SEBI jurisdiction over statutory auditors is limited to proven fraud or collusion; professional negligence directions were set aside.

SEBI's power to proceed against statutory auditors is confined to cases where the record shows manipulation of accounts, connivance, collusion, or fraudulent intent affecting the securities market. Where fraud, meeting of minds, and tangible material of manipulation are negatived, SEBI cannot sustain adjudicatory directions based on professional negligence or dereliction in audit, because it has no jurisdiction to regulate the audit profession. In that situation, only a non-binding intimation to the professional bodies may be considered, not directions imposing professional consequences. The impugned directions and referrals were therefore held unsustainable and were set aside.

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Issues: Whether SEBI could continue proceedings and issue directions against the statutory auditors, including advisory and referral directions to ICAI and NFRA, after recording no evidence of fraud, connivance, or manipulation with fraudulent intent.

Analysis: The scope of SEBI's inquiry against auditors is confined to whether there is material showing manipulation of accounts, connivance, collusion, or fraudulent intent in relation to the securities market. Where the recorded finding is that there is no evidence of fraud, no meeting of minds, and no tangible material showing manipulation with knowledge or fraudulent intention, SEBI cannot proceed further on an adjudicatory basis. In such a situation, directions that effectively address professional negligence or dereliction in audit fall outside SEBI's jurisdiction, because SEBI cannot regulate the profession of chartered accountants. At most, only administrative intimation to the professional bodies could be considered, not binding directions on professional conduct.

Conclusion: SEBI lacked jurisdiction to sustain the impugned directions once fraud and connivance were negatived, and the directions to be careful and the referrals for action were unsustainable.

Final Conclusion: The order under challenge was set aside and the appellants succeeded because the proceeding could not be used to impose SEBI's view on professional negligence in the absence of proved fraud or collusion.

Ratio Decidendi: SEBI may act against auditors only where the evidence shows connivance, collusion, manipulation, or fraudulent intent affecting the securities market; absent such material, SEBI cannot issue adjudicatory directions on professional negligence or regulate the audit profession.

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