instances of alleged lapses in auditing by the appellants. These included payments made without invoices, bills received after payments, vendors not listed in the prospectus, and discrepancies in amounts. The appellants argued that payments were evidenced by bank statements and invoices received shortly after payments. However, the tribunal found that the appellants failed to exercise due diligence in certifying the statutory audit. Despite this, there was no finding that the appellants were instrumental in preparing false and fabricated accounts or had connived in falsification of books of account.

4. Jurisdiction of SEBI over Chartered Accountants:
The tribunal referred to the judgment of the Bombay High Court in Price Waterhouse Co. Vs SEBI, which held that SEBI has jurisdiction to inquire into and investigate matters related to manipulating and fabricating books of account and balance sheets of companies. However, SEBI cannot encroach upon the powers vested with the institutes under the Chartered Accountants Act, 1949. The tribunal found that SEBI can proceed against Chartered Accountants if there is evidence of connivance or conspiracy in preparing false accounts, but not for professional negligence alone.

5. Determination of Fraud and Due Diligence:
The tribunal found that the appellants did not carry out due diligence while certifying the utilization of IPO proceeds. However, there was no finding of fraud, deceit, or inducement by the appellants. The tribunal emphasized that gross negligence or recklessness in adhering to accounting norms amounts to professional negligence, which falls under the jurisdiction of the Institute of Chartered Accountants of India (ICAI) and not SEBI. Therefore, the appellants could not be penalized under Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations.

Conclusion:
The appeal was allowed, and the impugned order was set aside. No costs were ordered. The tribunal concluded that the appellants were not guilty of fraud or manipulation but failed to exercise due diligence in their professional duties. The jurisdiction to address professional negligence lies with the ICAI, not SEBI.

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