2018 (2) TMI 1501 - SC - Indian Laws

Whether the Multi-National Accounting Firms (MAFs) are operating in India in violation of law in force in a clandestine manner, and no effective steps are being taken to enforce the said law. If so, what orders are required to be passed to enforce the said law? Held that - While we appreciate that it is for the policy makers to take a call on the issue of extent to which globalization could be allowed in a particular field and conditions subject to which the same can be allowed. Safeguards in the society and economy of the country in the process are of paramount importance. This Court may not involve itself with the policy making but the policy framework can certainly be looked at to find out whether safeguards for enforcement of fundamental rights have been duly maintained. In the present context, having regard to the statutory framework under the CA Act, current FDI Policy and the RBI Circulars, it may prima facie appear that there is violation of statutory provisions and policy framework effective enforcement of which has to be ensured. Statutory regulatory provisions intended to advance the object of law have to be enforced meaningfully. No vested interest can flout the same by manifesting compliance only in form. Compliance has to be in substance. The law enforcing agencies are expected to see the real situation. As found by the Expert Committee in its report, there is a compliance by MAFs only in form and not in substance, by having got registered partnership firms with the Indian partners, the real beneficiaries of transacting the business of chartered accountancy remain the companies of the foreign entities. The partnership firms are merely a face to defy the law. The principle of lifting the corporate veil has to apply when the law is sought to be circumvented. Absence of revisiting and restructuring oversight mechanism as discussed above may have adverse effect on the existing chartered accountancy profession as a whole on the one hand and unchecked auditing bodies can adversely affect the economy of the country on the other. Moreover, companies doing chartered accountancy business will not have personal or individual accountability which is required. Persons who are the face may be insignificant and real owners or beneficiary of prohibited activity may go scot free. The Union of India may constitute a three member Committee of experts to look into the question whether and to what extent the statutory framework to enforce the letter and spirit of Sections 25 and 29 of the CA Act and the statutory Code of Conduct for the CAs requires revisit so as to appropriately discipline and regulate MAFs - matter referred to three member Committee of experts.

Summary

Issues Involved:
1. Operation of Multi-National Accounting Firms (MAFs) in India.
2. Violation of the Chartered Accountants Act, 1949 (CA Act) and other laws by MAFs.
3. Regulatory framework and oversight of MAFs.
4. Foreign Direct Investment (FDI) policy violations.
5. Role and actions of the Institute of Chartered Accountants of India (ICAI).
6. Recommendations for legislative and regulatory changes.

Detailed Analysis:

1. Operation of Multi-National Accounting Firms (MAFs) in India:
The core issue was whether MAFs were operating clandestinely in India and violating existing laws. The petitioners argued that MAFs were providing services such as accounting, auditing, and taxation illegally, often through arrangements with Indian Chartered Accountancy Firms (ICAFs). The ICAI's Study Group Report and Expert Group Report highlighted that MAFs were operating without proper registration and were using corporate structures to circumvent regulations.

2. Violation of the Chartered Accountants Act, 1949 (CA Act) and Other Laws by MAFs:
The petitioners alleged that MAFs violated Section 224 of the Companies Act, 1956, Sections 25 and 29 of the CA Act, and the ICAI's Code of Conduct. They cited instances of fee sharing with non-members, use of international brand names, and indirect control by foreign entities over Indian firms. The reports noted that MAFs were not subject to ICAI's disciplinary control and were flouting FDI policies and FEMA regulations.

3. Regulatory Framework and Oversight of MAFs:
The judgment emphasized the need for a robust regulatory framework to oversee MAFs. It pointed out that the current system allowed MAFs to operate without proper accountability. The court suggested revisiting the regulatory regime and considering the establishment of an oversight body similar to the Sarbanes-Oxley Act in the USA, which mandates foreign public accounting firms to be accountable to regulatory bodies.

4. Foreign Direct Investment (FDI) Policy Violations:
The petitioners highlighted that MAFs violated FDI policies by making investments in Indian firms without RBI permission. They cited instances where PwC Services BV, Netherlands, made significant investments in Indian firms, which were allegedly used to acquire other audit firms through circuitous routes. The court noted the need for strict enforcement of FDI policies and FEMA regulations.

5. Role and Actions of the Institute of Chartered Accountants of India (ICAI):
The ICAI's response indicated that it had taken some actions against firms and individuals for misconduct. However, the court found that the ICAI's efforts were insufficient and that it should have conducted a more thorough investigation. The court directed the ICAI to further examine the issues and take necessary steps to uphold the law and professional ethics.

6. Recommendations for Legislative and Regulatory Changes:
The court recommended the formation of a three-member expert committee by the Union of India to review the statutory framework and suggest necessary changes. This committee would consider the need for new legislation similar to the Sarbanes-Oxley Act and Dodd-Frank Act in the USA. The committee would also examine the enforcement of FDI policies and FEMA regulations and suggest remedial measures.

Conclusion:
The court concluded that there was a prima facie case of violations by MAFs and directed the Union of India to constitute an expert committee to review the regulatory framework. The Enforcement Directorate (ED) was directed to complete its pending investigation, and the ICAI was asked to further examine the issues and take appropriate actions. The judgment aimed to ensure that MAFs operate within the legal framework and that the profession of auditing is properly regulated to protect public interest.