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2023 (4) TMI 1269 - Board - SEBISEBI power to initiate proceedings against statutory auditor - irregularities and misstatements in the financial statements ignored by auditors - Investigation alleged that CAS and KKM had been acting against the fiduciary capacity, and that instead of working in the interest of shareholders of CG Power, they facilitated the scheme of cleaning up the books of accounts of CG Power, despite being aware of the irregularities and misstatements in the financial statements of CG Power - violation of provisions of section 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003. Inordinate delay in issuing the SCN i.e. about 5-6 years old - HELD THAT - There is no provision under SEBI Act which prescribes a time limit for taking cognizance of a breach of the provision of SEBI Act and Rules and Regulations made thereunder. Further, as per Section 11C of SEBI Act, SEBI can initiate investigation at any point of time, for any period of alleged violation or any period of alleged transactions. In this regard, we note that SEBI initiated the investigation as soon as information regarding the issue came to its notice. Examination relating to this case are complex and time consuming process, which may require detailed analysis of the case facts as the current case involves multiple layers of transactions between multiple entities including entities situated in foreign jurisdictions. Subsequently, pursuant to the completion of examination, SCN was issued on October 18, 2021. Thereafter, we note that all the relevant information relied on for crystallizing the allegations against the Noticees have been provided to them and there was no delay the way it has been argued by Noticee No.1. Further, Noticee No.1 has also not specified how the delay, if any, has caused prejudice to it. Whether inspection and copies of certain documents sought was not provided? - As all relevant material relied upon in the instant proceedings have been provided to Noticee and exhaustive reply has also been filed by Noticee No.1 as already detailed in the preceding paragraphs. Further, Noticee No.1 has also not sufficiently demonstrated how the documents sought by it were relevant to the allegation in the present case of not disclosing the fact of the case and how this ground of non-availability of information has caused prejudice to it, thus the principles of natural justice have been complied with and the Noticee No.1's request in this regard are without merits. Default by Auditors - As despite being aware of the irregularities and misstatements in the financials of CG Power, Noticee No. 1 and 2 facilitated the scheme of cleaning of the books of account by the company and allowed to show the financials of the company as true and fair by certifying the same in its audit report for 2016-17 and 2017-18 respectively. Accordingly, I note that by doing so, they have violated the provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003. Does the violation, if any, on part of the Noticees attract penalty under Section 15HA of the SEBI Act? - As the alleged violation of the provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003 stands established against the Noticees and accordingly the Noticees are liable for monetary penalty under Section 15HA of the SEBI Act. How much penalty should be imposed on the Noticees taking into consideration the factors mentioned in Section 15J of the SEBI Act? - After considering all the facts and circumstances of the case and the factors mentioned in the provisions of Section 15-J of the SEBI Act, and in exercise of the powers conferred upon me under section 15-I of the SEBI Act, read with Rule 5 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995 Penalty of Rs.5,00,000/- (Rupees Five Lakh Only/-) need to imposed. The Noticees shall remit / pay the said amount of penalty within 45 days of receipt of this order through online payment facility available on the website of SEBI
Issues Involved:
1. Whether Noticee No. 1 and 2 have violated provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003? 2. Does the violation, if any, on part of the Noticees attract penalty under Section 15HA of the SEBI Act? 3. If so, how much penalty should be imposed on the Noticees taking into consideration the factors mentioned in Section 15J of the SEBI Act? Summary of Judgment: Issue I: Violation of SEBI Act and PFUTP Regulations The investigation revealed that CG Power and Industrial Solutions Ltd. understated its liabilities and advances to related and unrelated parties significantly in its financial statements for FY 2016-17 and FY 2017-18. SEBI's examination found that the statutory auditors, M/s Chaturvedi & Shah (CAS) and M/s K. K. Mankeshwar & Co. (KKM), facilitated these misstatements. CAS, despite being aware of irregularities, certified the financial statements as true and fair. KKM, appointed immediately after CAS's resignation, also failed to report these misstatements in its audit report for FY 2017-18. Both auditors were found to have acted against their fiduciary capacity, aiding CG Power in disseminating false information, thus violating Sections 12A(a), (b), and (c) of the SEBI Act and Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the PFUTP Regulations, 2003. Issue II: Penalty under Section 15HA of SEBI Act Given the established violations, the Noticees are liable for monetary penalties under Section 15HA of the SEBI Act. Issue III: Quantum of Penalty Considering the factors under Section 15J of the SEBI Act, including the lack of quantified disproportionate gain or investor loss and the need to maintain market integrity, a penalty of Rs. 5,00,000/- (Rupees Five Lakh Only) was imposed on each Noticee. Order: M/s Chaturvedi & Shah and M/s K. K. Mankeshwar & Co. are each fined Rs. 5,00,000/- for violating Sections 12A(a), (b), and (c) of the SEBI Act, 1992, and Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the PFUTP Regulations, 2003. The penalties must be paid within 45 days of the order. Failure to pay may result in recovery proceedings under Section 28A of the SEBI Act.
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