2021 (9) TMI 310 - HC - SEBI

Validity of appointment of Grant Thornton Bharat LLP (GTB) as a Forensic Auditor in respect of the financial statements of the respondent No.2/company - conflict of interest - violation of the principles of natural justice - absence of cause of action within the jurisdiction of this Court for maintaining the present petition - HELD THAT - The cause of action is a bundle of facts which when taken together, with the law applicable to the said facts, gives a right to the plaintiff to seek relief against the defendant. In other words, cause of action is premised on the existence of a group of facts put together that would entitle a plaintiff to approach the court for a remedy against the defendant. In UNION OF INDIA VERSUS ADANI EXPORTS LTD. 2001 (10) TMI 321 - SUPREME COURT , it was held by the Supreme Court that in order to confer jurisdiction on a High Court to entertain a writ petition, the averments in the writ petition must disclose that such integral facts have been pleaded in support of the cause of action that would empower a court to decide the dispute and it is not as if each and every fact pleaded in the petition would automatically lead to a conclusion that there would arise a cause of action within the territorial jurisdiction of a particular High Court, unless the facts are of such a nature that they would have a nexus or relevance with the lis involved in the case. It is also not in dispute that the sale proceeds of the shares of SAIPL to TMPPL, i.e., a sum of ₹ 1000-1200 crores had been placed in an escrow account held in trust for the shareholders and the very same Transaction Committee was required to deliberate upon and evaluate the various options available for distribution of the monies to the shareholders - It has not been denied by the respondent No.2/company that during this entire period when a decision was taken to delist the company and give an exit option to the public shareholders by offering them a floor price of ₹ 63.77 ps per share, Mr. Anoop Krishna was closely connected not only to the management, but also to the aforesaid promoters of the respondent No.2/company. We are unable to sustain the order dated 20.10.2020 passed by the respondent No.1/SEBI insofar as it has upheld the decision taken on 07.10.2020, of appointing GTB as a forensic auditor in respect of the financial affairs of the respondent No.2/company which is accordingly quashed and set aside - Petition allowed.

Summary

Issues Involved:
1. Conflict of interest in the appointment of Grant Thornton Bharat LLP (GTB) as a forensic auditor.
2. Violation of principles of natural justice.
3. Jurisdiction of the High Court.
4. Non-joinder of necessary parties.
5. Rights of minority shareholders.

Issue-wise Detailed Analysis:

1. Conflict of Interest in the Appointment of GTB:
The petitioner challenged the appointment of GTB as a forensic auditor by SEBI, citing a conflict of interest due to Mr. Anoop Krishna's association with both GTB's sister concern and the respondent No.2/company. Mr. Anoop Krishna was a member of the Board of Directors and the Chairman of the Audit and Transaction Committees of the respondent No.2/company. His close ties with the company and subsequent engagement with GT Restructuring Services LLP, a sister concern of GTB, raised concerns about the impartiality of the forensic audit. The court found merit in the petitioner's argument that the presence of Mr. Anoop Krishna created a reasonable apprehension of bias, which could compromise the integrity of the forensic audit.

2. Violation of Principles of Natural Justice:
The court emphasized that the principles of natural justice require authorities to act fairly and impartially. It was noted that SEBI's decision to continue with GTB as the forensic auditor lacked proper reasoning and application of mind. The court highlighted that justice should not only be done but should also be seen to be done. The mere possibility of bias, even without specific instances of prejudice, was sufficient to vitiate the audit process. The court concluded that SEBI's acceptance of GTB's clarification without addressing the conflict of interest concerns violated the principles of natural justice.

3. Jurisdiction of the High Court:
The court addressed the preliminary objection raised by SEBI regarding the lack of cause of action within its jurisdiction. The petitioner, a resident of Hyderabad, had communicated his grievances from Hyderabad and SEBI had a local office in Hyderabad. The court held that even a small fraction of the cause of action arising within its jurisdiction was sufficient to entertain the writ petition. The court also considered the principle of forum conveniens, noting that expecting a minority shareholder to approach the High Court in Mumbai would cause undue hardship.

4. Non-joinder of Necessary Parties:
SEBI argued that GTB should have been impleaded as a co-respondent. However, the court found that the clarification provided by GTB was already on record, and the main issue was SEBI's decision to appoint GTB as the forensic auditor. The court concluded that the absence of GTB as a party did not affect the maintainability of the petition.

5. Rights of Minority Shareholders:
The court rejected SEBI's contention that the rights of the petitioner as a minority shareholder were limited. It was noted that minority shareholders have several rights, including the right to receive a fair exit price in case of delisting. The court found that the petitioner's concerns about the fairness of the forensic audit were valid and that the interests of all minority shareholders were at stake. The court directed SEBI to appoint a different auditor from its panel to conduct the forensic audit, ensuring impartiality and protecting the interests of the minority shareholders.

Conclusion:
The court quashed SEBI's order appointing GTB as the forensic auditor and directed SEBI to appoint another auditor from its panel to conduct the forensic audit of the respondent No.2/company. The newly appointed auditor was instructed to continue the audit from where GTB left off, ensuring a fair and impartial audit process. The writ petition was allowed, with no order as to costs.