TaxTMI 
TaxTMI 
2010 (8) TMI 173
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....ormed by them. So far as Writ Petition No. 5249 of 2010 is concerned, the same is filed by a partnership firm, which is registered with the Institute of Chartered Accountants of India. The petitioner No. 2 of the said petition is the partner of the said firm. So far as Writ Petition No. 5256 of 2010 is concerned, the same is filed by the partnership firms of the Chartered Accountants registered with the Institute of Chartered Accountants of India as well as by the individual partners of certain firms, whose names are mentioned in the cause title of the petition. These petitions are principally directed against the initiation of proceedings by the SEBI against the Chartered Accountants under the provisions of sections 11, 11B, 11(4) of the Securities & Exchange Board of India Act, 1992 (hereinafter referred to as the "SEBI Act") on the ground that the SEBI had received information by virtue of an e-mail sent by one B. Ramalinga Raju of Satyam Computer Services Limited (hereinafter referred to as "the Company") on 7-1-2009 to certain Stock Exchanges and others disclosing that the statement of accounts of the Company provided to Stock Exchanges were not true and fair. The contents of ....
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....NIL amounts in deposit accounts in respective banks, in contrast to the balances stated in the books, the accrued interest presented in the books is also overstated and misleading. (e)Based on the confirmation received from the Banks the monthly statements are not true and correct. The additional transactions in the form of receipts shown in the monthly bank statement are fictitious. (f)Since fictitious receipts are recorded in the books as sales, to that extent revenues are also overstated and fictitious by Rs. 410.24 crore. Consequently, this has led to creation of artificial bank or debtor balances through manipulation of books." 4. It is alleged in the show-cause notice that acceptance of monthly bank statements as final statements by the Chartered Accountant Firm, viz. Price Waterhouse and Company for the purpose of auditing even though these were at significant variance with the daily bank statements and that reversal of entries were noted during the closing of monthly accounts. Certain other omissions have also been attributed to the said Chartered Accountant firm. Non-compliance with the auditing standards prescribed by the Institute of Chartered Accountants (herei....
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....jurisdiction is accordingly taken by the petitioners in their replies. Without prejudice to the said jurisdictional aspect, they have also submitted their replies regarding the allegations levelled in the show-cause notice. 7. During the pendency of the adjudication of the said show-cause notices before the SEBI, a request was made on behalf of the petitioners to decide the question about jurisdiction as a preliminary point. It is the say of the petitioners that unless the point of jurisdiction is determined first, SEBI cannot adjudicate the matter on merits as to whether the allegations levelled against the petitioners are established or not. 8. Mr. Janak Dwarkadas, learned senior Counsel appearing for the petitioners in Writ Petition No. 5249 of 2010, vehemently submitted that the petitioners are not required to submit to the jurisdiction of SEBI unless SEBI is vested with such jurisdiction. It is submitted by Mr. Dwarkadas that before the concerned Member of SEBI before whom the adjudication is to proceed, the preliminary point of jurisdiction was argued at length on behalf of the petitioners but he failed to pass any order in this behalf and is now going to decide the mat....
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....sed by the petitioners. 10. On the point of jurisdiction, it is submitted by the learned counsel for the petitioners that it is only the Institute of Chartered Accountants (hereinafter referred to as "the Institute") which is specially authorized to take proposed action against the Chartered Accountants and it is not open to SEBI to regulate the profession of Chartered Accountants. It is submitted on behalf of the petitioners that SEBI has no power under the Act to give any such direction prohibiting the Chartered Accountants from carrying their profession as Auditors in a particular listed Company, as this prohibition can be imposed only by the Institute when it is found that such Chartered Accountants have violated the professional norms or committed an act of professional misconduct and surely the SEBI cannot have any jurisdiction to restrain the Chartered Accountants from carrying their work as Auditors of any Company, either listed or otherwise. It is further submitted that since there is lack of inherent jurisdiction to adjudicate this aspect, this is a fit case in which this Court may set aside the show-cause notices issued by the SEBI on the ground that the said notices ....
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....en case if there is lack of inherent jurisdiction, the Court may issue appropriate writ, order or directions quashing the proceedings and it is not necessary that the petitioners should be asked to submit to the jurisdiction and to have their say on merits or that it is not a mandate of law that in no case point of jurisdiction can ever be decided first. In order to substantiate his say, reference has been made to the decisions of the Supreme Court to which we would refer to later in this judgment. 11. Mr. Seervai has urged an additional ground to the effect that so far as the petitioners of Writ Petition No. 5256 of 2010 are concerned, the show-cause notices have been issued to them in connection with the abetment. According to him, except section 24 of the SEBI Act, there is no other provision referable to the abetment of a particular act. It is submitted by Mr. Seervai that even otherwise, the petitioners of that petition have not played any role and, therefore, there was no question of issuing any show cause notices to them by SEBI. It is submitted by Mr. Seervai that the petitioners cannot be compelled to submit their say on merits by the SEBI and SEBI should not be allowed....
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.... regulate the profession of Chartered Accountants but surely SEBI has power to safeguard the interest of investors and also to regulate the interest of securities market. There is nothing wrong if any remedial and preventive measures are taken by keeping such persons at a distance, whose acts and misdeeds are likely to affect the interest of the investors and securities market. It is submitted by Mr. Ravi Kadam that the particulars as to how the books of account and balance-sheets have been manipulated has clearly been reflected in the show-cause notices. It is submitted that the show-cause notices had been issued on the basis of the material available with the SEBI and ultimately if it is found that the books of account of the Company were manipulated with a knowledge and intention, naturally it will have a direct bearing on the securities market and, therefore, it cannot be said that on the face of it the SEBI has no power to issue show-cause notices. It is submitted by Mr. Ravi Kadam that in any case the inquiry contemplated by the SEBI is only a fact-finding inquiry and during the inquiry if it is ultimately found that the petitioners have not played any role, then naturally th....
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.... is found in connection with the auditing of a listed Company, SEBI can take an appropriate decision for safeguarding the interest of investors and prevent such Chartered Accountant from auditing the books of account of such listed Companies. In the instant case, there is prima facie evidence regarding the bogus invoices and fudging of accounts. It is submitted that it cannot be said that there is no link between the Auditors and investors in any manner when the Chartered Accountants are in fact trustees for the shareholders. 14. Mr. Ravi Kadam has further submitted that in any case the question of jurisdiction should be allowed to be decided along with the main issue instead of deciding the matter in a piecemeal manner so that proceedings are not further delayed. It is further submitted that since an Appeal is provided against the order of the SEBI, it is necessary that the original proceedings should be decided on all points so that the appellate authority may not require to remand the matter in case such appeal is allowed. It is submitted that it is desirable that the authority should decide on all the points together instead of deciding the matter only on preliminary point. ....
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....ures referred to therein may provide for :- (a)Regulating the business in stock exchanges and any other securities markets; (b)Registering and regulating the working of stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner; (ba)registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf; (c)Registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds; (d)Promoting and regulating self-regulatory organizations; (e)Prohibiting fraudulent and unfair trade practices relating to securities markets; (f)Promoting investors' education and training of intermediaries of securities markets; (g)Prohibiting insider trading in securities; (h)Regulating substantial acquisition of shares and take over of com....
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....unt or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached; (f)direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation; Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or sub-section (2A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognized stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market : Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned." Section 11B refers to power to iss....
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....r deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; (d)engage in insider trading; (e)deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder; (f)acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognized stock exchange in contravention of the regulations made under this Act." Section 15HA deals with penalty for fraudulent and unfair trade practices. The said section reads thus : "15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher." Regulation 2(c) of SEBI (Prohibi....
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....he Chartered Accountant, who is a member of the Institute. Section 8 deals with disabilities and as per sub-clause (vi), a person shall not be entitled to have his name entered in or borne on the Register if he has been removed from membership of the Institute on being found on inquiry to have been guilty of professional or other misconduct. It also provides that a person who has been removed from membership for a specified period, shall not be entitled to have his name entered in the Register until the expiry of such period. Section 20 of the said Act provides that the Council may remove from the Register the name of any member of the Institute who is found to have been subjected to at the time when his name was entered in the Register, or who at any time thereafter has become subject to any one of the disabilities mentioned in section 8, or who for any other reason has ceased to be entitled to have his name borne on the Register. Section 21A prescribes that the Council shall constitute a Board of Discipline consisting of persons enumerated in the said section. There is a provision for removing a member or impose any penalty on the member as prescribed in the said section. Section....
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.... jurisdiction of the High Court to entertain the appellant's petition even at the initial stage of the proceedings proposed to be taken before the Industrial Tribunal is not in dispute. If the action taken by the appellant is not a lockout but is a closure, bona fide and genuine, the dispute which the respondents may raise in respect of such a closure is not an industrial dispute at all. On the other hand, if, in fact and in substance, it is a lockout, but the said action has adopted the disguise of a closure, and a dispute is raised in respect of such an action, it would be an industrial dispute which industrial adjudication is competent to deal with. The appellant contends that what it has done is a closure and so, the dispute in respect of it cannot be validly referred for adjudication by an Industrial Tribunal. There is no doubt that in law, the appellant is entitled to move the High Court even at the initial stage and seek to satisfy it that the dispute is not an industrial dispute and so, the industrial Tribunal has no jurisdiction to embark upon the proposed inquiry. 12. It is also true that even if the dispute is tried by the Industrial Tribunal, at the very commencement....
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....(s). A request is made with that these questions may be determined as preliminary issues so that if the decision on these questions are in the affirmative, the Tribunal may proceed to deal with the real dispute on merits. 12. We, however, cannot shut our eyes to the appalling situation created by such preliminary issues which take long years to settle as the decision of the Tribunal on the preliminary issue is immediately challenged in one or the other forum including the High Court and proceedings in the reference are stayed which continue to lie dormant till the matter relating to the preliminary issue is finally disposed of. 16. The facts in the instant case indicate that the appellant adopted the old tactics of raising a preliminary dispute so as to prolong the adjudication of industrial dispute on merits. It raised the question whether its activities constituted an 'industry' within the meaning of the Industrial Disputes Act and succeeded in getting a preliminary issue framed on that question. The Tribunal was wiser. It first passed an order that it would be heard as a preliminary issue, but subsequently by change of mind, and we think rightly, it decided to hear the iss....
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....Laws of England, it has been stated : 'Where the jurisdiction of a Tribunal is dependent on the existence of a particular state of affairs, that state of affairs may be described as preliminary to, or collateral to the merits of the issue. If, at the inception of an inquiry by an inferior Tribunal, a challenge is made to its jurisdiction, the Tribunal has to make up its mind whether to act or not and can give a ruling on the preliminary or collateral issue, but that ruling is not conclusive." 84. From the above decisions, it is clear that existence of "jurisdictional fact" is sine qua non for the exercise of power. If the jurisdictional fact exists, the authority can proceed with the case and take an appropriate decision in accordance with law. Once the authority has jurisdiction in the matter on existence of "jurisdictional fact", it can decide the "fact in issue" or "adjudicatory fact". A wrong decision on "fact in issue" or on "adjudicatory fact" would not make the decision of the authority without jurisdiction or vulnerable provided essential or fundamental fact as to existence of jurisdiction is present." 23. Mr. Dwarkadas, relying on the aforesaid judgment, submitted....
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....nt from the aforesaid angle. 25. So far as the question as to whether the SEBI has jurisdiction to issue such show-cause notices to the petitioners are concerned, we have already pointed out various provisions contained in the SEBI Act and the Regulations. Section 11(1) of the SEBI Act, which we have incorporated earlier, provides that it is the duty of the Board to protect the interests of investors in securities and to promote the development and to regulate the securities market by such measures as it thinks fit. It is true, as argued by the learned counsel for the petitioners, that while exercising powers under the Act, it is not open to the SEBI to encroach upon the powers vested with the Institute under the CA Act. However, it is required to be examined as to whether in substance by initiating the proceedings under the SEBI Act, the SEBI is trying to overreach or encroach upon the powers conferred under the CA Act. In this connection, it is required to be noted that the SEBI has powers under the Act and the Regulation to take remedial measures in connection with safeguarding the interest of investors and regulate the securities market. Under section 11 of the SEBI Act, the....
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....all times to the books and accounts and vouchers of the Company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the Company such information and explanations as the auditor may think necessary for the performance of his duties. The auditors in the Company are functioning as statutory auditors. They have been appointed by the shareholders by majority. They owe a duty to the shareholders and are required to give a correct picture of the financial affairs of the Company. It is not uncommon nowadays that for financial gains even small investors are investing money in the share market. Mr. Ravi Kadam has rightly pointed out that there are cases where even retired persons are investing their retiral dues in the purchase of shares and ultimately if such a person is defrauded, he will be totally ruined and may be put in a situation where his life savings are wiped out. With a view to safeguard the interests of such investors, in our view, it is the duty of the SEBI to see that maximum care is required to be taken to protect the interest of such investors so that they may not be subjected to any fraud or cheating in the mat....
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....r : "7.1 The Company Satyam is listed in India as well as abroad. In 2005, the Company issued a second tranche of ADRs listed on the New York Stock Exchange. The company is required to announce its results on both quarterly and annual basis or as in accordance with the provisions of listing requirements of respective stock exchanges. The company is required to publish such results in the newspapers. These are also made available on the web sites of the company and stock exchanges. Any financial analysis of the performance of the company and its future projections are primarily based on the quarterly and annual results of the company which are audited and certified by the Auditors. 7.2 It goes without saying that as professional auditors, PW and its partners are fully cognizant of the importance of the audited financial results certified by them. More specifically, they clearly knew very well that millions of investors would take investment decisions based on periodical financial results of the company. By certifying these false and overstated financial results over the years as true and fair, PW and its partners have misled the investors. These misleading publications have cr....
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.... basis of reflection of Company's financial health as disclosed in the balance-sheet of the Company and he may consider that it is safe to invest money in a particular company, if the balance-sheets have been certified by reputed Chartered Accountants and it reflects that the financial position of the Company is sound. An investor is likely to be guided by the audited balance-sheet of the Company and would presume that the facts incorporated in the balance-sheet are true and correct. Considering the said aspect, even though the petitioners may not have direct association in the share market activities, yet the statutory duty regarding auditing the accounts of the Company and preparation of balance-sheets may have a direct bearing in connection with the interest of the investors and the stability of the securities market. In our view, the petitioners in their capacity as auditors of the Company Satyam, which was at one point of time considered to be a blue chip company who had a defining influence on the securities market, can be said to be persons associated with the securities market within the meaning of the provisions of the said Act. 28. As regards the contention of Mr. Dwar....
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....urities and Exchange Board of India.-The provisions contained in sections 55 to 58, 59 to 84, 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207, so far as they relate to issue and transfer of securities and non-payment of dividend shall,- (a)in case of listed public companies; (b)in case of those public companies which intend to get their securities listed on any recognized stock exchange in India, be administered by the Securities and Exchange Board of India; and (c)in any other case, be administered by the Central Government." "227. Powers and duties of auditors.-(1) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor. 1A. Without prejudice to the provisions of sub-section (1), the auditor shall inquire - (a)whether loans and advances made by the company on the basis of security have been properly secured and whether the ter....
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....under section 228 by a person other than the company's auditor has been awarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor's report; (c)whether the company's balance-sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns; (d)whether, in his opinion, the profit and loss account and balance-sheet comply with the accounting standards referred to in sub-section (3C) of section 211; (e)in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company; (f)whether any director is disqualified from being appointed as director under clause (g) of sub-section (11) of section 274; (g)whether the cess payable under section 441A has been paid and if not, the details of amount of cess not so paid. 4. Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a), ( b), (bb), (c) and (d ) of sub-section (3) is answered in the negative or with a qualification, the auditor's report shall state the reason for the answer. 4A. The Cent....
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....das, that powers conferred on the SEBI must flow from the statutory provisions. But reading the provisions as indicated above, in our view, it cannot be said that there is lack of such power or that such power is not available with the SEBI. 31. Insofar as the submission of violation of fundamental rights under article 19(1)(g) and 19(6) are concerned, a citizen is entitled to practise any profession, or to carry on any occupation, trade or business. Such rights are always subject to reasonable restrictions. In a given case if a person carrying on his trade or profession is found to have committed any illegalities, such person can be prevented from carrying on such profession in the area covered by a particular statute for a particular period and, therefore, there is no absolute right available to a citizen to carry on profession irrespective of any act, omission or commission alleged against such person and in such eventuality he can be subjected to proceedings prohibiting such person from carrying on such profession or trade. 32. In the instant case, as pointed out earlier, if according to the SEBI, it is not advisable and safe to have any particular person to be an Auditor....
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....ovisions of any law made in this behalf by Parliament" by article 142(2). However, the power to punish for contempt being inherent in a court of record, it follows that no act of Parliament can take away that inherent jurisdiction of the court of record to punish for contempt and Parliament's power of legislation on the subject cannot, therefore, be so exercised as to stultify the status and dignity of the Supreme Court and/or the High Courts, though such a legislation may serve as a guide for the determination of the nature of punishment which this Court may impose in the case of established contempt. Parliament has not enacted any law dealing with the powers of the Supreme Court with regard to investigation and punishment of contempt of itself, (we shall refer to Section 15 of the Contempt of Courts Act, 1971, later on) and this Court, therefore, exercises the power to investigate and punish for contempt of itself by virtue of the powers vested in it under articles 129 and 142(2) of the Constitution of India." 34. Relying on the said judgment, Mr. Dwarkadas has submitted that if any professional is to be debarred from any provision, it is only the body which is looking after t....
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....r and ultimately its jurisdiction will depend upon the evidence which may be available in the inquiry and SEBI has to decide as to whether any directions can be given on the basis of available evidence on record. In our view, such a question is required to be considered only after the evidence is available during the inquiry but surely it cannot be said that SEBI has no power even to inquire about the same and that on the face of it the jurisdiction is barred, as submitted by the learned counsel for the petitioners. 36. As regards duties of the Chartered Accountant towards the shareholders, Mr. Ravi Kadam has relied upon the decision of the Supreme Court in the case of Institute of Chartered Accountants of India v. P.K. Mukherjee AIR 1968 SC 1104 wherein the Supreme Court has observed in para 6 as under : "6. On behalf of respondent No. 1 Mr. Chagla put forward the argument that since the cheques had already been given by the company the loans stood cleared and, in any event, respondent No. 1 had already informed the company of the irregularity in his letter dated May 25, 1955. It was therefore contended that there was no professional misconduct on the part of respondent No. ....
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.... Kadam has invited our attention to a decision of the learned Judge of the Gujarat High Court in the case of Karnavati Fincap Ltd. v. Securities & Exchange Board of India [1996] 87 Comp. Cas. 186 wherein the learned Single Judge has observed as under: "Firstly, as I have discussed hereinbefore, the inquiry cannot be said to be beyond the scope of section 11(2)(i). Even assuming for the present purpose, that section 11(2)(i) does not contemplate any inquiry against a buyer or purchaser, the list of measures enumerated in sub-section (2) of section 11 is merely illustrative of the nature of measures that may be taken by the Board in furtherance of its duties to attain the object of the statute, without affecting the generality of provisions of sub-section (1). It cannot be said that sub-section (2) provides an exhaustive list of measures which the Board can take and it cannot take other measures which are in consonance with the main purpose of the statute and consistent with the duty cast on it. It cannot be said that for protecting the interests of investors, the Board has no power to take appropriate measures to prevent and deal with fraudulent and manipulative transactions. The....
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....ordance with the Regulations against the one who violates the Takeover Regulations, namely, acquirer, the seller, the target company, the merchant banker, as the case may be. In this context a question also arises for consideration as to whether the Board has the power to pass interim orders. It seems to me that the SEBI has power to pass interim orders before and during the inquiry or investigation to effectuate the purpose of the SEBI Act and the Regulations. Under section 11 of the SEBI Act, the SEBI has the power to protect the interests of the investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. The power is of a very wide nature and is not hedged in by any restrictions. This power will embrace the power to issue interim orders. The SEBI in a fit case can pass interim orders in the interests of investors and to promote the development of and to regulate the securities market. Under the same provision, it can frame regulations as well for the same purpose. The final orders after the inquiry are contemplated under section 11B of the Act and at that stage it can issue such directions to any person ref....
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....ted out earlier, the proceedings started against the petitioners on the basis of some statements made by one Ramalinga Raju on the basis of e-mail to which a reference is made in the show-cause notices. Whether any of the petitioners with an intention and knowledge tried to fabricate and fudge the books of account is a matter of investigation and inquiry by the SEBI. Ultimately if any evidence in this behalf is brought on record before the SEBI during the inquiry, appropriate steps can be taken in this behalf as provided for by the SEBI Act. We must at this stage take note of the argument of Mr. Seervai that so far as his clients are concerned, they were not in any way connected with the audit of the Company in any manner. Simply because they are Partners of Price Waterhouse Network, no notice could have been issued against his clients. However, so far as this submission is concerned, these petitioners can very well point out these facts before the concerned Member of SEBI. SEBI being a quasi-judicial authority, while adjudicating the matter, will look into this aspect and will consider as to whether any particular firm of Chartered Accountants has any role to play or for that reas....