W.P.(C) Nos. 2505 & 5352 of 2010 Page 1 of 39 IN THE HIGH COURT OF DELHI AT NEW DELHI W.P.(C) No. 2505 of 2010 Reserved on: September 29, 2010 Decision on: November 22, 2010 TALLURI SRINIVAS ..... Petitioner Through: Mr. S. Ganesh, Senior Advocate with Mr. R. Sudhinder, Mr. Vibhu Bakru, Mr. Rahul Ravindran and Ms. Prerana Amitabh, Advocates. versus THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA THROUGH: ITS SECRETARY & ANR. ..... Respondents Through: Mr. Rakesh Agarwal with Mr. Pulkit Agarwal, Advocate for R-1/ICAI. Mr. Jatan Singh, CGSC for R-2/UOI. And W.P.(C) No. 5352 of 2010 SUBRAMANI GOPALKRISHNAN ..... Petitioner Through: Mr. N.K. Kaul, Senior Advocate with Mr. R. Sudhinder, Mr. Amit Sibal and Mr. Rahul Ravindran, Advocates. versus THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA THROUGH: ITS SECRETARY & ANR. ..... Respondents Through: Mr. Ramji Srinivasan, Senior Advocate with Mr. J. J. Bakshi, Mr. Zeyaul Haque and Mr. Amitesh S. Bakshi, Advocates for R-1/ICAI. Mr. Ravinder Agarwal, CGSC for R-2/UOI. CORAM: JUSTICE S. MURALIDHAR 1. Whether reporters of the local news papers be allowed to see the judgment? No 2. To be referred to the Reporter or not? Yes 3. Whether the judgment should be reported in the Digest? Yes JUDGMENT 22.11.2010 W.P.(C) Nos. 2505 & 5352 of 2010 Page 2 of 39 1. Although the facts in these two writ petitions are slightly different, the questions involved are more or less similar. Both Petitioners, being the members of the Institute of Chartered Accountants of India (`ICAI‟), i.e. the Respondent No. 1 in both the petitions seek to challenge a prima facie opinion dated 17th September 2009 arrived at by the ICAI and the disciplinary proceedings that have commenced consequent thereto. Both Petitioners seek a direction to the ICAI to keep the respective disciplinary proceedings against them in abeyance till the conclusion of the criminal cases against each of them. Factual Background 2. The Petitioner in Writ Petition (C) 2505 of 2010, Mr. Talluri Srinivas (`Srinivas‟) is a Chartered Accountant by profession and a member of the ICAI since 1990. Srinivas was a partner with M/s Price Waterhouse (`PW‟), a firm of Chartered Accountants registered with the ICAI. In the year 2000, PW were appointed as the statutory auditors of Satyam Computer Services Limited (`SCSL‟). While the statutory audits of SCSL for the years 2001 to March 2007 were conducted and the reports were signed by Mr. Subramani Gopalkrishnan (`Gopalkrishnan‟) (the Petitioner in Writ Petition (C) 5352 of 2010), the statutory audit for the quarters ending on 30th June 2007 and 30th September 2008 were conducted and signed by Srinivas. 3. On 7th January 2009, Mr. B. Ramalinga Raju, the then Chairman of SCSL wrote a letter to his Board of Directors in which inter alia he disclosed that the balance sheet of SCSL as on 30th September 2008 carried inflated (non- existent) cash and bank balances of Rs. 5,040/- crores (as against Rs. 5361 W.P.(C) Nos. 2505 & 5352 of 2010 Page 3 of 39 crore reflected in the books) and accrued non-existent interest of Rs. 376 crores, an understated liability of Rs. 1,230 crores on account of funds arranged by him and an overstated debtors position of Rs. 490 crores (as against Rs. 2651 crores reflected in the books). He also disclosed that for the September quarter, the company had reported a revenue of Rs. 2,700/- crores and an operating margin of Rs. 649 crores (24% of revenues) as against the actual revenue of Rs. 2,112 crores and an actual operating margin of Rs. 61 crores (3% revenues). This had resulted in artificial cash and bank balances going up by Rs. 588 crores in the Second Quarter alone. Mr. Raju tendered his resignation as the Chairman of SCSL and stated that he was prepared to subject himself to the law of the land and face the consequences thereof. 4. On 10th January 2009, the ICAI wrote a letter to M/s Price Waterhouse, Bangalore (PW, Bangalore) referring to the letter dated 7th January 2009 addressed by Mr. Raju to the Board of Directors of SCSL. It was stated by the ICAI that from the perusal of the said letter of Mr. Raju and the newspaper reports, it emerged that the audit figures for the years 2004-05 till the quarter ending on 30th September 2008 had been certified by PW, Bangalore as reflecting the true and fair picture of the accounts, which was now admitted even by the Chairman of SCSL to be incorrect. This meant that the PW, Bangalore “had failed to carry out necessary checks which are required while undertaking the audit of the financial statements and certifying the quarterly results of the company.” ICAI alleged that the PW, Bangalore had violated the accounting principles while auditing/ certifying the accounts/quarterly results of SCSL for the aforementioned years/Quarters; that in spite of the aforestated irregularities/manipulations in W.P.(C) Nos. 2505 & 5352 of 2010 Page 4 of 39 the financial statements, PW, Bangalore had stated that financial statements together with the notes thereon gave a true and fair view; that PW, Bangalore had failed to disclose material facts which were not disclosed in financial statements of SCSL; that it had failed to report material mis- statement known to it as statutory auditors, which appeared in the financial statements of SCSL. It was thus alleged that PW, Bangalore did not exercise due diligence and was grossly negligent in the conduct of its professional duties as statutory auditors of SCSL for all these years. 5. In the said letter dated 10th January 2009 addressed to PW, Bangalore the ICAI stated that the letter dated 7th January 2009 of Mr. Raju and the newspaper reports had been treated as “information” within the meaning of Section 21(2) of the Chartered Accountants Act, 1949 [as amended by the Chartered Accountants (Amendment) Act, 2006 with effect from 17th November 2006] (hereinafter „CA Act‟). PW, Bangalore was called upon “to disclose the name or names of the member or members who is/are answerable to the allegation/s and send a copy of the aforesaid information letter along with its enclosures to the said member/members and he/they be requested to send his/their Written Statement, if any, in triplicate, within 21 days of the receipt of this letter.” It was further stated that the member or members answerable, should also send a declaration duly signed in the enclosed format and in the event that the name/s of member/s answerable was not disclosed “then all the members who were partners or employees of the firm on the date of occurrence of the alleged misconduct, shall be responsible for answering the allegation or allegations contained in the information.” On 14th January 2009, similar notices were sent to Price W.P.(C) Nos. 2505 & 5352 of 2010 Page 5 of 39 Waterhouse, Kolkata (`PW, Kolkata‟) and Price Waterhouse, New Delhi (`PW, New Delhi‟). 6. On 30th January 2009, PW replied to the ICAI stating, inter alia:- “As regards the furnishing of the names of member/s that are answerable to the allegations, key members are as under: 1. Mr. S. Gopalkrishnan, Partner (Membership No. F – 18863) for the period April 1, 2000 to March 31, 2007. 2. Mr. S. Talluri, Partner (Membership No. F – 20864) for the period April 1, 2007 to September 30, 2008. 3. Mr. P. Shiva Prasad (Membership No. 204076) for the period April 1, 2001 and March 31, 2005. 4. Mr. C.H. Ravindranath (Membership No. 204494) for the period April 1, 2005 and September 30, 2008.” 7. PW also informed that Gopalkrishnan and Srinivas had been arrested by the local police and were, therefore, out of reach. The ICAI was requested to grant all the members, whose names were disclosed, some more time to respond to the notice dated 10th January 2009. PW also gave its response to the queries raised. As mentioned hereinbefore, on 23rd January 2009 Srinivas was arrested. Gopalkrishnan was arrested on 24th January 2009. 8. On 20th February 2009, the criminal investigation was transferred to the Central Bureau of Investigation („CBI‟) and RC No. 4(S)/2009 was registered against Gopalkrishnan, Srinivas and seven other accused persons under Sections 409, 420, 468, 471, 477-A, 201, 120-B IPC. 9. At the instance of the CBI, a Multi Disciplinary Investigation Team („MDIT‟) was constituted and a report was prepared by the ICAI Group on W.P.(C) Nos. 2505 & 5352 of 2010 Page 6 of 39 5th April 2009. In para 1.2 of the said report it has been mentioned that Mr. Uttam Prakash Agarwal, President of the ICAI and Mr. Amarjit Chopra, Vice President of the ICAI, represented the ICAI in the MDIT. In Para 1.3, it is stated that Mr. Agarwal constituted a group of local Chartered Accountant professionals from Hyderabad under the convenorship of Mr. Shanti Lal Daga, a member of the Central Council of ICAI, based in Hyderabad to provide requisite support and to help the CBI in its investigation of the scam. It is stated that Mr. Daga then led the group and interacted with Mr. V.V. Laxmi Narayana, the DIG who was heading the probe, and Mr. J.L. Negi, the Coordinator of the CBI investigation team. Para 1.4 of the report of the ICAI Group states that the Group has been entrusted with the “task of verification of compliances or otherwise by Price Waterhouse, the auditors of the company, with various auditing and assurances standards and guidance notes issued by ICAI, in respect of cash and bank balances, sales, receivables, interest accrued and tax deducted at source relating to fixed deposits and its impact on financial reporting and auditor‟s report thereon. Therefore, the verification by the Group is limited to the above heads of account of the financial statements.” The report further stated that the ICAI Group had “restricted its enquiry to the aforesaid heads of accounts and related matters for the years ending 31st March 2005, 31st March 2006, 31st March 2007, 31st March 2008 and for the quarters ended 30th June 2008 and 30th September 2008.” 10. The ICAI Group in para 19.1 of its report arrived at the following conclusions: “19.1 The statutory auditors have failed to exercise reasonable W.P.(C) Nos. 2505 & 5352 of 2010 Page 7 of 39 care and compliance with various auditing and assurance standards issued by the Institute of Chartered Accountants of India as a generally accepted auditing practice while reporting on the financial statements and the materiality of the misstatements are so huge that it has rendered the financial statements for all these years as untrue and unfair. However, the executive, management and staff have drawn substantial amounts as remunerations, commission, incentives, bonuses, ESOPs. The management has also declared the dividends to its shareholders under the Companies Act, 1956. However, all these overstatements and misstatements have reported the EPS at a higher level in the financial reporting annually as well as quarterly which has directly impacted the movement of the share prices in the stock exchanges market in India and abroad.” 11. On 7th April 2009, the CBI filed its first charge sheet in the Court of the Additional Chief Metropolitan Magistrate („ACMM‟) naming the Petitioners Gopalkrishnan and Srinivas and seven others as accused persons. Among the documents relied upon by the CBI was the report of the ICAI Group, which was a part of the MDIT. 12. Under Section 21(2) of the CA Act, on receipt of any information or complaint by the ICAI, the Director (Discipline) should arrive at a prima facie opinion on the occurrence of the alleged misconduct. Under Section 21(3), it is stated that where the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct mentioned in the First Schedule to the CA Act, then the matter will be placed before the Board of Discipline and where the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct mentioned W.P.(C) Nos. 2505 & 5352 of 2010 Page 8 of 39 in the Second Schedule or in both the Schedules, then the matter will be placed before the Disciplinary Committee. 13. The Director (Discipline) placed the prima facie opinion dated 17th September 2009 before the Disciplinary Committee. The view expressed therein was that Gopalkrishnan and Srinivas were prima facie guilty of professional misconduct within the meaning of Clauses (5), (6), (7), (8) and (9) of Part I of the Second Schedule to the CA Act. A prima facie opinion was also formed that the two Petitioners were guilty of other misconduct within the meaning of Section 22 read with Section 21 of the CA Act. 14. On the basis of the above prima facie opinion which was considered by the Disciplinary Committee, a separate notice dated 8th October 2009 was sent by the ICAI to each of the Petitioners enclosing the copy of the prima facie opinion and asking each of them to send their written statement along with supporting documents and a list of witnesses within 21 days. At that point of time, both the Petitioners were in judicial custody. 15. On 22nd November 2009, a supplementary charge sheet was filed by the CBI. A second supplementary charge sheet was filed on 7th January 2010. 16. On 4th February 2010, Srinivas was granted bail by the Supreme Court in Crl. Appeal No. 257 of 2010.The relevant portion of the order read as under: “We do not express any opinion on the merits of this case regarding the nature of offence or gravity thereof allegedly committed by the accused-appellant. W.P.(C) Nos. 2505 & 5352 of 2010 Page 9 of 39 Having regard to the fact that the appellant had been in custody for more than one year, we are of the view that he be released on bail subject to certain conditions:- 1. The appellant is permanent resident of Hyderabad. He will report to the investigating officer - S.P. (C.B.I.) once in two months in the first week. 2. The appellant shall appear in Court as and when the case is posted for hearing. 3. The appellant shall be available for further interrogation/investigation as and when required on the written requisition by the investigating agency. 4. The appellant shall not tamper with any evidence and shall not influence the prosecution witnesses. 5. The appellant shall execute bail bonds of Rs.20 lacs (Rupees twenty lacs only) with two solvent sureties of the like amount to the satisfaction of the Trial Court. 6. On executing the bail bonds he be released on bail pending trial.” 17. On 26th February 2010, notices were issued by the ICAI to Srinivas with respect to the disciplinary proceedings pending against him as well as Mr. Ch. Ravindranath. On 26th March 2010, Srinivas replied to the ICAI stating that Mr. Ravindranath had been cited as a witness in the criminal case pending before the Special Court, CBI against Srinivas. The proceedings for which the ICAI had summoned Srinivas as a witness in the disciplinary proceedings against Mr. Ravindranath arose from the very same acts of alleged omission or commission which formed the basis for various charges alleged against Srinivas in the pending criminal case. Accordingly, it was submitted by Srinivas that his appearance as a witness in the disciplinary W.P.(C) Nos. 2505 & 5352 of 2010 Page 10 of 39 proceedings against Mr. Ravindranath would severely prejudice his position in the criminal cases pending trial. As regards the disciplinary proceedings against himself, Srinivas pointed out that he would be dealing with it separately. By a separate letter dated 26th March 2010, Srinivas stated that the disciplinary proceedings against him should be deferred since the alleged acts of omission or commission on the basis of which disciplinary proceedings had commenced formed not only the basis of prima facie opinion but also formed the basis for various charges against him in the criminal cases. Srinivas expressed his apprehension that “any disclosure of my explanations or defenses until the final conclusion of my aforesaid pending criminal trial before the Special Court at Hyderabad, would seriously impact my defence in the above criminal trial.” 18. On 6th April 2010, the ICAI wrote to Srinivas asking him to attend as a witness in the disciplinary proceedings against Mr. Ravindranath failing which he would be subject to the consequence of non-attendance as laid down in Rule 12 of Order XVI of the Code of Civil Procedure, 1908 read with Section 21-C of the CA Act. By a separate communication received by Srinivas on 9th April 2010, the ICAI informed him that although the hearing on 30th March 2010 had been adjourned by the Disciplinary Committee, the scope of inquiry by the Disciplinary Committee and that of the criminal court were on a separate footing and, therefore, at the next date of hearing, i.e. 18th April 2010, he should remain present and further that no adjournment would be granted under any circumstances. 19. W.P. (C) 2505 of 2010 was filed by Srinivas in this Court on 15th April W.P.(C) Nos. 2505 & 5352 of 2010 Page 11 of 39 2010. On 16th April 2010, while directing notice to issue in the petition, this Court directed that the hearing fixed before the Disciplinary Committee of the ICAI on 18th April 2010 would be postponed by ten days. In the meanwhile, the Petitioner was to prepare and file a chart to show the exact allegations in the charge-sheet of the CBI and those in the show cause notice issued by the ICAI in the disciplinary proceedings. 20. On 25th June 2010 Gopalkrishnan was granted bail by the High Court of Andhra Pradesh subject to the following conditions:- “1. The petitioner-A.4 shall execute bail bond of Rs.20,00,000/- (Rupees twenty lacs only) with two solvent sureties of the amount to the satisfaction of the Additional Chief Metropolitan Magistrate, Nampally, Hyderabad, whereas petitioner-A.10 shall execute bail bond of Rs.20,00,000/- (Rupees twenty lacs only) with two solvent sureties of the like amount to the satisfaction of the XIV Additional, Chief Metropolitan Magistrate, Hyderabad. 2. In view of the fact that the Investigation is still in progress in connection with diversion of funds, the petitioners are directed to report before the investigating agency, daily at 10 a.m until further orders. 3. The petitioners shall appear in the Court as and when the case is posted for hearing. 4. The petitioners shall be available for further interrogation as and when required, on the written requisition by the investigating agency. 5. The petitioners shall not tamper with any evidence and shall not influence the prosecution witnesses. 6. On executing the bail bonds they be released on bail pending trial. However, the prosecution is at liberty to file cancellation of bail, if it is brought to the notice of the prosecuting agency that the present W.P.(C) Nos. 2505 & 5352 of 2010 Page 12 of 39 petitioners violate the conditions imposed by this Court.” 21. On 6th July 2010, two separate letters were sent by the ICAI to Gopalkrishnan. One required him to appear as a witness on 23rd July 2010 at 2 pm in the disciplinary proceedings against Mr. Ch. Ravindranath and Mr. P. Shiva Prasad who had both managed audits with the PW, Bangalore. In the other letter, Gopalkrishnan was asked to appear on 23rd July 2010 at 3 pm in the disciplinary proceedings against him. By separate letters dated 19th July 2010, Gopalkrishnan explained why he could not appear either as a witness in the disciplinary proceedings against Mr. Ravindranath and Mr. Shiva Prasad and also in the disciplinary proceedings against himself. This was more or less on the same lines as the stand of Srinivas. 22. Thereafter on 26th July 2010, by separate letters, the ICAI required Gopalkrishnan to again appear before the Disciplinary Committee on 12th August 2010 with reference to both the enquiries initiated against Mr. Ravindranath and Mr. P. Siva Prasad as well as the one pending against him. In the circumstances, Gopalkrishnan filed W.P.(C) 5352 of 2010 in this Court on 6th August 2010. 23. As regards the plea of Gopalkrishnan that he should not be asked to appear in the disciplinary proceedings against Mr. Ravindranath and Mr. Shiva Prasad, after hearing the submissions of counsel for both, the Petitioner as well as the ICAI, this Court on 9th August 2010 while disposing of the CM No. 10545 of 2010 passed the following order: “1. Notice. Mr. Tiku and Mr. Ravinder Agarwal, CGSC accept W.P.(C) Nos. 2505 & 5352 of 2010 Page 13 of 39 notice on behalf of Respondent Nos.1 and 2. 2. There are two inquiries for which two separate notices dated 26th July 2010 have been issued to the Petitioner by the Institute of Chartered Accountants of India („ICAI‟). The first show cause notice (at page 222 of the paper book) is regarding the inquiry against the Petitioner himself in which he has been asked to appear before the Disciplinary Committee on 12th August 2010. 3. In regard to the above inquiry, it is not in dispute that the Petitioner was head of the audit team of Price Waterhouse, the firm who were the statutory auditors for Satyam Computers Services Ltd for the years 2000 to 2007. He is facing criminal proceedings and a chargesheet in this regard has been filed against him by the Central Bureau of Investigation („CBI‟). He was granted bail by the High Court of Andhra Pradesh. This case is pending in the court of concerned Additional Chief Metropolitan Magistrate at Hyderabad. 4. Mr. Talluri Srinivas, the Petitioner in Writ Petition (Civil) No. 2505 of 2010 was the head of the audit team of Price Waterhouse for the subsequent years 2007 to 2009. He too is facing criminal trial, pursuant to the charge sheet filed by the CBI in his case. This Court had passed an interim order on 16th April 2010 in W.P.(C)No. 2505 of 2010 postponing the date of the disciplinary proceedings against Mr. Srinivas before the Disciplinary Committee of the ICAI. The said interim order has continued. The said writ petition is listed in this Court next on 20th October 2010. 5. Mr. Kaul, learned Senior counsel appearing for the Petitioner submits that as far as the enquiry against the Petitioner is concerned, the question of law raised in the present writ petition is identical to the question of law raised by Talluri Srinivas and, therefore, a similar interim relief should be granted to the Petitioner. W.P.(C) Nos. 2505 & 5352 of 2010 Page 14 of 39 6. Mr. Kaul points out that, as done in the case of Mr. Srinivas, the Petitioner too has produced a chart to show that there is an overlap of the disciplinary and criminal proceedings. He states that the Petitioner‟s case is covered by para 22 (ii) of the judgment of the Supreme Court in M. Paul Anthony v. Bharat Gold Mines Ltd. (1999) 3 SCC 679. 7. Having considered the above submissions, this Court directs that the disciplinary proceedings against the Petitioner shall remain stayed till the next date of hearing. 8. The second notice dated 26th July 2010 requires the Petitioner to remain present as a witness in the disciplinary proceedings initiated against Mr. P. Siva Prasad and Mr. Ravindranath which has also been fixed for 12th August 2010. Both Mr. P. Siva Prasad and Mr. Ravindranath have been cited as prosecution witnesses by the CBI in the chargesheet filed against the Petitioner. It is submitted that the Petitioner may not be compelled to make any statement before the Disciplinary Committee that may prejudice his defence in the criminal trial. 9. Mr. Tiku, on the other hand, submits that the Petitioner has been cited as a witness by the above two persons and the Respondent ICAI is under an obligation under the statute to summon him. He, nevertheless, states that the Petitioner will be under no compulsion to make any statement before the Disciplinary Committee which he might think will prejudice his defence in the criminal trial. Mr. Tiku added that