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TMI Blog2023 (6) TMI 1337X X X X Extracts X X X X X X X X Extracts X X X X ..... ticees. However, at the same time we can turned a blind eye to the fact that the Noticees had issued a Qualified Report highlighting certain irregularities in the financials of the Company that were taken up for limited review for the quarter ended 31-12-2014. The instances of being unprofessional or being negligence would be difficult to equate with committing fraud in connivance with the management, where evidences are not sufficient to demonstrate that the Noticees had actually manipulated the books of accounts with knowledge and fraudulent intention. In the absence of any tangible evidence, the question of fraud committed by the them would be difficult to survive and therefore in the absence of any material to establish knowledge/collusion/connivance of the Noticees with such fraudulent scheme, the Noticee cannot be brought under disciplinary/penal jurisdiction of SEBI. With respect to any possible connivance or collusion by the Noticees with the Company or its management, it is acknowledged that, in such matter it is very difficult to find out either a written agreement or such agreement of minds and the same has to be culled out from the acts of the parties. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter referred to as the Forensic Audit Report ), highlighting therein various irregularities in financial statements apparently showing profits through inflated sales and non-existent purchases and sales by Arvind Remedies Limited (hereinafter referred to as ARL or Company ). 2. Subsequent to the receipt of the aforementioned document, a preliminary examination was undertaken by SEBI to ascertain as to whether the books of accounts of ARL were manipulated during the Financial Years (FYs) 2011 to 2015. Following were, inter alia, the observations of the preliminary examination conducted by SEBI. a) ARL showed purchases and sales with Controlled / Connected Entities. The funds for the purchase and sell transactions with Controlled / Connected Entities have been noticed to be routed through circuitous transactions without actual movement of goods and; on most occasions the funds movement of many layers were happening on the same day indicating that ARL inflated its sales and profits. b) ARL prepared different sets of financial statements for FYs ending March 31, 2011, March 31, 2012 and March 31, 2013 and thereby projected untrue financial statements to various stakehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1B of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act, 1992 ) including the following, should not be taken/imposed against them as extracted from the said order hereunder :- Directing them to restrain from, directly or indirectly, issuing any certificate required under securities laws i.e. SEBI Act; Securities Contract (Regulations) Act, 1956; Depositories Act, 1996; Rules, Regulations, Guidelines made thereunder; Listing Agreement along with the applicable provision of the Companies Act, 2013; Rules, Regulations, Guidelines made thereunder, which are administered by SEBI, with respect to Listed entities; Intermediaries and Initial Public Offer(s) . 4. Simultaneously, a detailed investigation into the trading activities was also conducted pertaining to the scrip of ARL as well as with reference to manipulations of financial statements and insider trading by promoters of the Company, while off-loading the shares of the Company during the period of April 01, 2010 to June 13, 2016 (for convenience Investigation Period ) for possible violation, if any, of the provisions of SEBI Act, 1992 and rules and regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seeking external confirmation, on the auditor, however, the Noticee auditors in this case had appeared to be consciously not followed the same by verifying the debtors; (iii) Under the AAS, the auditor shares the primary responsibility for the prevention and detection of fraud and error with those actually in charge of the governance and management of the entity; (iv) The importance of AAS 4 cannot be overlooked where it states, 'When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of Professional Scepticism throughout the audit.' The several red flags listed above, which were all too noticeable for any reasonable professional auditor to miss, failed to engender the necessary professional scepticism in the auditors associated with the audit of ARL. e) It was unearthed that the Noticees being the statutory auditors of ARL have aided /facilitated ARL in projecting untrue financial statements for financial years ending March 31, 2011, March 31, 2012 and March 31, 2013 to various stakeholders which portrayed its collusive intention in facilitating the ARL and its management to deceive its stakeholders. Noticees have knowingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to his other commitments. Accordingly, another opportunity of personal hearing was provided to both the Noticees on 26.07.2022, however on the said date again, the Noticees requested SEBI to provide inspection of various documents including the Investigation Report hence, the hearing could not be conducted successfully. After noting that the inspection of the documents sought by the Noticee no.1 has been duly provided by SEBI on 18.10.2022, a final opportunity of personal hearing was accorded to both the Noticees on 23.11.2022, which was attended by Noticee no. 2 who advanced various arguments in his defense on the lines of the replies filed by him with SEBI. I also note that the Authorized Representative (AR) of Noticee no. 1, before appearing for the personal hearing, requested for another adjournment on the ground that a Writ Petition Application (WPA) no. 25410 of 2022 has been filed by Noticee no. 1 before the Hon ble High Court of Calcutta. However, considering the facts that there was no stay on the present proceedings by the Hon ble High Court of Calcutta and also the fact that already various adjournments have been provided to the Noticee no. 1 in the past, it was infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assing the interim order, on the basis of same set of allegations, SCN has been issued by SEBI. It may not be legally tenable to issue two show cause notices for the same set of allegations. b) Subsequent to issuance of interim order, reply vide letter dated 15.07.2020 was filed by Noticee, however, no communication was issued by SEBI during the period between interim order and SCN. Because of intervening delay, which spans over three years, the instant proceedings stand vitiated by the principles of delay and SEBI is estopped from raking up a five-year-old matter. c) As a statutory auditor, DCB, upon coming to know of some issues / fraud in ARL, had qualified the quarterly report of ARL for the quarter ending 31-12-2014. This fact was submitted while responding to the interim order, however, it appears that the same has not been considered while issuing the SCN in the matter. d) The seal of DCB and signature of Noticee no. 2 on the multiple financial statements of ARL as referred to in the SCN are forged and don t pertain to the Noticee. e) The references made to various AAS in the SCN have been withdrawn / substituted with different standards. Therefore, the allegatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the allegation of professional misconduct for reasons of gross negligence can t be fixed against the statutory auditor. In fact, the Forensic Audit Report has time and again pointed out involvement of management of ARL in fraudulent practices. k) Noticee has not signed multiple sets of financial statements with varying figures. Despite his submissions, no action has been taken to use the services of a handwriting expert to find out the genuineness of signatures and initials on the alleged forged documents. Merely because multiple financial statements with varying figures have been unearthed by Forensic auditors, it is not right to conclude that all the sets with varying figures have been signed by the Noticee no. 2 unless and until the signatures are verified by hand writing experts. He has signed only one set of financial statements for the financial year or limited review reports for various quarters on behalf of the firm, which was submitted by the management to NSE / BSE. l) DCB was subjected to Peer review conducted by the ICAI and the file of ARL was reviewed by ICAI and the reviewer reported no exception of any nature. m) Noticee has referred to following j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; PFUTP Regulations, 2003 3. Prohibition of certain dealings in securities No person shall directly or indirectly (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard, I note from the perusal of the two sets of financial statements (one i.e. reported in the Annual Report and another that was unearthed by the Forensic Auditors) that there are substantial differences in the figures including the sales and profit figures of ARL as reported in the afore mentioned two sets of financial statements. Some of the differences observed in the aforesaid two sets of financial statements pertained to ARL and were alleged to have been signed by Noticees are presented in the table below: TABLE NO. 2 Year Sales as reported in Annual Report (INR crores) Sales as per another set of signed financial statements (INR crores) Difference (%) 2010-11 362 27 93% 2011-12 437 41 91% 2012-13 664 38 94% TABLE NO. 3 Year Profit after tax as reported in Annual Report (INR crores) Profit after tax as per another set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2 were forged. I also can t ignore the fact that despite the allegations having been placed on them that they had signed multiple financial statements to facilitate the management of ARL to present wrong, false and untrue disclosure of financial statements to the stakeholders, the Noticees have so far not demonstrated their bonafide by at least protesting or complaining against the Company or its management before appropriate authorities for impersonating the signature of Noticee no. 2 and seal of Noticee no. 1 on those financial statements or for misrepresenting to the public that certain audited accounts apparently were being audited by them which, according to their assertions were not audited by them. The Noticees ought to have filed a criminal complaint for forgery and criminal breach of trust against the management of the Company for forging their signatures and seal on different set of financial statements due to which, they have been served with a SCN from SEBI. However, no such action apparently has been taken by the Noticees to protect their interest and reputation or to prove their innocence, despite the fact that the allegation of signing different sets of financial s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reports, ARL had posted inflated figures of sales and purchases of goods. The investigation reveals that the sales and purchase were made with entities, which are noticed to be connected and controlled by ARL or its promoter. In this respect, the aforesaid sales/purchases of goods as were disclosed by ARL were entered into and transacted with the following entities: Preventive Pharmaceuticals Private Limited; Aroma Remedies Private Limited; Holy Remedies Private Limited; Zurich Bio Tech Pharma; Venus International Private Limited; Cosmic Remedies Private Limited; Avathar Pharmaceuticals Private Limited; Bright Medicure Private Limited; Maximus Wellnus Drugs Private Limited; Elixir Life Science Private Limited; Mascot Machines Private Limited; Matrix Device and Mechanism Private Limited; Zeal Hi-Tech Engineers Private Limited For the purpose of convenience, the aforesaid entities are together referred to Controlled / Connected Entities of ARL. 17. I note from the records available before me that there were frequent bank transfers observed between Controlled / Connected Entities and ARL. I also note that there were regular bank tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .00 - 26/12/2011 669011000320 Maximus Wellnus Drugs Private Limited ARL - 7,431,500.00 26/12/2011 669011000320 Maximus Wellnus Drugs Private Limited Zurich Bio Tech Pharma 7,430,500.00 - 04/04/2012 669011000297 Zeal Hi-Tech Engineers Private Limited ARL - 7,292,454.00 18. The details of sales/purchases of goods as alleged to have been undertaken by ARL with Controlled / Connected Entities are as under: TABLE NO. 5 FY Purchases by ARL from Controlled / Connected Entities (in INR Crore) Total Purchases (As reported in P L Account of ARL) (in INR Crore) % 2011-12 220.75 354.69 62 2012-13 202.96 494.75 41 2013-14 297 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DATE CREDIT AMOUNT RECEIVED FROM DATE DEBIT AMOUNT PAID TO 25-11-2011 70,45,500 ARL 25-11-2011 69,25,850 ARL 28-11-2011 68,48,300 ARL 28-11-2011 68,96,250 ARL 29-11-2011 45,12,300 ARL 29-11-2011 45,05,150 ARL 01-12-2011 49,49,500 ARL 01-12-2011 4,950,600 ARL 15-12-2011 54,65,800 ARL 15-12-2011 54,50,950 ARL 21-12-2011 68,54,557 ARL 21-12-2011 68,65,850 ARL III NAME OF THE CONTROLLED / CONNECTED ENTITY: MATRIX DEVICE AND MECHANISM PVT. LTD ACCOUNT NO. 6311134717 BAN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred to Preventive Pharmaceuticals 29-10-2012 93,18,940 Preventive Pharmaceuticals transferred to ARL Transaction 2 Date Amount (in INR) Particulars 25-09-2013 2,78,10,300 ARL transferred to Venus International 26-09-2013 2,72,13,610 Venus International transferred to Holy Remedies 26-09-2013 2,65,38,350 Holy Remedies transferred to ARL Transaction 3 Date Amount (in INR) Particulars 20-Nov-14 16,11,000 ARL transferred to Preventive Pharmaceuticals 83,90,000 22-Nov-14 1,00,00,060 Preventive Pharmaceuticals transferred to Zurich Biotech 22-Nov-14 99,76,593 Zurich Biotech transferred to ARL 21. From the aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ARL for almost same amounts. Considering the above factual observations and other material on record, SEBI vide order dated August 24, 2022, held the Company, its MD and other Directors guilty for manipulation of books of accounts and financial statements. 23. After having convinces myself beyond doubt that the books of accounts and financial statements of Company during the Investigation Period were indeed manipulated and did not show true affairs of the Company as evidenced by the compelling findings from the SEBI s investigation and the forensic report, I now move on to the role of statutory auditors of the Company in this regard. I note that the SCN has alleged that during the course of their statutory audit of the Company, Noticees have knowingly and in collusion with ARL have actively facilitated by intentionally failing to highlight the irregularities in the financial statements of ARL despite having noticed the obvious red flags about mis-statements of financial figures, and have thus enabled ARL and its directors in falsification/ misstatement of financial statements of ARL. 24. I note that SCN has referred to paragraphs 7 and 15 of AAS 5 which, inter alia, state th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about falsification of accounts and two sets of financial statements, etc. could have been easily noticed by the Noticees, in case they had adopted the procedure to obtain the external evidence by obtaining balance confirmations from the debtors/ creditors. At this juncture, it is important to mention here that M/s Vivekanandan Associates, the subsequent statutory auditors of ARL, have stated in the independent auditors report for the year ended March 31, 2016 that they had sent request letters for account confirmations to the debtors (Controlled / Connected Entities), but no confirmation was received from them. From the above, it is very evident that the Noticees have not shown Professional Skepticism while performing their duties of the statutory auditor and have certainly failed in exercising professional diligence and care as expected of the statutory auditor of a listed company like ARL. 26. Noticee no. 2 has submitted that AAS5 which refers to Audit Evidence has been repealed and replaced with Standard on Auditing (SA 500) with effect from April 01, 2009 and hence, not applicable on the Noticees. In this regard, I note that AAS 5 states that the quality of external evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s / profits as reported by the management of the Company for the relevant years would have easily alerted Noticees with regard to its veracity. Hence, they ought to have verified the authenticity of such figures reported by the management of the Company at least by obtaining account confirmations from the debtors as a first precaution but they have conveniently omitted the same. Such a glaring act of omission and causal approach further cast serious aspersion on their professional ethics and ability and further give rise to a suspicion about their suspect collusion / connivance with the management of the Company, in presenting those false and misleading audited financial results for many years. 28. I further note that Noticees have stated that DCB was subjected to Peer review conducted by the ICAI and the file of ARL was reviewed and no exception was reported by the reviewer. In this regard, it is pertinent to note that the findings in SCN regarding manipulation of books of accounts of ARL pertain to the FY 2011-12 to FY 2014-15. However, Noticees have not specified as to which year s accounts of ARL were reviewed by the peer reviewer. Nonetheless, from the ICAI s website(https: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le is one that creates a sense of trust in outsiders making them believe that an independent and competent entity has examined the financial records of the company and has found them to be in order. Investors in the securities market rely on the opinion of the statutory auditors while evaluating the financial statements of a company. Being a professionally qualified entity and being governed by elaborate auditing standards prescribed by ICAI, it is always presumed that a statutory auditor would have conducted audits of books of accounts of a company after exercising due care and diligence and would diligently point out shortcomings in the records or processes followed by the company, which the listed company is obligated by law to disclose to the shareholders and such listed company is also required to explain the steps it is taking to remedy those shortcomings. Therefore, the argument of the Noticees that statutory audit just expresses opinion with respect to true and fair presentation of the accounts based on information provided by the management of the company, is erroneous and a misleading argument that is misplaced on fact and law, hence the same is rejected in limine. More ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o have destroyed raw material worth INR197.3 crores and it was observed that the said raw material was destroyed without intimation to the relevant governmental agencies like the Drug Control, Pollution Control Board, Excise Department, etc. and also without the permission of banks, with whom the said raw materials were hypothecated. However, ARL submitted to SEBI a copy of letter claimed to have been written by it, to Tamil Nadu Pollution Control Board (TNPCB) in this regard and when the same was verified by SEBI from TNPCB, it denied receipt of any such intimation from the Company. I note from the submissions of the Noticees that in the limited review report of the Company for the Quarter ended 31-12-2014, they have categorically stated that no intimation was given to excise and other regulatory authorities in respect of destruction of inventories. I also note that the Noticees in their afore-stated Qualified report have, inter alia, highlighted other irregularities such as receivables from certain other distributors aggregating to INR 4,958 lacs since the confirmation is not available with the company, regarding provision against certain inventories likely to be non usable du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive role played by the auditor in the perpetration of the fraud, the auditor shall not come under the disciplinary/penal jurisdiction of SEBI and for all such lack of professionalism or negligence in performing duties as an auditor of a company, it is the ICAI/ National Financial Reporting Authority (NFRA) who shall be the competent authority to adjudicate upon that. In other words, the mens rea, i.e. the intent to commit an act knowing the same to be false, untrue or illegal, needs to be established qua the auditor in order to bring him/ it under the disciplinary/penal jurisdiction of SEBI under the category of fraud . 36. The Noticees have further sought to submit that since, there is no evidence to even remotely indicate about connivance of these Noticees with the management of ARL, it would not be legally justified to exercise jurisdiction to punish the Noticees. The Noticees while assailing the jurisdiction of SEBI have also referred to the findings of the Hon ble High Court of Bombay in the matter of Price Waterhouse Co. Vs SEBI (Writ Petition no. 5249/2010, judgment dated August 13, 2020), wherein while upholding the jurisdiction of SEBI, the Hon ble High Court has h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y other Regulator created for that purpose. 38. It is further noted that Noticees have also relied upon various judicial decisions to contend that the scope of the enquiry by SEBI can be limited to the charge of conspiracy and involvement in the fraud, if any, so as to take consequential action in terms of SEBI Act, 1992 read with PFUTP Regulations, 2003 of SEBI. However, it is not open to SEBI to enquire into any charge of professional negligence of the Auditor since the audit firm was not dealing directly in the securities. An instance of negligence or recklessness in adhering to the accounting norms in the course of auditing can only point out to the professional negligence which would amount to a misconduct that may be taken up only by ICAI. 39. Keeping the aforesaid argument of the Noticees in view, I note that, to take any action against a chartered accountant under SEBI Rules and Regulations, two essentials ingredients are required to be satisfied: a. Gross negligence and dereliction of duty on the part of auditor; and b. It s connivance and collusion with the company/management 40. There is no dispute to the finding that the Noticees were instrumental in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igence and sheer professional misconduct as displayed by the Noticees as the Statutory Auditor of the Company which has been deliberated and established beyond doubt in the preceding paragraphs, the instant proceedings are disposed of with the following directions. Directions 41. In view of the foregoing findings and observations in the preceding paragraphs, I find that the materials brought forth in the Investigation while propounding the allegation against the Noticees herein, lack the tenacity to withstand legal scrutiny required in the matter pertaining to violation of the PFUTP Regulations, 2003 or suchlike. Accordingly, I am constrained to dispose of the present proceedings qua the Noticees with a cautionary advice to be careful while dealing in the securities market. 42. However, looking at the glaring misconduct and dereliction of duties and abhorrence of due diligence while conducting statutory audit as glaringly displayed by the Noticees, it is directed that a certified copy of this order be forwarded to ICAI and NFRA for appropriate action, if any, as deemed fit at their end. 43. The Order shall come into force with the immediate effect. 44. Further, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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