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TMI Blog2011 (10) TMI 517X X X X Extracts X X X X X X X X Extracts X X X X ..... l competence, was preceded by a proper procedure comporting with the principles of natural justice - decision of the RBI, as communicated in its letter dated 24th June 2009 to the PNB, to discontinue the Petitioner as an SCA, even for the limited extended period ending 30th June 2009, was violative of the principles of natural justice and was, therefore, illegal - W.P. (C) NO. 10672 OF 2009 - - - Dated:- 10-10-2011 - S. MURALIDHAR, J. Vineet Malhotra for the Petitioner. H.S. Parihar and Jagdeep Kishore for the Respondent. JUDGMENT 1. The Petitioner, a firm of chartered accountants, is aggrieved by a decision of Reserve Bank of India ('RBI'), Respondent No. 1, communicated to Punjab National Bank ('PNB'), Respondent No. 2, advising that the PNB may carry out the quarterly review for the quarter ending 30th June 2009 with the five existing statutory central auditors ('SCAs'), excluding the Petitioner firm in view of the circumstances mentioned in the PNB's letter dated 27th May 2009 addressed to the RBI. Background Facts 2. By a letter dated 6th October 2005 issued by the PNB, the Petitioner was appointed as a Joint SCA along with five other SCAs t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s SCA and that this amounted to blacklisting of the Petitioner firm apart from being mala fide . The Petitioner was not served any prior show cause notice and the decision was, therefore, violative of principles of natural justice. There was correspondence exchanged between the Petitioner, the PNB and the RBI in regard to reports sent by the Petitioner firm to the RBI pointing out the irregularities committed by the PNB. The Petitioner alleges that Respondent No. 3 Dr. K.C. Chakraborty who was at the relevant time the Chairman-cum-Managing Director ('CMD') of PNB, prior to being appointed as the Deputy Governor of the RBI on 15th June 2009, had requested the Petitioner to withdraw its qualified report in relation to irregularities since it would otherwise adversely affect his carrier prospects. Respondent No. 3 even tried to coerce the Petitioner through the President of the Institute of Chartered Accountants of India. The Petitioner however declined to succumb to the pressure. The Petitioner had pointed out to the RBI that there were irregularities in granting of loans to two real estate companies in the aggregate of over Rs. 1000 crores where the value of security was far less t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B, viz., the Mall, Patiala, and Large Corporate Branches ('LCBs') at Bangalore and Delhi. While the audit at the Mall Patiala and LCB Bangalore had been completed, the audit of the LCB in Delhi had been delayed. The PNB had informed the RBI that the audit at LCB, Delhi was started on 27th March 2009 but was discontinued by the Petitioner on the same day without any valid reason. Thereafter, the audit was resumed on 8th April 2009 by two partners of the Petitioner firm. It was stated that one of the senior partners had called for information on 27th April 2009 in respect of twelve borrower accounts. The PNB apprehended that the finalization of the work of consolidation of branch accounts would not be completed within the time period fixed by the PNB, i.e., 2nd May 2009 which in turn would delay the finalization of annual accounts. The RBI asked the Petitioner firm to forward its comments in respect of the above observations not later than 9th May 2009. 7. The RBI also enclosed with its counter affidavit a copy of letter dated 7th May 2009 written by the Petitioner to the RBI explaining what according to the Petitioner had transpired during the audit of the LCB, Delhi. Inter a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner's observations "are not only subjective but most of the times frivolous and magnified out of proportion." Further, the Petitioner's "objective has been to embarrass the Bank and harass its officers. The behaviour and attitude is indicative of cynicism and sadism as well." Accordingly, PNB reiterated its "earlier recommendations to replace immediately M/s. Gupta Gupta, SCA who have completed their term in any case with the audit for March 2009 and provide a new SCA for June 2009 limited review itself." In case this was not possible for any reason, the Petitioner should be removed 'immediately' and PNB "permitted to get the quarterly limited review done by remaining 5 SCAs only." 9. It appears that the above letter dated 27th May 2009 of the PNB was not sent by the RBI to the Petitioner for its comments. Instead, on 24th June 2009 the RBI wrote the following letter to the CMD, PNB: "Finalization of annual accounts - 2008-09 - Complaint against audit firm - M/s. Gupta Gupta. Please refer to your letter dated May 27, 2009 on the captioned subject. 2. In this connection, we advise that you may carry out the quarterly review for the quarter ending June 30, 2009 with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be decided by this Court under Article 226 of the Constitution. Thirdly, the dealings between a chartered accountant and its client were supposed to be confidential. The Petitioner firm had tried to exert pressure on the PNB by various actions and inactions to which the PNB did not succumb. Fourthly, the Petitioner firm had been engaged as an SCA hired for a specified period which had expired after the finalization of the accounts. In the circumstances, the question of issuance of any prior notice or granting a hearing to the Petitioner for discontinuing its services did not arise. PNB submits that the Petitioner firm would be considered for being empanelled again after a gap of two years by the appropriate authority. PNB has denied that any irregularity has been committed in relation to any of the accounts as pointed out by the Petitioner firm. PNB reiterated its dissatisfaction with the conduct of the audit by the Petitioner and the unnecessary inconvenience caused by the Petitioner firm. 13. Despite service of notice, Respondent No. 3 did not enter appearance. Also, no reply has been filed on his behalf. The averments against him in the writ petition remain uncontroverted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the procedure already outlined in the counter affidavit. 18. Mr. Jagdeep Kishore, learned counsel for the PNB submitted that the Petitioner could not insist on being continued as SCA beyond the period of four years. He also stated that the PNB was open to the Petitioner being empaneled as SCA in future notwithstanding the exchange of correspondence that took place in regard of retention of the Petitioner for the limited review for the quarter ending June 2009. He too reiterated that discontinuance of the Petitioner for the quarter ending 30th June 2009 should not be viewed as a stigma on the Petitioner. Whether the discontinuance of the Petitioner as SCA was lawful? 19. In view of the submissions of learned counsel for the parties, the scope of the present writ petition has narrowed down. The only question that arises for determination is whether the discontinuance of the Petitioner firm as SCA for the quarter ending 30th June 2009 was stigmatic and therefore required compliance with the principles of natural justice? This Court therefore does not propose to examine the allegations and counter allegations concerning the Petitioner on the one hand and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prestigious one. As a corollary the discontinuance of a firm of auditors as SCA, unless for circumstances unconnected with integrity or competence, is bound to be viewed negatively. Further, since the number of SCAs of a public sector bank is unlikely to be more than six, the appointment and discontinuance of an SCA is likely to be known immediately to all chartered accountants. 22. An SCA of a public sector bank discharges statutory responsibilities traceable to Section 224 (2) of the Companies Act 1956, the BR Act, the 1970 Act and the 1980 Act. In the context of the circulars issued by the RBI on the charging of interest by public sector banks, the Supreme Court in Central Bank of India v. Ravindra [2001] 107 Comp. Cas. 416/[2002] 36 SCL 1 explained that the power conferred on the RBI under Sections 21 and 35A of the BR Act is coupled with the duty to act fairly and reasonably. The RBI's circulars were held to be binding on "those who fall within the net of such directives." By analogy the RBI's circulars as regards the appointment and continuance of SCAs must be viewed as binding on public sector banks including the PNB. RBI discharges a statutory duty when it selects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Petitioner's professional competence and integrity. In other words, the tenor of the allegations by PNB against the Petitioner in the letter dated 27th May 2009 was not confined to the issue of delay. Specifically, PNB alleged that the intention of the Petitioner was "to malign the reputation and image of the bank"; that the Petitioner was "abrasive ab initio and uncooperative in their approach right from the first audit and are lacking in professionalism."; that they have been "putting the entire system to undue stress and holding the bank to ransom"; "their objective has been to embarrass the bank and harass its officers. The behaviour and attitude is indicative of cynicism and sadism." Then came the impugned decision of the RBI communicated in its letter dated 24th June 2009 permitting PNB to discontinue the Petitioner as SCA for the limited extended review for the quarter ending 30th June 2009. 24. It is not as if the letter dated 24th June 2009 simply states that the Petitioner will be discontinued. It refers to the PNB's letter dated 27th May 2009 and states that the Petitioner could be discontinued as SCA "in view of the circumstances cited in the above letter." It is th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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