Case: Price Waterhouse &amp; Company &amp; Others Vs. Securities and Exchange Board of India &amp; Another

If at the initial stage it becomes necessary to pass an interim order, the SEBI has been endowed with such a power under Section 11 of the Act. In case the provisions of section 11 are construed in a restrictive manner, the interests of the investors in securities and development and regulation of securities market will suffer. Mr. Raval, the learned Additional Solicitor General has also taken the same position on behalf of the Board. Though the SEBI is possessed 9of the power to pass an interim order, in the instant case it did not exercise that power on the ground that it was in the interest of the shareholders to allow them to receive the value of their shares at the rate of Rs. 100/-per share which is the same rate at which the shares of SVCL held by the financial institutions were purchased by the nine companies. It cannot be said that the reason for not suspending the process set in motion by the public announcement was not adequate or was arbitrary or the reason suffered from illegality or irrationality. The grant of interim order was in the discretion of the SEBI. Such direction cannot be interfered with even when serious and substantial questions have been raised by the petitioner and the third respondent. I have no doubt that the SEBI will bestow its consideration on the issues which arise in the case. The determination of these questions will not be made by this Court sitting in writ jurisdiction when such determination lies in the domain of the authorities mentioned in the Regulations..... ...... ...............38. Considering the judgments and the scheme of the Act which we have adverted to earlier, the SEBI in the instant case, on the basis of show cause notices, has jurisdiction to inquire into and investigate the matter in connection with manipulating and fabricating the books of accounts and balance-sheets of the Company. The powers of the SEBI are, therefore, independent and it cannot be said that it can encroach upon the powers of the Institute under the CA Act.39. Section 11 (1) of the SEBI Act empowers SEBI to inquire into as well as to initiate the proceedings like the one in question. As pointed out earlier, the proceedings started against the petitioners on the basis of some statements made by one Ramalinga Raju on the basis of email 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 accounts 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 reason any of the petitioners had played any role in any manner they may bring the matter to the notice of the SEBI. In a given case, if ultimately it is found that there was only some omission without any mens rea or connivance with anyone in any manner, naturally on the basis of such evidence the SEBI cannot give any further directions. If there is available evidence, SEBI can proceed further in the matter of giving direction against a particular Chartered Accountant as envisaged by Sections 11 and 12 of the SEBI Act and Regulations in this behalf. On the basis of detailed evidence on record, this aspect is required to be considered by SEBI. The question of jurisdictional fact depends upon the facts which may be available at the time of evidence before the SEBI. SEBI will have to answer the question as to whether on the basis of evidence on record, it has any power to give directions as provided under the SEBI Act. This aspect will depend upon the evidence which may be available at the time of inquiry. All these aspects are therefore left to the consideration of SEBI at the time of passing final order in the inquiry.40. It is needless to say and also as pointed out by Mr. Ravi Kadam that SEBI is not going to transgress its jurisdiction and will confine itself to the object of protecting the interests of investors and regulating the securities market. It is in the said context that the above matter will have to be considered. The SEBI shall now proceed with the matter as indicated above in accordance with law and pass appropriate orders after conclusion of the inquiry. At the time of passing the ultimate order, the SEBI shall consider the aspect as to whether any directions can be issued by SEBI on the basis of evidence available on record as per the provisions of Section 11 and 12 of the SEBI Act. The ultimate jurisdiction of SEBI for giving any such direction will depend upon the evidence which may be available during the course of inquiry. By this judgment, we have only indicated that on the face of it, it cannot be said that SEBI has absolutely no jurisdiction to issue show cause notices against the petitioners simply because they are professionals and whether the facts stated in the show cause notice are correct or not may be adjudicated as per the evidence available, after affording reasonable opportunity of hearing to the petitioners.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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 SEBI has power to prohibit fraudulent and unfair trade practices relating to securities market. Under Section 11 (4) of the SEBI Act, the SEBI is entitled to pass appropriate orders in the interest of investors or securities market and is entitled to take measures as prescribed in the said Section. Under Section 11 B, powers have been conferred on the SEBI to give appropriate directions even to any person or class of persons referred to in Section 12 or associated with the securities market. The powers available to the SEBI under the Act are to be exercised in the interest of investors and interest of securities market. In order to safeguard the interest of investors or interest of securities market, SEBI is entitled to take all ancillary steps and measures to see that the interest of the investors is protected. Looking to the provisions of the SEBI Act and the Regulations framed thereunder, in our view, it cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, the SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that the SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed Company. Whether such directions and orders are required to be issued or not is a matter of inquiry. In our view, the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry. It is true, as argued by the learned counsel for the petitioners, that the SEBI cannot regulate the profession of Chartered Accountants. This proposition cannot be disputed in any manner. It is required to be noted that by taking remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by the SEBI, it can never be said that it is regulating the profession of the Chartered Accountants. So far as listed Companies are concerned, the SEBI has all the powers under the Act and the Regulations to take all remedial and protective measures to safeguard the interest of investors and securities market. So far as the role of Auditors is concerned, it is a very important role under the Companies Act. As posited in Section 227 of the Companies Act, 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. 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 matter of their investments in the securities market. Normally, an investor invests his money by considering the financial health of the Company and in order to find out the same, one will naturally would bank upon the accounts andof the Company. If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed Company. In our view, the SEBI has got inherent powers to take all ancillary steps to safeguard the interest of investors and securities market. The powers conferred under various provisions of the Act are wide enough to cover such an eventuality and it cannot be given any restrictive meaning as suggested by the learned counsel for the petitioners. It is the statutory duty of the SEBI to see that the interests of the investors are protected and remedial and preventive measures are required to be taken in this behalf. It is required to be noted that in the instant case the inquiry is still pending and ultimately the decision is required to be taken by SEBI on the basis of available evidence on record. However, in order to determine the jurisdiction of SEBI, the contents of the show cause notice which is the first step of initiating proceedings are required to be seen. Reading the contents of the show cause notices and the relevant statutory provisions, it cannot be said that the SEBI has no jurisdiction at all to enquire into the affairs of the petitioners in so far as it relate to Satyam. In the case of Government contracts, the Government is entitled to blacklist a particular tenderer with a view to see that such a tenderer is not allowed to participate in the future tenders the same is done by following appropriate procedure in that behalf. In our view, it cannot be said that the show cause notices issued by SEBI are, on the face of it, not sustainable on the ground that the SEBI has no jurisdiction to enter into the affairs of the petitioners or that it lacks jurisdiction to go into such questions.In so far as the submission of Mr. Dwarkadas that the petitioners are not directly associated by the securities market is concerned, it is true that the petitioners may not have any direct association with the securities market since they were performing their duties as Auditors of the Company and were associated with the preparation of theof the Company. It is however required to be noted that normally an investor would like to invest his money in the shares of a Company on the basis of reflection of Companys financial health as disclosed in theof the Company and he may consider that it is safe to invest money in a particular company, if thehave 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 auditedof the Company and would presume that the facts incorporated in theare 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 ofmay 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. Dwarkadas that except the Institute, no other body has any power to regulate the profession, it is required to be noted that SEBIs powers are restricted only in connection with taking care of the interest of the investors and safeguarding the interest of the investors and also to regulate the share market. SEBI has, therefore, all the powers to give appropriate directions in the aforesaid field. By initiating the proceedings, it cannot be said that the SEBI is encroaching upon the rights of the Institute or prohibiting a Chartered Accountant from practicing as a Chartered Accountant. It is natural that SEBI has no power to pass an order prohibiting a particular Chartered Accountant from practicing as a Chartered Accountant or cannot debar a Chartered Accountant from practicing as Chartered Accountant but SEBI can definitely take regulatory measures under the SEBI Act in the matter of safeguarding the interest of the investors and securities market and in order to achieve the same, it can take appropriate remedial steps which may include keeping a person including a Chartered Accountant at a safe distance from the securities market. SEBI can always take preventive as well as remedial measures in this behalf. Exercising such powers, therefore, cannot be said to be in any way in conflict with the powers of the Institute under the CA Act. If ultimately any decision is taken by debarring any particular person from auditing the books of a listed company, such direction can always be said to be within the powers of SEBI and that is in the aid of regulating the affairs in connection with the investors interests and the interest of the securities market. By exercising such powers, it cannot be said that the SEBI is trying to regulate the profession of Chartered Accountants in any manner and in that view of the matter, in our view, it can never be said that it is in conflict with Section 24 of the CA Act.29. In so far as the submission of Mr. Dwarkadas that an Auditor can be removed only as per Section 227 of the Companies Act is concerned, it is true that Section 227 of the Companies Act provides for removing of an Auditor. However that is an independent and separate power altogether. So far as Section 55A of the Companies Act is concerned, SEBI can exercise certain powers as provided under the Companies Act. Sections 55A and 227 read asPowers of Securities 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 nonpayment 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 subsection (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 terms on which they have been made are not prejudicial to the interest of the company or its members;(b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;(c) where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the Company; (d) whether loans and advances made by the company have been shown as deposits;(e) whether personal expenses have been charged to revenue account;(f) where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and theis correct, regular and not misleading.2. The auditor shall make a report to the members of the company on the accounts examined by him, and on everyand profit and loss account and on every other document declared by this Act to be part of or annexed to theor profit and loss account which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view(i) in the case of theof the state of the companys affairs as at the end of its financial years; and(ii) in the case of the profit and loss account, of the profit or loss for its financial year.(3) The Auditors report shall also state(a) whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit;(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him;(bb) whether the report on the accounts of any branch office audited under Section 228 by a person other than the companys auditor has been awarded to him as required by clause (c) of subsection (3) of that section and how he has dealt with the same in preparing the auditors report;(c) whether the companysand 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 andcomply with the accounting standards referred to in subsection (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 subsection (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 subsection (2) or in clauses (a), (b), (bb), (c) and (d) of subsection (3) is answered in the negative or with a qualification, the auditors report shall state the reason for the answer. 4A. The Central Government may, by general or special order, direct that, in the case of such class or description of companies as may be specified in the order, the auditors report shall also include a statement on such matters as may be specified therein: Provided that before making any such order the Central Government may consult the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), in regard to the class or description of companies and other ancillary matters proposed to be specified therein unless the Government decides that such consultation is not necessary or expedient in the circumstances of the case.5. The accounts of a company shall not be deemed as not having been, and the auditors report shall not state that those accounts have not been properly drawn up on the ground merely that the company had not disclosed certain matters if (a) those matters are such as the company is not required to disclose by virtue of any provisions contained in this or any other Act, and (b) those provisions are specified in theand profit and loss account of the company.30. As pointed out earlier, the aforesaid provisions are independent, over and above the powers available to the SEBI under the SEBI Act. It cannot be said that the SEBI has no power to take remedial measures as provided under Section 11 of the SEBI Act. It is required to be noted that so far as the powers of the Institute are concerned, the same are in connection with prohibiting the Chartered Accountant from practicing and removing his name from the roll which cannot be said to be similar to the powers prescribed under Section 11 and 12 of the SEBI Act as well as the Regulations framed thereunder. For example, under Section 24 of the SEBI Act, SEBI is even entitled to take penal action which powers are not available with the Institute in any manner. At this stage even the provisions of the Consumer Act may also be taken into account whereunder in the matter of deficiency in service, an appropriate order can be passed even against a professional but that would not mean that while exercising such powers the forum under the Consumer Protection Act is encroaching upon the powers of either the Institute of Chartered Accountants or for that reason powers prescribed under any other Act. It is true, as argued by Mr. Dwarkadas, 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. In so far as the submission of violation of fundamental rights under Article 19 (1) (g) and 19 (6) are concerned, a citizen is entitled to practice 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 of a listed Company, if he is found that he has committed any misdeeds or fraud qua the interest of investors or the securities market, it can always regulate its affairs by preventing such person from carrying on such work for a particular period and exercising of such powers can be said to be in any way infringement of Article 19 (1) (g) of the Constitution of India. At this stage it is required to be noted that the jurisdiction of SEBI is restricted only to the listed companies. We are not in a position to agree with the submission of Mr. Dwarkadas that it is not open to SEBI to take shelter of accounting standards prescribed under the CA Act. However, if it is found in a given case that the Chartered Accountant has violated the audit norms prescribed by the Institute under the CA Act, the SEBI can certainly consider the said aspect in order to find out as to whether such a professional person should be allowed to continue to function as an Auditor of a listed Company if by continuing such person as an Auditor of a listed Company, it may hamper the interest of the investors of such a listed Company. Considering the matter from the aforesaid angle and considering the provisions of the SEBI Act, Companies Act and CA Act, in our view, it can never be said that the SEBI has absolutely no jurisdiction and that professionals like Chartered Accountants cannot be subjected to any inquiry or proceedings by the SEBI on the ground that it is only the Institute which can take care of such a situation. So far as the Regulations are concerned, they have been framed under Section 30 of the SEBI Act. Reading the said Section discloses that the SEBI is vested with the necessary powers for safeguarding the interest of investors by framing appropriate regulations. The SEBI Regulations are wide enough to be attracted to cover the nature of allegations made in the show cause notices. Whether the allegations stand proved would be a matter of inquiry on the basis ofper the show cause notices, the petitioners have been asked to show cause as to why the petitioners should not be debarred from carrying out the auditing work of a listed company for a particular period. As stated above, the jurisdiction and powers of the SEBI in this behalf are only restricted to the field of listed companies only. It is like a preventive action by which the SEBI wants to safeguard the interest of the investors. In the instant case, there is prima facie material available with the SEBI for holding such an inquiry. In view of the same, the decision of the Supreme Court cited above has no relevance to the facts of the present case.35. As regards the professional norms are concerned, it is true, as submitted by Mr. Dwarkadas, that it is only the Institute which is the regulating body to deal with the same. However, in a given case, if there is prima facie evidence in connection with the conduct of a Chartered Accountant such as fabricating the books of accounts, etc., the SEBI can certainly give appropriate direction not to utilize the services of such a Chartered Accountant in the matter of audit of a listed Company. At this stage we would like to put a word of caution that these observations have been made by us only with a view to find out whether SEBI lacks inherent jurisdiction and it should not mean that this Court has expressed any opinion regarding the conduct of a particular Chartered Accountant involved in the case. However, in order to find out whether there is total lack of jurisdiction or whether SEBI has jurisdiction to adjudicate the matter and in order to examine this question that these observations have been made by us. Since the inquiry has not commenced, we have merely confined ourselves to the allegations made in the show cause notices to find out as to whether SEBI has jurisdiction to proceed further with the inquiry and nothing more. However, on conclusion of inquiry, if no evidence is available regarding fabrication and falsification of accounts, etc., then naturally SEBI cannot give any direction in any manner 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.Considering the judgments and the scheme of the Act which we have adverted to earlier, the SEBI in the instant case, on the basis of show cause notices, has jurisdiction to inquire into and investigate the matter in connection with manipulating and fabricating the books of accounts andof the Company. The powers of the SEBI are, therefore, independent and it cannot be said that it can encroach upon the powers of the Institute under the CA Act.Section 11 (1) of the SEBI Act empowers SEBI to inquire into as well as to initiate the proceedings like the one in question. As pointed out earlier, the proceedings started against the petitioners on the basis of some statements made by one Ramalinga Raju on the basis of email 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 accounts 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 aauthority, 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 reason any of the petitioners had played any role in any manner they may bring the matter to the notice of the SEBI. In a given case, if ultimately it is found that there was only some omission without any mens rea or connivance with anyone in any manner, naturally on the basis of such evidence the SEBI cannot give any further directions. If there is available evidence, SEBI can proceed further in the matter of giving direction against a particular Chartered Accountant as envisaged by Sections 11 and 12 of the SEBI Act and Regulations in this behalf. On the basis of detailed evidence on record, this aspect is required to be considered by SEBI. The question of jurisdictional fact depends upon the facts which may be available at the time of evidence before the SEBI. SEBI will have to answer the question as to whether on the basis of evidence on record, it has any power to give directions as provided under the SEBI Act. This aspect will depend upon the evidence which may be available at the time of inquiry. All these aspects are therefore left to the consideration of SEBI at the time of passing final order in the inquiry.40. It is needless to say and also as pointed out by Mr. Ravi Kadam that SEBI is not going to transgress its jurisdiction and will confine itself to the object of protecting the interests of investors and regulating the securities market. It is in the said context that the above matter will have to be considered. The SEBI shall now proceed with the matter as indicated above in accordance with law and pass appropriate orders after conclusion of the inquiry. At the time of passing the ultimate order, the SEBI shall consider the aspect as to whether any directions can be issued by SEBI on the basis of evidence available on record as per the provisions of Section 11 and 12 of the SEBI Act. The ultimate jurisdiction of SEBI for giving any such direction will depend upon the evidence which may be available during the course of inquiry. By this judgment, we have only indicated that on the face of it, it cannot be said that SEBI has absolutely no jurisdiction to issue show cause notices against the petitioners simply because they are professionals and whether the facts stated in the show cause notice are correct or not may be adjudicated as per the evidence available, after affording reasonable opportunity of hearing to thewe have only interpreted the provisions of the SEBI Act and the CA Act, in our view, no substantial question of law of general importance is involved and hence the prayer for leave to appeal to Supreme Court is rejected.