Just a moment...

Report
FeedbackReport
Bars
×

By creating an account you can:

Logo TaxTMI
>
Feedback/Report an Error
Email :
Please provide your email address so we can follow up on your feedback.
Category :
Description :
Min 15 characters0/2000
TMI Blog
Home / RSS

2011 (10) TMI 517

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

.... final accounts of the PNB for the year ending 2005-06. Admittedly, the Petitioner's appointment was continued on a year to year basis and in terms of the then existing guidelines for a period of four years, i.e., from 2005-2006 to 2008-2009. In terms of a Circular dated 5th June 2003 of the RBI, the Bank for whom the firm of SCAs has been appointed to audit the accounts of the previous year, is usually also asked to undertake quarterly review for the quarter ending 30th June of the next year. Since the Petitioner along with other five SCAs had signed the balance sheet of PNB on 20th May 2009, the Petitioner legitimately expected to be asked to continue as one of the SCAs for the limited review for the quarter ending June 2009. 3. The Petitioner states that it received on the late night of 24th June 2009 a notice of that date from the PNB fixing a meeting of all the SCAs including the Petitioner on 26th June 2009 at 11 am for finalization of the Long Form Audit Report ('LFAR') for 2008-09, progress of tax audit report for 2008-09 and allocation of review work for the quarter ending June 2009. The Petitioner further states that it attended the said meeting held on 26th June 2009 an....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....ner highlighted the grossly inflated values of the land and property given as security for the loans advanced by PNB. For the financial year ending 31st March 2009, the Petitioner noticed irregularities in the value of securities in regard to loans to two real estate companies. In addition a loan of Rs. 325 crores had been advanced to Ambience Developers Limited. In its Notes on Accounts in respect of the balance sheet for the year ending 31st March 2009, PNB acknowledged that there was a shortfall in the actual value of the security in relation to the advances given to the aforementioned real estate companies. The other observations in relation to the claiming of interest were also admitted by the PNB. The Petitioner states that it was discontinued as SCA for the limited review for the quarter ending 30th June 2009 since PNB apprehended that the Petitioner would detect further irregularities. The Petitioner states that the caveats filed by the PNB in the Bombay High Court referred to a letter dated 24th June 2009 written by the RBI to the PNB. Thereafter, on 13th July 2009 the Petitioner wrote to the PNB and the RBI requesting for a copy of the said letter. A copy thereof had not ....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....r. S.B. Gupta had been injured due to a fracture of his knee. His absence did not actually delay the audit of the PNB. The information sought by Mr. Gupta about the twelve borrower accounts was essentially for the finalization of the audit report. These accounts included those of DLF (with an advance of Rs. 1000 crores) and Parsvnath (with an advance of Rs. 100 crores) in which the Petitioner had suspected fraud or fraudulent activity about which the Petitioner had sent reports to the RBI. The Petitioner noted that the PNB has since released another Rs. 700 crores as additional loan to DLF Limited. PNB had reclassified four accounts as standard assets which had been classified by the Petitioner in the limited review of quarter ending 31st December 2008 as non-performing assets (NPAs). These were Parasvnath Developers Limited, Ambience Developers Limited, Ambience Hotels & U Resorts Limited and Gujrat Anjan Cement Limited. It was pointed out that the Petitioner was not responsible for the delay since it was on account of the failure of the PNB to respond to the clarification sought by the Petitioner. The Petitioner further asked the RBI whether the PNB had reported delays to RBI abo....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....tated the procedure adopted by it, as under: "16. It is submitted as per the practice followed by this Respondent in regard to complaints against audit firms, if any adverse comments/complaints are received against any auditor/audit firm, the matter is examined in detail and if considered necessary, appropriate action is taken against the auditors/audit firms concerned. The letter of Respondent No. 2 dated May 27, 2009 (Annexure R-1) brought out certain reasons for not continuing with the services of the Petitioner firm for conducting the quarterly limited view for the quarter ending June 2009. As the Petitioner firm had taken more than a month in finalising the branch audit report, besides delaying the finalisation of the consolidation work relating to annual accounts of the Respondent No. 2 and levelled unsubstantiated allegations of suspected fraudulent transactions, it was decided by this Respondent to accede to the request of Respondent No. 2 for not associating the Petitioner firm to conduct the quarterly review of the bank's results for the quarter ending June 30, 2009 and accordingly the Respondent No. 2 was advised vide letter dated June 24, 2009." 11. However, later in ....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....other five SCAs and that in comparison thereto, the Petitioner could not be accused of having delayed the audit. Further, even as regards the finalisation of the consolidated accounts, the Petitioner could not be faulted for causing any delay. Submissions of Counsel 15. This Court has heard the submissions of Mr. Vineet Malhotra, learned counsel for the Petitioners, Mr. H. S. Parihar, learned counsel for Respondent No. 1 RBI and Mr. Jagdeep Kishore, learned counsel for Respondent Nos. 2 and 3. 16. Mr. Malhotra, apart from reiterating submissions made in the writ petition and in the rejoinder affidavits, pointed out that discontinuance of the Petitioner firm as SCA for the limited review for the extended period ending 30th June 2009 was stigmatic, since the other five SCAs were retained. The discontinuance was on account of the complaint made to the RBI against the Petitioner by the PNB which was accepted and acted upon by the RBI. RBI ought not to have unilaterally accepted the complaint by the PNB without seeking explanation from the Petitioner on PNB's specific allegations. The procedure adopted by the RBI was contrary to the principles of natural justice. Conscious of the lim....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....continue the Petitioner as SCA. It is concerned only with the process by which such decision was arrived at. 20. The procedure for the appointment of a firm of auditors as SCA for a public sector bank envisages a primary role for the RBI, which acts as such in exercise of its powers under Section 30 (1A) of Banking Regulation Act, 1949 ['the BR Act']. In terms of Section 10 (1) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 ['1970 Act'] and the corresponding provision in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 ['1980 Act'], the RBI has to mandatorily grant prior approval to the appointment of SCAs of twenty-six public sector banks. The RBI has issued circulars specifying the norms for appointment of SCAs in public sector banks. Where the total liabilities and assets of the public sector bank is up to Rs. 50,000 crore the prescribed number of SCAs is four; where it is between Rs. 50,000 crore and up to Rs. 1 lakh crore, the number of SCAs is five and above Rs 1 lakh core, the number of SCAs is six. The SCAs appointed during 2006-07 and thereafter would have a tenure of four years after which they were to be rested fo....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....n general whose monies it is the custodian of. On their part the SCAs are expected to discharge their professional duties in the context of the above statutory obligations and their answerability to both the RBI and the public in general. The relationship of an SCA with the public sector bank whose audit they are engaged to undertake transcends the usual client-auditor relationship. The involvement of the RBI in the appointment and discontinuance of an SCA is meant to ensure a degree of protection to the SCA which is expected to discharge its professional duty fearlessly and independently. The discontinuance of an SCA cannot be brought about by the public sector bank acting by itself. Just as there can be no appointment of an SCA without the intervention of the RBI, there can be no discontinuance of an SCA without the RBI taking a decision in that regard. The greater the power to appoint and remove an SCA, the higher the responsibility on the RBI as the holder of such power to exercise it in a fair and reasonable manner after following a just procedure which comports with the principles of natural justice. 23. Where a complaint is made against an SCA by a public sector bank, it wo....