-1- W.P. Nos. 5249 & 5256 of 2010 IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION WRIT PETITION NO. 5249 OF 2010 1. Price Waterhouse & Co. ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 007568S ) having address at 5th floor, Tower D, ) The Millennia, 1 & 2 Murphy Road, ) Ulsoor, Bangalore-560 008. ) 2. Ms. Sharmila Karve, Partner, ) Price Waterhouse & Co. ) bearing Registration No. 007568S ) having address at 5th floor, Tower D, ) The Millennia, 1 & 2 Murphy Road, ) Ulsoor, Bangalore-560 008. )..Petitioners versus 1. Securities and Exchange Board of India, ) SEBI Bhavan, Plot No. C4-A, G Block, ) Bandra Kurla Complex, Bandra (East), ) Mumbai-400 051 ) 2. Whole Time Member Mr. M.S. Sahoo, ) Securities and Exchange Board of India, ) SEBI Bhavan, Plot No. C4-A, G Block, ) Bandra Kurla Complex, Bandra (East), ) Mumbai-400 051 ).Respondents Mr. Janak Dwarkadas, Senior Advocate, along with Mr. Shyam Mehta, Mr. Somasekhar Sundaresan, Mr. Zerick Dastur, Ms. Khursheed Vazifdar and Ms. Prerna Arora, instructed by M/s. J. Sagar Associates, for the petitioners. Mr. Ravi Kadam, Advocate General, along with Mr. Shiraz Rustomjee, Mr. Jayesh Ashar, Mr. Mihir Mody and Mr. Rajesh Talekar, instructed by M/s. K. Ashar & Company, for the respondents. -2- W.P. Nos. 5249 & 5256 of 2010 WITH WRIT PETITION NO. 5256 OF 2010 1. Price Waterhouse & Co. ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 007567S ) having address at 5th floor, Tower D, ) The Millennia, 1 & 2 Murphy Road, ) Ulsoor, Bangalore-560 008. ) 2. Price Waterhouse & Co. ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 304026E ) having address at Plot No. Y-14, Block EP,Sector V ) Salt Lake Electronics Complex, ) Bidhan Nagar, Kolkata-700 091 ) 3. M/s. Lovelock & Lewes ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 301056E ) having address at Plot No. Y-14,Block EP, Sector V ) Salt Lake Electronics Complex, ) Bidhan Nagar, Kolkata-600 091 ) 4. M/s. Lovelock & Lewes ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 116150W ) having address at 252,Veer Savarkar Marg, ) Shivaji Park, Dadar, ) Mumbai-400 028 ) 5. Price Waterhouse & Co. ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 301112E ) having address at Plot No. Y -14, Block EP, Sector V ) Salt Lake Electronics Complex, ) -3- W.P. Nos. 5249 & 5256 of 2010 Bidhan Nagar, Kolkata-700 091 ) 6. Price Waterhouse & Co. ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 12754 N ) having address at P1, Aditya Vihar, ) 30, Saidulajab, Mehrauli, Badarpur Road, ) New Delhi-110 030 ) 7. Price Waterhouse & Co. ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 50032S ) having address at 32, Khadar Nawaz Khan Road, ) Nugambakkam, Chennai-600 006 ) 8. Price Waterhouse & Co. ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 16844N ) having address at Sucheta Bhavan, ) 1st floor, II-A,Vishnu Digamber Marg, ) New Delhi-110 002 ) 9. M/s. Dalal & Shah ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 102020W ) having address at President Plaza, 1st floor, ) Plot No. 36, Opp. Muktidham Derasar, ) Thatlej Cross Road, S.G. Highway, ) Ahmedabad-380 054 ) 10. M/s. Dalal & Shah ) a partnership firm registered with the ) Institute of Chartered Accountants of ) India bearing Registration No. 102021 W ) having address at 252, Veer Savarkar Marg, ) Shivaji Park, Dadar, Mumbai-400 028 ) 11. Mr.Vivek Prasad, Partner ) Price Waterhouse & Co. ) bearing Registration No. 007567S ) -4- W.P. Nos. 5249 & 5256 of 2010 having address at 5th floor, Tower D, ) The Millennia, 1 & 2 Murphy Road, ) Ulsoor, Bangalore-560 008. ) 12. Mr. Partha Ghosh, Partner, ) Price Waterhouse & Co. ) bearing Registration No. 304026E ) having address at Plot No. Y-14, Block EP,Sector V ) Salt Lake Electronics Complex, ) Bidhan Nagar, Kolkata-700 091 ) 13. Mr. Lalit Punjabi, Partner, ) M/s. Lovelock & Lewes ) bearing Registration No. 301056E ) having address at Plot No. Y-14,Block EP, Sector V ) Salt Lake Electronics Complex, ) Bidhan Nagar, Kolkata-600 091 ) 14. Mr. Thomas Mathew, Partner, ) M/s. Lovelock & Lewes ) bearing Registration No. 116150W ) having address at 252,Veer Savarkar Marg, ) Shivaji Park, Dadar, ) Mumbai-400 028 ) 15. Mr. Kersi Vachha, Partner, Price Waterhouse & Co. ) bearing Registration No. 301112E ) having address at Plot No. Y -14, Block EP, Sector V ) Salt Lake Electronics Complex, ) Bidhan Nagar, Kolkata-700 091 ) 16. Mr. Kumar Dasgupta, Partner, ) Price Waterhouse & Co. ) bearing Registration No. 12754 N ) having address at P1, Aditya Vihar, ) 30, Saidulajab, Mehrauli, Badarpur Road, ) New Delhi-110 030 ) 17. Mr. Venkat Raman Srinivasan, Partner, ) Price Waterhouse & Co. ) bearing Registration No. 50032S ) having address at 32, Khadar Nawaz Khan Road, ) Nugambakkam, Chennai-600 006 ) -5- W.P. Nos. 5249 & 5256 of 2010 18. Mr. Bipin Pawar, Partner, ) Price Waterhouse & Co. ) bearing Registration No. 16844N ) having address at Sucheta Bhavan, ) 1st floor, II-A,Vishnu Digamber Marg, ) New Delhi-110 002 ) 19. Ms.Anuradha Tuli, Partner, ) M/s. Dalal & Shah ) bearing Registration No. 102020W ) having address at President Plaza, 1st floor, ) Plot No. 36, Opp. Muktidham Derasar, ) Thatlej Cross Road, S.G. Highway, ) Ahmedabad-380 054 ) 20. Mr. S. Venkatesh, Partner ) M/s. Dalal & Shah ) bearing Registration No. 102021 W ) having address at 252, Veer Savarkar Marg, ) Shivaji Park, Dadar, Mumbai-400 028 )..Petitioners versus 1. Securities and Exchange Board of India, ) SEBI Bhavan, Plot No. C4-A, G Block, ) Bandra Kurla Complex, Bandra (East), ) Mumbai-400 051 ) 2. Whole Time Member Mr. M.S. Sahoo, ) Securities and Exchange Board of India, ) SEBI Bhavan, Plot No. C4-A, G Block, ) Bandra Kurla Complex, Bandra (East), ) Mumbai-400 051 ).Respondents Mr. N.H. Seervai, Senior Advocate, along with Mr. Shyam Mehta, Mr. Somasekhar Sundaresan, Mr. Zerick Dastur, Ms. Khursheed Vazifdar and Ms. Prerna Arora, instructed by M/s. J. Sagar Associates, for the petitioners. Mr. Ravi Kadam, Advocate General, along with Mr. Shiraz Rustomjee, Mr. Jayesh Ashar, Mr. Mihir Mody and Mr. Rajesh Talekar, instructed by M/s. K. Ashar & Company, for the respondents. -6- W.P. Nos. 5249 & 5256 of 2010 CORAM: P.B. MAJMUDAR & R.M. SAVANT, JJ. DATE: AUGUST 13, 2010. ORAL JUDGMENT: (Per P.B. Majmudar, J.) 1. The question raised in these petitions is as to whether the Securities and Exchange Board of India (for short “the SEBI”) has power to issue show cause notices to the Chartered Accountants in connection with the work which they have undertaken for a listed Company in the matter of maintaining accounts and balance-sheets? 2. These petitions have been filed challenging the action of the SEBI to issue show cause notices to the firm of Chartered Accountants as well as to the individual Chartered Accountants in connection with the audit performed 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 -7- W.P. Nos. 5249 & 5256 of 2010 the SEBI against the Chartered Accountants under the provisions of Section 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 January 07, 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 the e-mail referred to in the show cause notices are to the effect that the balance-sheet of the Company as on September 30, 2008 carries inflated (non-existent) cash and bank balances of Rs. 5040 crores (as against Rs. 5361 crores reflected in the books). It is also alleged that the accrued interest of 376 crores is shown which is non-existent. The liability of Rs. 1230/- was shown on account of funds arranged by the said Mr. Raju and overstated debtor position of Rs. 490 crores as against Rs. 2651 crores reflected in the books. It is also alleged that for the quarter ending on September 30, 2008, the Company had reported a revenue of Rs. 2700 crores and had an operating margin of Rs. 649 crores (24 per cent of the revenue) as against actual revenue of Rs. 2112 crores and an actual operating margin of Rs.61 crores ( 3 per cent revenues) resulting in the artificial cash and bank balances going up by Rs. 588 crores in this quarter. It is alleged that the gap in the balance-sheet has arisen purely on account of inflated profits over a period of last several years. On the basis of receiving such information, the SEBI ordered an investigation into -8- W.P. Nos. 5249 & 5256 of 2010 the affairs of the Company to ascertain particularly whether the provisions of the SEBI Act and Rules and Regulations made thereunder have been violated. To facilitate such investigation, SEBI also ordered inspection of the books and accounts of the Company. 3. As per the show cause notice, the findings of the investigation and inspection conducted so far which are found relevant in connection with the relations of the concerned petitioners as Auditors of the Company and abstract of the cash and balance balance of the Company is also incorporated in the said show cause notice. Various accounting figures have been given in the said show cause notice. The summary of findings has been given in the said show cause notice and in paragraph 3.4.1, following prima facie conclusions are reached by SEBI. “a. It is unambiguous from the above analysis that the current account balance of BoB New York branch has been overstated by Rs. 1,731.88 crore as on September 30, 2008. b. Fixed Deposits accounts have been overstated by Rs. 3308.41 crore as on September 30, 2008. c. these overstatements can be traced back to the year 2001 to 2008, cash and bank balances have been overstated by Rs. 5,040.29 crore. d. Since there were negligible or 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. -9- W.P. Nos. 5249 & 5256 of 2010 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 & 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 (hereinafter referred to as “the Institute”) has also been finding place in the said show cause notice. After referring to the provision of Section 12A of the SEBI Act and the Regulations framed thereunder, the show cause notices were issued to the petitioners as to why action under Sections 11, 11B and 11 (4) of the SEBI Act and Regulation 11 of the (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as “the SEBI Regulation”) should not be taken against all the petitioners which may include prohibiting the petitioners firm, directly or indirectly, from in any manner issuing any certificate with respect to compliance -10- W.P. Nos. 5249 & 5256 of 2010 of obligations of listed companies and intermediaries registered with SEBI and requirements of those made under the SEBI Act, the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996 and the provisions of the Companies Act, 1956 which are administered by SEBI under Section 55A of the SEBI Act, the Rules , Regulations, guidelines made under these Acts (which are administered by SEBI) and the listing agreement permanently or for a specific period and that the petitioners should be restrained from assessing the securities market and prohibited from buying, selling or dealing in the securities of the Company and its associate listed Companies in any manner whatsoever, permanently or for a specific period. It has also been mentioned in the said show cause notices that this is without prejudice to SEBI’s right to initiate prosecution under Section 24 of the SEBI Act and other action as it may deem fit in terms of the provisions of the Act and Rules and Regulations framed thereunder. The petitioners were asked to show cause within 21 days as to why such action should not be taken. 5. A supplemental show cause notice was also issued in pursuance of the further material which became available to the SEBI during the course of investigations. Particulars in this connection have also been given in the said show cause notice. -11- W.P. Nos. 5249 & 5256 of 2010 6. The petitioners gave replies to the said show cause notices and inter alia raised the point of jurisdiction of SEBI to proceed against the petitioners who are members of the Institute as, according to the petitioners, SEBI lacks inherent jurisdiction to inquire into the conduct of the petitioners who are professionals and the point of 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 leveled 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 leveled 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 -12- W.P. Nos. 5249 & 5256 of 2010 but he failed to pass any order in this behalf and is now going to decide the matter on merits by asking the petitioners to submit their say on merits of the allegations alleged against the petitioners in the show cause notice. He submitted that the petitioners have filed the above petition with a prayer that the proceedings initiated by SEBI may be quashed and set aside as the SEBI lacks inherent jurisdiction to adjudicate upon the show cause notice. So far as Writ Petition No. 5256 of 2010 is concerned, the same is filed by partnership firms of Chartered Accountants comprising of several partners. Mr. Seervai, learned senior counsel appearing for these petitioners, submitted that the petitioners had not taken part in any manner in the matter of audit of the books of account of the Company and, therefore, the show cause notices could not be issued against the said petitioners. It is submitted that simply because the petitioners are associated with Price Waterhouse & Company is no ground for issuing show cause notices against them. 9. Both these petitions are accordingly filed for quashing the proceedings pending before the SEBI on the ground that there is inherent lack of jurisdiction on the part of the SEBI to initiate any proceedings or call for any information from the petitioners who are discharging their duty as professionals and if there is any omission or neglect on the part of any of the petitioners or for that purpose by any Chartered Accountants in the matter of discharging their professional duties, it is only the Institute who has the power to regulate this -13- W.P. Nos. 5249 & 5256 of 2010 profession of the Chartered Accountants under the Chartered Accountants Act, 1949 (hereinafter referred to as the “CA Act”) and SEBI has no jurisdiction to issue the show cause notices and inquire into or adjudicate the alleged violations against the petitioners. Though during the course of this petition, it is argued by Mr. Dwarkadas and Mr. Seervai that the SEBI should have decided the question of jurisdiction first and should have at least passed an order on the applications of the petitioners one way or the other. The concerned Member of SEBI has failed to discharge his duties as a quasi judicial authority by not passing any order on such applications of the petitioners regarding the preliminary issue of jurisdiction. It is submitted that it in any case at least some order was required to be passed by the concerned Member of the SEBI on the preliminary issue raised 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 -14- W.P. Nos. 5249 & 5256 of 2010 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 have been issued without jurisdiction. It is submitted by Mr. Dwarkadas and Mr. Seervai that in any case the concerned petitioners can never be said to be directly associated with the securities market and SEBI’s jurisdiction is limited only to regulate the securities market and not beyond that and that it can never be said that the petitioners are connected with the securities market in any manner and SEBI has no jurisdiction to initiate any inquiry in connection with the affairs of the petitioners who are discharging their duties as professional Chartered Accountants while auditing the accounts of a listed Company. It is submitted that the SEBI can regulate the securities market but cannot regulate the profession of Chartered Accountants. It is further submitted that under Section 24 of the CA Act, if any person tries to regulate the profession of Chartered Accountants, the same would amount to an offence and under these circumstances the show cause notices issued to the petitioners are required to be quashed and set aside by holding that the SEBI has no power to issue such show cause notices in connection with the alleged act or omissions attributed to the petitioners while discharging their professional duty with a Company. It is -15- W.P. Nos. 5249 & 5256 of 2010 further submitted on behalf of the petitioners that in any case, whether the petitioners have violated the audit norms prescribed by the Institute is not a matter which falls within the purview of the SEBI. Even otherwise, it cannot be said that the members of the SEBI can have any technical knowledge in this behalf and this aspect is therefore required to be left only with the body of professionals i.e. the Institute. It is also submitted on behalf of the petitioners that in any case by holding an inquiry under the SEBI Act, the SEBI cannot rely on the norms prescribed by the Institute and by lifting those norms from the said Act, SEBI cannot proceed against the Chartered Accountants on the ground that such audit norms have been violated by a particular Chartered Accountant. It is submitted that whether any audit norms have been violated by the petitioners is a question which can be decided only by the Institute and not by the SEBI. It is submitted that the SEBI, therefore, lacks jurisdiction to proceed further with the matter and to adjudicate the show cause notices. It is submitted on behalf of the petitioners that in a given 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. -16- W.P. Nos. 5249 & 5256 of 2010 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 to proceed on merits unless the question of jurisdiction is decided first. It is submitted that jurisdictional facts and adjudicatory facts are different and unless it is established that the SEBI has jurisdiction to go into the question which