S.S.N. Moorthy, Member -
(1.) THE short question that arises in these two connected Appeals No. 8 and 9 of 2011 arising out of the same order is whether the Appellants are entitled to the copies of the statements / documents referred to / relied upon in the show cause notice issued by the Securities and Exchange Board of India (hereinafter referred to as 'the Board') to the Appellants and whether they are also entitled to cross -examine the persons whose statements are either relied upon or referred to in the show cause notice. Before we deal with this issue, it is necessary to refer to the background in which these appeals have been filed.
(2.) THE Board, among others, received on January 7, 2009 an email from one B. Ramalinga Raju, the then Chairman of Satyam Computer Services Limited (for short 'Satyam') revealing that statements of accounts of Satyam furnished to the stock exchanges were not true and fair. The email, inter alia, stated that balance -sheet of Satyam as on September 30, 2008 had inflated (non -existent) cash and bank balances of Rs. 5040 crores as against Rs. 5361 crores reflected in the books, accrued interest of Rs. 376 crores which was non -existent, understated liability of Rs. 1230 crores on account of funds arranged by him and overstated debtor position of Rs. 490 crores as against Rs. 2651 crores reflected in the books. The email also mentioned about the artificial cash and bank balances for the quarter ending September 30, 2008 and that the gap in the balance -sheet had arisen on account of inflated profits over a period of last several years. On receipt of this email, the Board ordered investigations into the affairs of Satyam in order to ascertain whether the provisions of the Securities and Exchange Board of India Act, 1992 (for short the Act) and the rules and regulations made there under had been violated. The Board also ordered inspection of the books of accounts of Satyam. Since Price Waterhouse, the Appellant in Appeal No. 8 of 2011, was the auditor of Satyam, the Board ordered inspection of the documents that were available with the Appellant also. Investigations revealed that Satyam had more than 125 bank accounts with different banks including the Bank of Baroda, New York Branch. Since the email had stated that the balances as reflected in the books of accounts were not correct, the Board sought confirmation of the balances from the banks including the Bank of Baroda, New York Branch. It transpired that there was substantial difference in the balance as per the books and the balance as per the confirmation sent by the bank. Investigations further revealed that Satyam received two sets of bank statements - daily bank statement and monthly bank statement and that the daily bank statement received through email was printed and filed in the accounts wing and the monthly bank statement was being received through internal courier from the office of Ramalinga Raju (the then Chairman of Satyam). The Board found that the debit and credit entries in the two sets of statements were substantially different and that the books of account of Satyam were being prepared on the basis of monthly statements which were incorrect. Investigations also revealed that sales/revenue were inflated through insertion of large number of fictitious invoices raised in respect of fake customers and/or transactions and that the Appellants had obtained direct bank confirmations on 13 occasions from various banks during six quarters. The bank confirmations received by the auditors from Satyam and which had been relied upon by them showed balances which were at variance with those given in the confirmations directly received from the banks. Price Waterhouse, the Appellant in Appeal No. 8 of 2011 is a partnership firm registered with the Institute of Chartered Accountants of India (ICAI) with its office in Bangalore and it was the auditor of Satyam from April 1, 2000 to September, 2008. S. Gopalakrishnan, a partner of the firm had certified the audit reports for the period from April, 2000 to March, 2007 and Srinivas Talluri, another partner of the firm had certified the audit report(s) for the period from April, 2007 to September, 2008. Since the inaccurate financial results of Satyam were being published quarter after quarter, this, according to the Board, distorted the decision of millions of investors and induced them to trade in the securities of Satyam. It is, therefore, alleged that the Appellant had not properly audited the financial statements of Satyam and there was no reasonable basis for the opinion expressed by it in its report in view of the serious irregularities. The financial statements presented, did not present fairly and accurately the financial position of Satyam which was manipulated and false. It is further alleged that the Appellant did not maintain control over the process of sending and receiving confirmations, ignored the differences between the two sets of confirmations and the discrepancies in the indirect confirmation, did not make any examination or enquiry in this regard in violation of stipulated norms and practices which indicates its complicity or acquiescence in misreporting and manipulating the books of accounts of Satyam. It is further alleged that the Appellant is liable to be treated as having participated in the fraud perpetrated by Ramalinga Raju, Chairman of Satyam and others or as having aided and abetted the same. Accordingly, the Appellants were asked to show cause as to why appropriate action should not be taken against them under Section 11 and 11B of the Act and Regulation 11 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (for short the FUTP Regulations). The Appellants replied to the show cause notices and inter alia raised the point of jurisdiction of the Board to proceed against the Appellants who are members of the Institute of Chartered Accountants of India and are regulated by the provisions of the Chartered Accountants Act, 1949. According to the Appellants, the Board lacked inherent jurisdiction to enquire into the conduct of the Appellants who are professional chartered accountants. The Appellants filed writ petitions No. 5249 and 5256 of 2010 before the High Court of Judicature at Bombay challenging the show cause notices issued by the Board. The said writ petitions were rejected by the High Court by its judgment dated August 13, 2010 holding inter alia that the Board has power under the Act to take regulatory measures in the matter of safeguarding the interest of 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. The relevant portions of the said judgment are reproduced for facility of reference:
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 and balance -sheets of 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.
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 enquiry 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.
It is seen from the records that before approaching the Hon'ble High Court challenging the jurisdiction of the Board to initiate action against the Appellants under the Act, the Appellants had made certain requests for copies of documents and statements of witnesses relied upon by the Board in the show cause notice and the Board had responded thereto. After the High Court order was passed, another application dated November 22, 2010 was filed on behalf of the Appellants to the Board requesting for statements of certain persons recorded by the Board during investigations and also requesting for cross examination of certain witnesses whose statements have been relied upon. The said application is reproduced hereunder for easy reference:
1. The Applicant refers to the Show Cause Notice dated February 14, 2009 and Supplementary Show Cause Notice dated February 19, 2010 (collectively, "the Show Cause Notices") issued by Securities and Exchange Board of India ("SEBI").
2. As already mentioned in the replies dated August 10, 2009 and April 26, 2010, the conclusions arrived by SEBI in the Show Cause Notices are largely based on and rely upon statements of certain persons. The Applicant has sought to examine/cross -examine the persons whose statements are basis of the allegations against the Applicant. In order to enable the Applicant to meet the charges leveled against the Applicant, cross -examination of the following persons is requested:
(a) Shri Ramalinga Raju, former Chairman, Satyam;
(b) Shri Rama Raju, former Managing Directing, Satyam;
(c) Mr. Vadlamani Srinivas, former Senior Vice President and Chief Financial Officer; and
(d) Mr. G. Rama Krishna, former Vice President (Finance), Satyam
(e) Please also note that the Show Cause Notice dated February 14, 2010 refers to and relied upon statements made by various undisclosed persons in paragraphs 184.108.40.206, 220.127.116.11, 18.104.22.168, 22.214.171.124, 3.2.2 and 3.3.1. We now call upon you to disclose the identity of the persons whose statements are so referred to and relied upon against the Applicant and also keep these persons present and available for cross -examination.
3. The above list is a preliminary list of persons that the Applicant believes it needs to cross -examine. The Applicant reserves the right to add, supplement or modify the above list as may be required.
(3.) STATEMENTS of the following persons have been recorded by SEBI and have been sought to be interpreted and relied upon in the Show Cause Notices and the Applicant seeks the right to examine/cross - examine the said persons:
(a) Mr. Srinivas Talluri, PW partner
(b) Mr. C. H. Ravindranath, PW engagement team
(c) Mr. P. Siva Prasad, PW engagement team
(d) Mr. Prekki Srinivasa Sudhakar, PW engagement team
(e) Ms. Madduri Negi Venkata Gayatri, PW engagement team
(f) Mr. Samvit Durga, PW engagement team
(g) Mr. Girish Bala Kishore Tallam, PW engagement team
(h) Mr. N. Ramu, PW engagement team
(i) Shri V.V. K. Raju, Senior Vice President (Finance), Satyam;
(j) Shri Srinivas Kishan Anapu, head of Internal Information Systems, Satyam;;