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TMI Blog2019 (9) TMI 592X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow cross examination. SEBI did not do so and took the matter to the Supreme Court and kept it pending for six years. The Supreme Court on January, 2017 held that the stand of SEBI was incorrect and directed that cross examination and inspection should be allowed to the appellants. During the pendency of the proceedings, the appellants were carrying on their business and auditing listed companies to the satisfaction of the shareholders and / or of the investors without any blemish. Over the last decade, the appellants have adopted extensive remedial measures as per SEC / PCAOB settlement orders. The independent monitors appointed by SEC / PCAOB have certified that remedial measures have been successfully implemented, meaning thereby that the audit quality met with the requisite standards. Thus looking from this angle also, the order of debarment was not the appropriate choice. Considering the aforesaid we are of the view that the order of WTM debarring the PW firms to audit listed company on the ground of PW network or projecting it as a PW brand cannot be sustained. There is no doubt that there has been a professional lapse on the part of the auditors in conducting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 11 and 11-B of the SEBI Act to persons who in some way was associated with the securities market as well as under the Companies Act. Order of the WTM of SEBI debarring the PW firms as well as the two auditors from auditing listed Companies cannot be sustained and is quashed. Directions to listed Companies not to engage any audit firm forming part of PW network is also quashed - Appeal No. 6 of 2018 WITH Appeal No. 7 of 2018 WITH Appeal No. 190 of 2018 AND Appeal No. 191 of 2018 - - - Dated:- 9-9-2019 - Mr Tarun Agarwala, Presiding Officer And Dr. C. K .G. Nair, Member The Appellants : Mr. Mukul Rohatgi, Senior Advocate with Mr. Janak Dwarkadas, Senior Advocate, Mr. Somasekhar Sundaresan, Mr. Zerick Dastur, Ms. Archana Uppuluri, Mr. Kunal Kothary, Ms. Palak Agrawal, Mr. Khushil Shah, Ms. Ruby Singh Ahuja and Mr. Anupam Prakash, Advocates i/b Zerick Dastur Advocates Solicitors, Mr. Shyam Mehta, Senior Advocate with Mr. Zerick Dastur, Ms. Archana Uppuluri, Mr. Kunal Kothary, Ms. Palak Agrawal and Mr. Khushil Shah, Advocates i/b Zerick Dastur Advocates Solicitors For The Respondent : Mr. Ravi Kadam, Senior Advocate with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order. 4. Appeal No. 6 of 2018 has been filed by Price Waterhouse Co. alongwith nine other Chartered Accountant (CA) firms under the banner Price Waterhouse (PW). Appeal No. 7 of 2018 has been filed by Price Waterhouse, Bangalore. Appeal No. 190 of 2018 has been filed by S. Gopalakrishnan and Appeal No. 191 of 2018 has been filed by Srinivas Talluri. 5. The facts leading to the filing of the aforesaid appeals are that PW Bangalore was given the audit for auditing the books of accounts of Satyam Computers Services Limited (hereinafter referred to as SCSL ). The engagement partner for the audit of SCSL for the period 2000-07 was S. Gopalakrishnan and for the financial year 2007-08 which was extended till September 2008, the engagement partner was Srinivas Talluri. 6. SCSL was regarded as one of the top IT outsourcing firms in the world. The Company had won numerous awards and accolades including in the areas of its internal audit and corporate governance. SCSL was admired as one of India s multinational companies. SCSL was also listed in the New York Stock Exchange in 2001 after necessary due diligence carried out by renowne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12A(c) of the SEBI Act read with Regulations 3(c), 3(d), 4(1), 4(2)(a), 4(2)(e), 4(2)(f), 4(2)(k) and 4(2)(r) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as, PFUTP Regulations). Subsequently, a supplementary show cause notice dated February 19, 2010 was issued to the above persons/entities alongwith Lovelock Lewis Mumbai, Price Waterhouse Kolkata, Price Waterhouse New Delhi, Price Waterhouse Co. Chennai. Another show cause notice dated February 19, 2010 was issued to Dalal Shah Ahmadabad, and Dalal Shah Mumbai. 10. The show cause notice is a voluminous document. In a nutshell, the respondent directed the appellants to show cause for : ( i) successive failure to exercise even a minimum level of diligence in verifying the accounting systems and internal controls of SCSL, though accounting manipulations were going on quarter after quarter over the course of eight years; ( ii) gross negligence and recklessness in conducting an audit in accordance with the accounting standards and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterhouse in India. The auditor s report, balance sheets, Profit Loss accounts of SCSL were signed by S. Gopalakrishnan, Chartered Accountant for the period from April 2000 to March 2007. S. Gopalakrishnan was a partner in Price Waterhouse Bangalore as well as in Lovelock Lewes Kolkata. Srinivas Talluri was the Chartered Accountant who signed the auditor s report, etc. of SCSL for the period from April 2007 to March 2008. He was a partner in Price Waterhouse Bangalore and Lovelock Lewes Kolkata as well as in Price Waterhouse Co. Kolkata. 12. It was further alleged in the SCN that the 11 firms have common branch offices located in New Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Pune, Gurgaon, Bhuvneshwar Ahmedabad and there were several common partners in these firms. These firms share resources, manpower, offices, revenues, etc. amongst themselves and, for this purpose, the 11 firms have entered into an agreement in 2000 for resource sharing. It was further stated that the members of the engagement team which worked on the audit of SCSL was on the pay roll of Price Waterhouse Kolkata and Lovelock Lewes Kolkata. 13. Two W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... einafter referred to as CA Act ). It was submitted that under the provisions of the SEBI Act and the Regulations framed thereunder, directions can be issued by SEBI for regulating the securities market, but beyond that, it had no power to issue any such directions. It was contended that the powers of SEBI cannot be construed to cover anybody under its umbrella on the ground of regulating the securities market. The petitioners in Writ Petition No. 5256 of 2010 submitted that the said petitioners had not taken part in any manner in the matter of audit of accounts of the Company and therefore the show cause notice could not be issued against them. It was asserted that the show cause notice could not be issued simply because the petitioners were associated with Price Waterhouse Company. It was contended that if there was any occasion or request on the part of any Chartered Accountants in the matter of discharging their professional duties, it is only the ICAI which had the power to regulate the profession of the Chartered Accountant (CA) under the CA Act. 16. The contention of SEBI before the High Court was that by issuing notices to CA s and to the audit firms, SE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority assumes jurisdiction over a particular matter. A jurisdictional fact is one on existence or non-existence of which depends jurisdiction of a court, a tribunal or an authority. It is the fact upon which an administrative agency's power to act depends. If the jurisdictional fact does not exist, the court, authority or officer cannot act. If a Court or authority wrongly assumes the existence of such fact, the order can be questioned by a writ of certiorari. The underlying principle is that by erroneously assuming existence of such jurisdictional fact, no authority can confer upon itself jurisdiction which it otherwise does not possess. 19. On the question of jurisdiction, the Bombay High Court held that it was not open to SEBI to encroach upon the powers vested with the ICAI under the CA Act. The powers available to SEBI under SEBI Act are to be exercised in the interest of investors and interest of securities market. Further, in order to safeguard the interest of investors or interest of securities market, SEBI was entitled to take all ancillary steps and measures to ensure that the interest of the investors were protected. 20. The Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon the evidence which is available during such inquiry. It is true, as argued by the learned counsel for the petitioners, that the SEBI cannot regulate the profession of Chartered Accountants. This proposition cannot be disputed in any manner. It is required to be noted that by taking remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by the SEBI, it can never be said that it is regulating the profession of the Chartered Accountants. So far as listed Companies are concerned, the SEBI has all the powers under the Act and the Regulations to take all remedial and protective measures to safeguard the interest of investors and securities market. and further held:- Normally, an investor invests his money by considering the financial health of the Company and in order to find out the same, one will naturally would bank upon the accounts and balance-sheets of the Company. If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate directions in the aforesaid field. By initiating the proceedings, it cannot be said that the SEBI is encroaching upon the rights of the Institute or prohibiting a Chartered Accountant from practicing as a Chartered Accountant. It is natural that SEBI has no power to pass an order prohibiting a particular Chartered Accountant from practicing as a Chartered Accountant or cannot debar a Chartered Accountant from practicing as Chartered Accountant but SEBI can definitely take regulatory measures under the SEBI Act in the matter of safeguarding the interest of the investors and securities market and in order to achieve the same, it can take appropriate remedial steps which may include keeping a person including a Chartered Accountant at a safe distance from the securities market. SEBI can always take preventive as well as remedial measures in this behalf. Exercising such powers, therefore, cannot be said to be in any way in conflict with the powers of the Institute under the CA Act. If ultimately any decision is taken by debarring any particular person from auditing the books of a listed company, such direction can always be said to be within the powers of SEBI and that is in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent and does not encroach upon the powers of the ICAI under the CA Act. The Court further held that whether any of the CA and the CA firms had, with intention and knowledge, tried to fabricate and fudge the books of accounts was a matter of investigation and enquiry by SEBI and, if ultimately if any evidence came on record to this effect, in that event, SEBI could take appropriate steps. The Bombay High Court thus held:- Whether any of the petitioners with an intention and knowledge tried to fabricate and fudge the books of accounts is a matter of investigation and inquiry by the SEBI. Ultimately if any evidence in this behalf is brought on record before the SEBI during the inquiry, appropriate steps can be taken in this behalf as provided for by the SEBI Act. 26. Insofar as the petitioner s of Writ Petition No. 5256 of 2010 were concerned, the Bombay High Court held that SEBI would adjudicate whether a petitioner firm of CA had any role to play and if in a given case, ultimately it was found that there was only omission without any mens rea or connivance with anyone, then on such evidence, SEBI could not issue any further direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rohatgi, Senior Advocate along with Mr. Janak Dwarkadas, Senior Advocate and assisted by Mr. Somasekhar Sundaresan, Mr. Zerick Dastur, Ms. Archana Uppuluri, Mr. Kunal Kothary, Ms. Palak Agrawal, Mr. Khushil Shah, Ms. Ruby Singh Ahuja and Mr. Anupam Prakash, Advocates for the appellants in Appeal No. 6 of 2018; Mr. Shyam Mehta, Senior Advocate along with Mr. Zerick Dastur, Ms. Archana Uppuluri, Mr. Kunal Kothary, Ms. Palak Agrawal and Mr. Khushil Shah, Advocates for the appellant in Appeal No. 7 of 2018; Mr. Gaurav Joshi, Senior Advocate along with Mr. R. Sudhinder, Ms. Prerana Amitabh and Ms. Vatsala Pant, Advocates for the appellant in Appeal No. 190 of 2018; Mr. Mustafa Doctor, Senior Advocate along with Mr. R. Sudhinder, Ms. Prerana Amitabh and Ms. Vatsala Pant, Advocates for the appellant in Appeal No. 191 of 2018 and Mr. Ravi Kadam, Senior Advocate along with Mr. Kevic Setalvad, Senior Advocate, Mr. Jayesh Ashar, Mr. Mihir Mody, Ms. Shreya Parikh, Mr. Sushant Yadav and Mr. Tabish Mooman, Advocates for the respondent in all the appeals. 29. As per the directions of the Bombay High Court, the scope of enquiry was restricted only to the charge of conspiracy and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lsify a record or document (Black s Law Dictionary 7th Edition). The word falsify may be used to convey two distinct meanings- either that of being intentionally or knowingly untrue, made with intent to defraud or mistakenly and accidentally untrue (Black s Law Dictionary 8th Edition). Chambers Dictionary 2004 Edition defines concoct as to fabricate, to plan, devise, to make up or put together, to prepare. The same dictionary defines fudge as the act of distortion, to cheat, to dodge, to cover up and indulge as to yield to the wishes of, to favour, to gratify, to gratify one s appetite freely. Instrumental has been defined as acting as an instrument or means, serving to promote an object. Intended means planned, with design. Black s Law Dictionary 8th Edition defines knowledge as an awareness or understanding of a fact or circumstance. Black s Law Dictionary 6th Edition defines collusion as an agreement between two or more persons to defraud a person of his rights by the forms of law, or to obtain an object forbidden by law. It implies the existence of fraud of some kind, the employment of fraudulent means, or of lawful means for the accomplishment of an unlawful pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay or may not impose criminal liability depending upon the existence, vel non , of a duty to act under the circumstances (Black s Law Dictionary, 6th edition). In Chambers Law Dictionary the word manipulate means to work with the hands, to turn to one s own purpose or advantage and manipulation means the act of manipulating by hands. 32. From the aforesaid, it becomes apparently clear that what the Bombay High Court meant was that there must be evidence to show that there was fabrication, falsification and fudging of the books of account of SCSL by the appellants and that the said fabrication, etc. was done with intent, knowledge, connivance and collusion with the management in order to play a fraud on the shareholders / investors. The evidence must be apparent and glaring and not on the basis of preponderance of probabilities. There must be direct evidence of falsification and fabrication of the books of account of SCSL. 33. This leads us to go into the question as to how WTM has arrived at a finding that the appellants were guilty of misconduct and were responsible for the fabrication of the books of account of SCSL. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal duties of an auditor. ( viii) the auditors have relied upon the monthly bank statement of Bank of Baroda which turned out to be forged and manipulated. ( ix) bank statement was obtained from SCSL instead of obtaining it directly from the bank. ( x) by not seeking external confirmation of the current account balance of SCSL with Bank of Baroda, New York, the auditors had failed to exercise care and prudence and adhere to the standards and procedures prescribed under AAS 30. ( xi) complete reliance on the bank statements provided by SCSL without taking recourse to external confirmation on the ground that SCSL enjoyed a good reputation for corporate governance does not behove an auditor with an attitude of professional skepticism as mandated under para 18 of AAS 4. ( xii) even though the fake invoices were not distinguishable with the genuine invoices to a naked eye, it was the duty of the auditor to transcends beyond what is visible to the naked eye by requiring the auditors to apply an attitude of professional skepticism. ( xiii) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ldevbhai Patel Others, (2017) 15 SCC 1 . Thus reliance on the judgment of the Bombay High Court by the appellants was unnecessary and misplaced. 34. In a nutshell, the WTM held that failure to seek external confirmation of the bank balances, fixed deposits, failure to detect fake invoices without adopting the rigorous procedure mandated by AAS draws an inference of gross negligence and inference of involvement in the fudging of the accounts. This gross negligence amounts to an act of commission of a fraud for the purposes of SEBI Act and SEBI PFUTP Regulations for which mens rea is not required to be proved beyond a reasonable doubt but could be based on a preponderance of probability. 35. Reliance has been made on a decision of the Supreme Court in Securities and Exchange Board of India vs. Shri Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1 wherein the Supreme Court held that mens rea is not indispensable in PFUTP violations. The Supreme Court held:- To attract the rigor of Regulations 3 and 4 of the 2003 Regulations, mens rea is not an indispensable requirement and the correct test is one of preponderance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act. PFUTP Regulations Definitions 2. ( 1) In these regulations, unless the context otherwise requires,- .. ( b) dealing in securities includes an act of buying, selling or subscribing pursuant to any issue of any security or agreeing to buy, sell or subscribe to any issue of any security or otherwise transacting in any way in any security by any person as principal, agent or intermediary referred to in section 12 of the Act. ( c) fraud includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. 4. Prohibition of manipulative, fraudulent and unfair trade practices ( 1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. ( 2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- ( a) indulging in an act which creates false or misleading appearance of trading in the securities market; .. ( e) any act or omission amounting to manipulation of the price of a security; ( f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the SCR Act, 1956 which defines security to mean the right or interest in securities. A conspectus reference to Sections 12-A(a), (b) and (c) read along with Regulations 2(1)(b) and (c), as well as Section 2(h)(iii) of the SCR Act, 1956 sufficiently disclose that it would cover any act which will have relevance in protecting the interest of the investors in securities and security market with any person however remotely the same are connected with such securities, in the event of such an act working against the interest of investors in securities and securities market by way of fraud which has been elaborately defined under Regulation 2(i)(c) of the 2003 Regulations. 90. Under Section 12-A, it is specifically provided to prohibit any manipulative and deceptive devices, insider trading and substantial acquisition of securities or control by ANY PERSON either directly or indirectly. If SEBI's allegation listed out earlier as well as all the other allegations fall under Sections 12-A(a), (b) and (c), there will be no escape for the respondents from satisfactorily explaining before the Tribunal as to how these allegations would not result in fully establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deceptive devices which would operate as a fraud or deceit is directly linked to securities and dealing in securities . If a person is not dealing in securities either directly or indirectly then Section 12A would not be applicable. In this regard securities have been defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 ( SCRA Act for short) which is extracted hereunder:- ( h) securities include- ( i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; ( ia) derivative; ( ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; ( ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; ( id) units or any other such instrument issued to the investors under any mutual fund scheme; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s undermines the integrity and efficiency of the market. 29. On a comparative analysis of the definition of fraud as existing in the 1995 Regulations and the subsequent amendments in the 2003 Regulations, it can be seen that the original definition of fraud under the FUTP Regulations, 1995 adopts the definition of fraud from the Contract Act, 1872 whereas the subsequent definition in the 2003 Regulations is a variation of the same and does not adopt the strict definition of fraud as present under the Contract Act. It includes many situations which may not be a fraud under the Contract Act or the 1995 Regulations, but nevertheless amounts to a fraud under the 2003 Regulations. 30. The definition of fraud under clause (c) of Regulation 2 has two parts; first part may be termed as catch all provision while the second part includes specific instances which are also included as part and parcel of term fraud . The ingredients of the first part of the definition are: 1. includes an act, expression, omission or concealment whether in a deceitful manner or not; 2. by a person or by any other per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 4(1). Therefore Regulation 4(1) has to be read to have its own ambit which adds to what is contained under Regulation 3. 39. It should be noted that the provisions of Regulations 3(a), (b), (c), (d) and 4(1) are couched in general terms to cover diverse situations and possibilities. Once a conclusion, that fraud has been committed while dealing in securities, is arrived at, all these provisions get attracted in a situation like the one under consideration. We are not inclined to agree with the submission that SEBI should have identified as to which particular provision of the 2003 FUTP Regulations has been violated. A pigeon-hole approach may not be applicable in this case instant. 47 . Accordingly, non-intermediary front-running may be brought under the prohibition prescribed under Regulations 3 and 4(1), for being fraudulent or unfair trade practice, provided that the ingredients under those heads are satisfied as discussed above. From the above analysis, it is clear that in order to establish charges against tippee, under Regulations 3(a), (b), (c) and (d) and 4(1) of the 2003 FUTP, one needs to prove that a person who had provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduced would not have acted in the manner that he did but for the inducement is sufficient. No element of dishonesty or bad faith in the making of the inducement would be required. 42. In the light of the above and on the totality of the facts in the given case, we are of the opinion that while interpreting a statute, an effort must be made to give effect to each and every word used by the legislature. The Courts should presume that the legislature inserted every part for a purpose and the legislative intention is that every part of the statute should have effect. While interpreting a provision, the effort must always be made to find out the true intention behind the law. 43. From the aforesaid decisions and on a reading of the provisions of Section 12A of the SEBI Act and Regulation 3 4 of PFUTP Regulations, it is apparently clear that the object of Section 12A PFUTP Regulations is to curb market manipulations . The manipulative and deceptive devices must be in relation to securities and must be by a person dealing in securities . The Supreme Court in Kanaiyalal (supra) has expanded the term person to include a non-intermediary c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of probabilities would also apply in the case of the appellants, still, it must be proved by cogent evidence that the appellants are guilty of inducement . In the absence, of any evidence, the charge of fraud is not proved, nor the provisions of Regulation 3 and 4 of PFUTP Regulations applicable. If there was gross negligence, recklessness in adhering to the AAS in the course of auditing the accounts of SCSL, it can and can only point out to professional negligence which would amount to a misconduct to be taken up only by ICAI. 45. The evidence that has been brought on record indicates that certain directors and employees had connived in the fabrication, falsification and misrepresentation in the books of account and financial statements of SCSL. The books of account contained false and inflated current account bank balances, fixed deposit balances, fictitious interest from sales. We find that there is no direct evidence to show that the engagement partners / audit firms / other PW firms were directly involved in the fabrication of the books of account of SCSL. In fact, the Chairman of SCSL has gone on record in so many words that the statuto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the engagement partners had willfully with intent and knowledge connived with the management of SCSL in the fabrication and falsification of the accounts and induced the investors in taking a wrong decision. No such finding has been arrived at by the WTM in the impugned order. 50. The WTM has dwelt at great length in considering the auditing standards prescribed under the Chartered Accountants Act in coming to a conclusion that the auditors acted in reckless or careless manner and thus committed a fraud as defined under Section 2(c) of the PFUTP Regulations. The approach adopted by the respondents is patently misconceived and based on surmises and conjectures. In the peculiar facts and circumstances of the case, a finding of guilt cannot be imposed upon the appellants on the basis of preponderance of probabilities. There has to be a specific finding that there was an intention on the part of the engagement partners and/or of the audit firm that they had deliberately with intention and knowledge fabricated the books of accounts of SCSL in connivance with the top management of SCSL. In the instant case, there is overwhelming evidence to show that the fabrication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Exchange Board of India vs. Shri Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1 is misconceived. The contention of SEBI that it can exercise its jurisdiction on a Chartered Accountant as the definition of fraud under Section 2(c) of PFUTP Regulations includes any representation made in a reckless or careless manner cannot be applied in the facts of the present case. The decision of the Supreme Court in Kanaiyalal matter (supra) was passed where the person was dealing directly in securities. In the present case directions have been issued in a matter where a Chartered Accountant has certified the books of accounts. Such act of Chartered Accountant by no stretch of imagination could be treated as dealing directly or indirectly in securities. It is in this light that the Bombay High Court clearly held that mens rea is required to be proved and that there must be an intention and knowledge that an engagement partner / audit firm connived or colluded with the management in the falsification and fabrication of the books of account. The High Court clearly recorded:- It is further submitted that during inquiry if any evidence is broug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sional misconduct to be taken up strictly by the ICAI but such lapse under no circumstances could lead to a conclusion that the engagement partner / the audit firm had with intent manipulated the books of accounts in a reckless or careless manner. 56. Let us now consider what is the role of an auditor. Under Section 224 of the Companies Act, 1956, a Company is required to appoint an auditor. Under Section 226 of the Companies Act, an auditor must be a Chartered Accountant within the meaning of the CA Act. Section 227 provides powers and duties of an auditor. Under Section 229, an auditor is required to sign the auditor s report. Under Section 230, the auditor is required to read the auditor s report before the Company in general meeting. Failure to comply with the provisions of the Companies Act entails penalty upon the auditor under Section 233 of the Companies Act. 57. Auditing and Assurance Standards (AAS) has been framed by ICAI relating to the role and responsibility of an auditor. Under AAS2, the objective of an audit of financial statements, prepared within a framework of recognized accounting policies and practices and relevant statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... honesty and high ethics, and establish appropriate controls to prevent and detect fraud and errors within the entity. An auditor cannot obtain absolute assurance that material misstatements in the financial statements will be detected. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with the auditing standards generally accepted in India. An audit does not guarantee that all material misstatements will be detected because of such factors as the use of judgment, the use of testing, the inherent limitations of internal control and the fact that much of the evidence available to the audit is persuasive rather than conclusive in nature. For these reasons, the auditor is able to obtain only a reasonable assurance that material misstatements in the financial statements will be detected. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error because fraud, generally, involves sophisticated an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tecting an intentional misstatement that is concealed through collusion between or amongst one or more individuals in the management. Whether the auditor has performed an audit or not in accordance with auditing standards generally accepted in India is determined by the adequacy of the audit procedures performed in the circumstances and the suitability of the auditor's report based on the result of these procedures. However, unless the audit reveals evidence to the contrary, the auditor is entitled to accept records and documents as genuine. Accordingly, an audit performed in accordance with auditing standards generally accepted in India rarely contemplate authentication of documentation, nor are auditors trained as, or expected to be, experts in such authentication. 59. Under AAS 30, the auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence to support certain financial statement assertions. In making this determination, the auditor should consider materiality, the assessed level of inherent and control risk, and how the evidence from other planned audit procedures would reduce audit ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the assets of a company is primarily that of the management and the auditor is entitled to rely upon the safeguards and internal controls instituted by the management, although he will, of course, take into account any deficiencies he may note therein while drafting the audit programme. The auditor does not conduct the audit with the objective of discovering all frauds, because in the first place it would take a considerable amount of time and it would not be possible to complete the audit within the time-limit prescribed by law for the presentation of accounts to the shareholders. Further, such an audit would have to involve a detailed and minute examination of all the books, records and other documents of the company, and the cost of doing so would be prohibitive and disproportionate to the benefits which may be derived by the shareholders. Finally, even if such examinations were to be conducted, there will be no assurance that all types of frauds, omissions and forgery, etc., would be discovered. The auditor, while conducting the audit, bears in mind the possibility of existence of fraud and irregularities in the accounts of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64. In Deputy Secretary to the Government of India, Ministry of Finance Vs S.N. Das Gupta , AIR 1956 Cal 414 , the Calcutta High Court while examining whether a Chartered Accountant was guilty of negligence in the discharge of his duties as auditor held:- the scope of the enquiry to be made by him and the nature of the facts which he has to certify have been held to be indicated. He has to ascertain and report not merely whether the balance-sheet exhibits, the true state of the company's affairs as shown in the books of the company, but also whether the books of the company themselves exhibit the true state of the company's affairs. Next as to the method the Auditor must follow. He must of course examine the books of the company to see what they contain, but he must also ask for further information and for explanations when such are required. In performing that function, he is required on the one hand to employ reasonable skill and care, but on the other hand, he is not required to do more. He is not required to begin with suspicion and to proceed in the manner of trying to detect a fraud or a lie, unless so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion amounts to gross negligence or recklessness amounting to fraud or complete failure to comply with the auditing standards. At best, it amounts to a lapse. The audit could have been conducted with more care and prudence. 66. The contention that the auditor should proceed with the attitude of professional skepticism as mandated under AAS-4 is misplaced. Picking a para somewhere from an AAS does not mean that the auditor only has to sniff like a bloodhound and proceed with an attitude of professional skepticism. The entire AAS is required to be considered as a whole to see what are the duties of an auditor and what professional standards are required to be mentioned. Reliance by the respondents of a decision of the U.S. Court of Appeals in Kyle Pippins vs. KPMG LLP, MANU/FESC/0889/2014 has no application to the present controversy. The Court was faced with the question whether the plaintiffs were entitled to receive overtime compensation. It was found that the plaintiffs received substantial specialised education as accountants and held that they were employed in a professional capacity and thus were not entitled to receive overtime compensation. While con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal Financial Reporting Authority which would, inter alia, also review quality of services provided by the member of the ICAI which has already been set up in 2018. Complaints against auditors could be considered by this authority but professional skepticism in isolation cannot be considered under SEBI Laws. Under Section 28B of the CA Act, a Quality Review Board has been constituted to perform the following functions, namely- ( i) to make recommendations to the Council with regard to the quality of services provided by the members of Institute; ( ii) to review the quality of services provided by the members of the Institute including audit services; and ( iii) to guide the members of the Institute to improve the quality of services and adherence to the various statutory and other regulatory requirements. 70. Thus, in view of the aforesaid, SEBI as a regulator has no authority under SEBI laws and regulations to look into the quality of audit services performed by the auditors. 71. Detecting fraud is difficult, especially, involving material financial statement, misstatemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udit. So also the standard of care, while assessing the practice as adopted is justified in the light of knowledge available at the time of incident and not at the time of trial. The law requires that a professional man lives up in practice to the standard of the ordinary skilled man exercising and preferring to have special professional skill. He need not possess the highest expert skill; it is enough if he exercises the ordinary skill of an ordinary competent man exercising his particular art. 73. In Bolam vs Friern Hospital Management Committee [1957] 1 WLR 582 it was held:- No matter what profession it may be, the common law does not impose on those who practice it any liability for damage resulting from what in the result turn out to have been errors of judgment, unless the error was such as no reasonably well-informed and competent member of that profession could have made. 74. In Eckersley Others vs. Binnie Others, the Court of Appeal (Civ Div) held :- In deciding whether a professional man has fallen short of the standards observed by ordinarily skilled and competen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regulation of the security market. By way of elaboration under Sections 11(2)(a) to (e) it is stipulated that the duty of SEBI would include regulating the business in the stock exchanges and any other securities market which would include the working of stockbrokers, share transfer agents and similarly placed other functionaries associated with securities market in any manner, registering and regulating the working of the depositories, participants of securities including foreign institutional investors in particular to ensure that fraudulent and unfair trade practices relating to securities markets are prohibited and also prohibiting insider trading in securities. 76 . Under Sections 11(4)(a) and (b) apart from and without prejudice to the provisions contained in subsections (1), (2), (2-A) and (3) as well as Section 11-B, SEBI can by an order, for reasons to be recorded in writing, in the interest of the investors of securities market either by way of interim measure or by way of a final order after an enquiry, suspend the trading of any security in any recognised stock exchange, restrain persons from accessing the securities market and prohibiting any perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been left to the discretion and wisdom of SEBI. It is necessary to record here that the aforesaid power to adopt such measures as it thinks fit to promote investors' interest, to promote the development of the securities market and to regulate the securities market, has not been curtailed or whittled down in any manner by any other provisions under the SEBI Act, as no provision has been given overriding effect over sub-section (1) of Section 11 of the SEBI Act. 78. Thus, the powers conferred on SEBI under Section 11 and 11B is to protect the interests of investors in securities and to promote the development of and to regulate the securities market. Therefore, the measure to be adopted by SEBI is remedial and not punitive. In a given case a measure of debarring a person from entering the securities market will be justified, but in our view, banning an audit firm or an auditor from auditing the books of a listed Company or from certifying any report of a listed Company cannot be justified. By no stretch of imagination, a direction debarring an auditor from auditing the books of a listed Company can be said to be remedial in nature. A remedial action is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80. The charge against the said ten firms is that they are entities / firms practicing as CA in India under the brand and banner of Price Waterhouse (PW) and are liable for the audit of SCSL on the basis of them being a member of network of firms under the banner Price Warehouse (PW). 81. As regards the liability of the firms in the PW Network, the following facts, as revealed during the investigation, are relevant for consideration: ( i) SCSL had appointed PW (branch office being in Hyderabad) as its auditors and PW Bangalore is stated to have taken up the assignment. Persons deployed for the SCSL Audits were sourced from various firms/offices of PW. The audits thus involved personnel from various firms linked to the PW Network. ( ii) The core engagement team who worked on the audit of SCSL was on the payroll of other PW firms, namely, Price Waterhouse Calcutta and Lovelock and Lewes Hyderabad and not PW Bangalore. The resources of these firms were utilized as per the resource sharing arrangement between member firms. PW Bangalore has paid the other two firms for the services rendered by them in the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dited listed companies under the brand and banner PW and further directed the listed companies and intermediaries registered with SEBI not to engage any one firm forming part of the PW network for issuing any certificate with respect to compliance of statutory obligations with SEBI. The reasoning and finding of the WTM leading to the passing of the impugned order was based on the following reasons:- ( a) The webpage of PWC India indicates that PWC has offices at Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Kolkata, Mumbai, Pune etc. and that the webpage that PWC Global describes PWC as the brand under which member firms of Price Waterhouse Coopers International Limited (PWCIL) operate and provide professional services which member firms include the ten firms in question. ( b) The settlement order of Securities and Exchange Commission, USA (SEC) has imposed remedial sanctions and a cease and desist order against five of the ten firms of PW in India in the context of fraud at SCSL, namely, Lovelock Lewes, PW Bangalore, PW Co. Bangalore, PW Calcutta and PW Co. Calcutta. ( c) Similar findings were also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d become stale and the delay caused, at the instance of SEBI, was not curable. 86. It was urged that the ban imposed is on the CA firms and not on the partners. It was contended that as on the date of the impugned order there were 98 partners in the ten firms out of which 70 are new partners who were not partners of the firms during the period 2000 to 2009 and thus banning them from doing audit work of listed Company merely because those are presently partners in PW firms is wholly arbitrary and illegal. Further, 90% of the staff engaged in the engagement team are different now and debarring them for no fault of theirs was thus also arbitrary and illegal. 87. It was thus contended that vicarious liability of a CA cannot be extended to the firm and other firms other than the audit firm nor the vicarious liability could be fastened upon the new partners who admittedly had no role in the audit of SCSL as they were not partners at the relevant moment of time. 88. It was contended that the WTM has failed to consider the provisions of The Partnership Act, 1932 which governs the appellant firms. The learned counsel submitted that und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contended that the SCSL scam had a direct and adverse impact in the share market. The prices of SCSL scrip fell drastically. Millions of investors lost their hard earned money on account of abject failure on the part of the statutory auditor of SCSL in failing to comply with its duty to the shareholders of ensuring fairness and accuracy in the audited accounts. It was urged that failure to comply with the basic auditing standards constituted fraud and thus it was vital to uphold the directions in the impugned order against all PW entities. 95. It was contended that even though PW Bangalore is stated to have taken up the audit assignment of SCSL, the audit assignment was accepted on behalf of PW. The letterhead did not mention PW Bangalore. In fact, the letter of acceptance was issued on the letterhead of PW Hyderabad and thus an irresistible inference can be drawn that all PW CA firms were one and the same under a common brand and network. This is further fortified that persons deployed for the audit were sourced from other PW firms of PW network. 96. The learned senior counsel submitted that the PW network enabled the PW entities to set up and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These ten firms had nothing to do with the audit of SCSL. They had no knowledge of the day to day affairs of SCSL either directly or indirectly. There is not even a whisper of a finding in the impugned order against the ten firms about any connivance or collusion or intention or knowledge on their part in the audit of SCSL. The entire basis of debarring the ten firms is the resource sharing agreement, the brand PW and the networking of PW as a brand. In our opinion, the approach adopted by the WTM is patently erroneous and is flawed. 100. In the absence of any finding of connivance or collusion or intention or knowledge on the part of the ten firms in the audit of SCSL, and in view of the clear cut directions of the Bombay High Court, no directions could have been issued by the WTM against the ten firms. The reasoning adopted by the WTM in relation to the resource sharing agreement, the brand PW and the networking of the PW cannot be accepted. 101. The ten firms have entered into a resource sharing agreement in which resources are shared pursuant to an agreement and on the basis of consideration and without liability being transferred. For facili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F. Nothing contained in the agreement shall constitute an authority in favour of any of the Firms to represent, commit or engage on behalf of the other Firms merely by reason of the sharing of resources or any other act pursuant to the agreement. Nothing contained in the agreement shall constitute a partnership or an agency or donation of a power of attorney in fact or in law to represent, bind or liaise in favour of any Firm on behalf of any of the Firms. The sharing of resources pursuant to this agreement shall be purely on a principal-toprincipal basis alone. G. Any dispute or difference in relation to this agreement shall be resolved by binding arbitration by a sole arbitrator to be appointed by mutual consent in accordance with the Arbitration and Conciliation Act, 1996 IN WITNESS whereof this agreement has been duly executed the day and year abovewritten. 102. The resource sharing agreement makes it clear that the firms could draw collective resources employed amongst the firms on an as necessary basis in order to ensure rendering of quality services to their respective clients in the field of audit, etc. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r CA firms. 105. ICAI has formulated Rules of Network amongst the firms registered with the ICAI. These Rules enable the practice of CA firms as a Network on a sharing of resources basis. In order to appreciate as to what in fact is a network, it would be relevant to extract a few provisions of the Rule:- RULES OF NETWORK 1. These Rules are called Rules for Network amongst the firms Registered with. The Institute of Cost Accountants of India. 2. Definition. ( i) Network Network amongst two or more firms means an arrangement to facilitate the better function of the affiliate member firms in the interest of the profession and not for acquisition of any gain Such Network shall include the formal Network to use collective resources such as turnover, infrastructures manpower location for execution of Professional services of one or more type. [ Explanation 1. An affiliation as referred to above shall also include: ( i) Having an association with an accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, whether registered or not with the Institute, it with be necessary for such a network to comply with all applicable ethical requirements prescribed by the Institute from time to time in general and the following requirements in particular. ( a) If one firm of the network is the statutory of an entity then the associates (including the networked firm(s)) or the said firm directly/indirectly should not accept the internal audit or book ‐ keeping or such other professional assignments which are prohibited for the statutory auditor firm. 6. Consent of Client: The network shall obtain consent of the client to engage affiliate in discharging the professional assignment. 8. Object of Network: The Network itself will not carry on any business for acquisition of gain for itself and only act as a facilitator for its members/constituents Members firms to pursue their professional jobs. 10. Issuing Reports: Only the firm(s)/Member(s) forming network are eligible to issue/sign/attest any certificate/Report/professiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admission on the part of the ten firms that there is a network of PW firms would not make all the ten firms guilty of fraud or manipulation of the books of accounts of SCSL. The approach of the WTM in aiming the network responsible for the fraud in SCSL is farfetched, and cannot be sustained. If ICAI allows independent firms to pool their resources it does not make these firms as one big unit. There is no shred of evidence to show that there was revenue sharing between the ten firms. We are further of the opinion that being members or connected with PW Cooper International Ltd., a UK based private limited company, may make them a network of firms under the name PW but that by itself does not make them responsible for the alleged irregularities in the audit of SCSL. The network Rules does not, in our opinion, shows that ICAI perceives a network of firms as a single unit . For the purpose of avoidance of conflict of interest, the clause relating to ethical compliance providing that if one firm of the network is a statutory auditor of an entity, then an associate firm of the same network cannot accept internal audit of the same Company does not amount nor can it lead to an inference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name of the firm which conducted the audit namely Price Waterhouse . The ICAI registration number of this auditing firm is 07568S. 110. SEBI s argument that the audit opinions were signed by the network of Price Waterhouse is legally untenable and contrary to the applicable law. Section 226(1) of the Companies Act, 1956 provides that- 226. QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS. 1. A person shall not be qualified for appointment as auditor of Company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1449 (38 of 1949): Provided that a firm whereof all the partners practicing in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practicing may act in the name of the firm . Therefore, the stress on the words We , our etc in the audit opinion means that it represents the PW network is absolutely erroneous in as much as the representation was only by the concerned firm which conducted the audit. 111. SCSL and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointment of statutory auditors was addressed by SCSL to Mr. Gopalakrishnan at the Hyderabad branch of appellant in Appeal No. 7. The response was addressed by the Mr. Gopalakrishnan of the appellant in Appeal No. 7. 114. The WTM referred to certain letters to show that the letters were being addressed in the name of Price Waterhouse from the Shivaji Park office in Mumbai. It was thus urged that it was that PW network that was auditing the accounts of SCSL. The submission of the respondent is untenable for the same reasons that the said letters were issued by the appellant in Appeal No. 7 and not by the network firms. The Shivaji Park address is the branch office of the appellant in Appeal No. 7. It was signed by a partner of the appellant in Appeal No. 7. This does not in any way show any acceptance of responsibility by the network of appellant firms as alleged by SEBI. Section 27 of the Chartered Accountants Act, 1949 permits maintenance of branch offices for Chartered Accountancy firms Maintenance of branch offices: where a chartered accountant in practice or a firm of chartered accountants has more than one office in India, each one of the offices shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Public Company Accounting Oversight Board (PCAOB). To elaborate on this issue, we find that in the aftermath of the SCSL scam, the SEC and the PCAOB of the United States of America deemed it appropriate to institute cease and desist and censure proceedings against PW, Bangalore, Lovelock and Lewes, Kolkata, Price Waterhouse Co. Bangalore, PW, Kolkata and Price Waterhouse Co. Kolkata (Appellant Nos. 1, 5 and 2 in Appeal No. 6 of 2018). These proceedings were instituted pursuant to the relevant provisions of the Securities Act which, inter alia, dealt with an auditor lacking in character or integrity or found to have engaged in unethical or improper professional conduct or willfully violated or aided or abetted the violation of the securities laws. The consenting PW entities anticipated the institution of these proceedings and submitted an offer of settlement which was accepted by the SEC and PCAOB. In the light of the said offers of settlement, consent orders were passed by both, SEC and PCAOB dated 5th April 2011. In the order dated 5th April 2011, the SEC observed that there had been gross violations of the auditing standards in the SCSL audit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervations made in the said orders cannot be relied upon as a piece of evidence in as much as these are settlement orders where the firms agreed to settle with SEC and PCAOB in exchange for a reasonable order involving remedial measures as a result of which the firms were allowed to continue with the existing audit engagement. The settlement orders issued a slew of remedial measures which was accepted and acted upon by the appellants. In our view, the settlement orders have no precedential value in SEBI proceedings. If SEC and PCOAB are to be relied upon by SEBI, then they should have also issued similar measures and further allowing PW firms to continue with the existing audit arrangement instead of debarring them from auditing listed Companies. The appellants have denied the findings and observations in these orders and in our opinion are entitled to deny these findings in any other legal or regulatory proceedings. Whereas, SEC PCAOB had jurisdiction over auditors of US listed Companies, the same is not the case with SEBI. We may point out that PCAOB in its order acknowledged at multiple places that PW Bangalore served as SCSL s auditor. The PCAOB also recorded that Price Waterh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore he became a partner. 124. The aforesaid provision is patently clear. A new partner inducted into a firm is not liable for any act of the firm done before he became a partner. Further, when a new partner is taken or an existing partner retires with the consent of all the partners, it becomes a case of reconstitution of the partnership firm under Section 187 of the Income Tax Act. Where a firm is dissolved either by agreement of the partners or by operation of law and another firm takes over the business, then it will be a case of succession governed by Section 188 of the Income Tax Act as held by a Full Bench of the Allahabad High Court in Dahi Laxmi Dal Factory vs. Income Tax Officer, Sitapur, 1974 All LJ 883 . 125. Thus, the liability of a new partner commences from the date of his admission as a partner in the firm. He is not liable for the preexisting debts. Unless there is an agreement to show that the incoming partner is liable for the pre-existing debts, a new partner cannot be made liable to honour the liabilities of the old firm before he became a partner. 126. In this regard, reliance is placed on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he attitude of the respondent appears to be that SEBI and SEBI laws are superior, and that SEBI cannot be brow beaten. The respondent has lost sight of Section 32 of SEBI Act which specifically provides that the provisions of the SEBI Act shall be in addition to, and not in derogation of the provisions of any other law for the time being in force. Such old law is the Partnership Act which is still in force and is squarely applicable. 129. Section 4 of The Partnership Act, 1932 defines a partnership . The Supreme Court in Deputy Commissioner of Sales Tax, (Law) Board of Revenue (Taxes), Ernakulam vs. M/s. K. Kelukutty, (1985) 4 SCC 35 explained partnership as- The Indian Partnership Act, 1932 has, by Section 4, defined a partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all . The section declares further that the persons who have entered into partnership with one another are called individually partners and collectively a firm . The components of the definition of partnership , and therefore of a firm consist of (a) persons, (b) a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms. 131. In Ritesh Agarwal and Another vs Securities and Exchange Board of India and Others, (2008) 8 SCC 205 , the Supreme Court held:- A citizen of India has a right to carry on a profession or business as envisaged by Article 19(1)(g) of the Constitution of India. Any restriction imposed thereupon must be made by reason of a law contemplated under clause (6) thereof. In the absence of any valid law operating in the field, there would not be any source for imposing penalty. A right to carry on trade is a constitutional right. By reason of the penalty imposed, the Board inter alia has taken away the said constitutional right for a period of ten years which, in our opinion, is impermissible in law as the Regulations were not attracted. 132. The said principle is squarely applicable in the instant case. If the appellants have violated the provisions of the Companies Act they can be prosecuted there under but the respondent cannot invoke the SEBI laws in this cavalier fashion which violates the appellants fundamental right to carry on business as envisaged under Article 19(1)(g) of the Constitution of India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission. Once you breach your duty, negligence becomes actionable as there has been a failure to attain that standard of care. 137. A professional such as an auditor comes under a category of persons professing some special skill. Any task which is required to be performed with a special skill would generally be undertaken to be performed only if the person possesses the requisite skill for performing that task. The only assurance which such professional can give is, that he is possessed of the requisite skill in that branch of profession which he is practicing and that he would be exercising his skill with reasonable competence. This is what a person / Company approaching the professional can expect. 138. Thus, a professional may be held negligent if he is not possessed of the requisite skill which he professed to have possessed or he did not exercise with reasonable competence. The standard to be applied for judging whether the person charged has been negligent or not, would be that of an ordinary competent person exercising ordinary skill in that profession. It is not necessary for that person to possess the highest level of e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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