2022 (1) TMI 1413 - AT - SEBI

Power of SEBI statutory initiating action against statutory auditor / chartered accountant - Misutilization of IPO proceeds - funds diverted to different entities in the guise of making payments towards the objects stated in the prospectus - role of the appellant as the statutory auditor with regard to due diligence done by it by certifying the expenditure incurred by the company towards the IPO expenses out of the IPO proceeds - HELD THAT - We find that the A.O. has only found that due diligence was not carried out by the appellant. There is no finding that the appellants were instrumental in preparing false and fabricated accounts or have connived in preparation or falsification of the books of account. There is no finding that the appellants had manipulated the books of accounts with knowledge and intention, in the absence of which, there is no deceit or inducement by the appellants. In the absence of any inducement, the question of fraud committed by the appellants does not arise. This Tribunal in Price Waterhouse 2019 (9) TMI 592 - SECURITIES APPELLATE TRIBUNAL, MUMBAI has categorically held that a C.A. can be proceeded against them if they are instrumental in preparing false and fabricated accounts otherwise SEBI has no power to proceed against them. 29G Section 12A(a) (b) of the SEBI Act is obviously not applicable to the appellant as they are not dealing in the securities. Similarly, Section 12(c) cannot be made applicable because no fraud has been carried out by the appellant. Further, in the absence of connivane, deceit, or manipulation Regulation 3 4 of the PFUTP Regulations cannot be made applicable. The appeal is hereby allowed with no order as to costs.

Summary

Issues Involved:
1. Delay in launching proceedings.
2. Applicability of PFUTP Regulations.
3. Alleged lapses in auditing by the appellants.
4. Jurisdiction of SEBI over Chartered Accountants.
5. Determination of fraud and due diligence.

Detailed Analysis:

1. Delay in Launching Proceedings:
The appellants argued that the delay in launching proceedings caused prejudice. They conducted the audit in 2012, but the show cause notice was issued in December 2019. The tribunal found that despite the delay, no prejudice was shown to have been caused to the appellants. The facts were admitted, and only the explanation that reasonable care was taken was forwarded before the Learned AO. Therefore, the delay did not cause any prejudice to the appellants.

2. Applicability of PFUTP Regulations:
The appellants contended that the provisions of PFUTP Regulations were not applicable as no fraud was alleged against them. The tribunal examined Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations, which prohibit manipulative, deceptive, and fraudulent practices in securities. The tribunal concluded that the appellants were not dealing in securities, and there was no finding of fraud, deceit, or manipulation by the appellants. Therefore, Section 12A and Regulations 3 and 4 of the PFUTP Regulations were not applicable to the appellants.

3. Alleged Lapses in Auditing by the Appellants:
The tribunal noted several instances of alleged lapses in auditing by the appellants. These included payments made without invoices, bills received after payments, vendors not listed in the prospectus, and discrepancies in amounts. The appellants argued that payments were evidenced by bank statements and invoices received shortly after payments. However, the tribunal found that the appellants failed to exercise due diligence in certifying the statutory audit. Despite this, there was no finding that the appellants were instrumental in preparing false and fabricated accounts or had connived in falsification of books of account.

4. Jurisdiction of SEBI over Chartered Accountants:
The tribunal referred to the judgment of the Bombay High Court in Price Waterhouse Co. Vs SEBI, which held that SEBI has jurisdiction to inquire into and investigate matters related to manipulating and fabricating books of account and balance sheets of companies. However, SEBI cannot encroach upon the powers vested with the institutes under the Chartered Accountants Act, 1949. The tribunal found that SEBI can proceed against Chartered Accountants if there is evidence of connivance or conspiracy in preparing false accounts, but not for professional negligence alone.

5. Determination of Fraud and Due Diligence:
The tribunal found that the appellants did not carry out due diligence while certifying the utilization of IPO proceeds. However, there was no finding of fraud, deceit, or inducement by the appellants. The tribunal emphasized that gross negligence or recklessness in adhering to accounting norms amounts to professional negligence, which falls under the jurisdiction of the Institute of Chartered Accountants of India (ICAI) and not SEBI. Therefore, the appellants could not be penalized under Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations.

Conclusion:
The appeal was allowed, and the impugned order was set aside. No costs were ordered. The tribunal concluded that the appellants were not guilty of fraud or manipulation but failed to exercise due diligence in their professional duties. The jurisdiction to address professional negligence lies with the ICAI, not SEBI.