9911796707
TMI Blog2023 (6) TMI 1337X X X X Extracts X X X X X X X X Extracts X X X X ..... reliminary 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 stakeholders which portrayed its intention to deceive its stakeholders. c) In the Annual Reports, ARL posted inflated figures of sales and purchases of goods. As observed from the Forensic Audit Report, goods shown as being purchased were, actually not purchased by ARL. Further, sales shown to have been made by ARL were without actual delivery of goods. d) The sales/purchases of goods were disclosed by ARL as having been made with the Controlled / Connected Entities. All these Controlled / Connected Entities, were incorporated during the FYs 2010-11 and 2011-12, the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reunder, 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 regulations made thereunder. Findings of Investigation 5. In the course of investigation conducted by SEBI, while analyzing the price and trade movement in the scrip of ARL, following facts, inter alia, came to light: A. Manipulations of financial statements of ARL a) It is noticed that ARL had inflated both purchases and sales by entering into transactions with connected entities and making entries in bank statements which were either reversed or routed in a circular manner without movement of goods. As a result of the same, the books of account of ARL were not reflecting true and fair view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 knowingly failed to perform their duties in compliances with the rules prescribed for the auditors and thereby abetted ARL in preparation and presenting of false and fabricated books of account containing potential ingredients to induce investors to trade in the scrip of ARL as well as to keep shareholders and investors in dark about the true financial position of the Company. In view of the aforesaid, the Noticees have been alleged to have violated provisions of Sections 12A (a), (b) and (c) of SEBI Act, 1992 and regulation 3 (b), (c), (d), 4(1) and 4(2)(f), (k) and (r) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 informed to the Noticee no. 1 to ensure its presence and argue the case on merit to complete the hearing and that no further opportunity of hearing will be provided in the matter. Subsequently, the AR appeared on behalf of Noticee no. 1 on 23.11.2022 and argued on the lines of the reply already filed with SEBI, contending that SEBI lacks jurisdiction to proceed against Noticee no. 1 and again sought adjournment from hearing on the ground that the above mentioned Writ Petition has been filed assailing the issuance of SCN in the matter. Noticee no. 2 on the other hand has made submissions on merit arguing vehemently that the SCN does not contain suffici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 allegations of non-compliance of such AASs are not only baseless but also without application of mind. Submissions by Noticee no. 2 f) Noticee was the first entity to highlight certain irregularities in the Company and raised obvious red flags on irregularities / unusual transactions, by way of disclosure and qualifications in the limited review report for the quarter ended 31-12-2014. The afore said limited review report was heavily qualified with qualifications on stock, debtors and fixed assets etc. Their report was the first report in public domain regarding irregularities in ARL. Therefore, the allegation that the Noticee has missed the red flags is not correct. g) Had the Noticees been negligent in any manner, professionally or otherwise, he would not have qualified the review rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 judicial decisions in support his submission that no action should be taken against the Noticees as auditors until connivance is found with the management of the Company: Hon'ble Bombay High Court in matter of Tri-Sure India Ltd. vs A.F. Ferguson and Co. and Others [1985 SCC OnLine Bom 342 : (1987) 61 Comp Cas 548]; SEBI order in the matter of Mr. Rashim Tandon (Partner, Deloitte Haskins & Sells LLP) dated August 26, 2021 (Order No.- Order/GR/KG/2021-22/13092) In Kingston Cotton Mill Co., Lord Justice Lindley made it clear that the auditors should not be suspicious but only reasonably careful; In London & General Bank, it was decided that an auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (%) 2010-11 16.90 1.23 93% 2011-12 19.41 2.15 89% 2012-13 40.62 2.22 95% 13. From the above two tables, it can be noted that there is a huge difference in the sales and profits figures reported in the Annul reports of ARL vis-a-vis the financial statement unearthed during the Forensic Audit. For instance, sales reported in the Annual Report of ARL for the FY ended March 31, 2013 was INR 664 crores, however, in realty as per another financial statement of ARL, the same was barely INR 38 crores i.e. 94% less than what was reported in the Annual Report. Similarly, profits disclosed in the Annual Report of ARL for the FY ended March 31, 2013 was INR 40.62 crores, however, as per another financial statement of ARL, the same was 95% less than what was reported in the Annual Report wherein the profit was shown as only INR 2.22 crores. 14. I note that both the Noticees have submitted that Noticee no. 2 has not signed multiple sets of financial statements with varying figures as alleged against them and the seal used on such financial statements does not pertains to DCB (Noticee no. 1). They have further argued that the issue was raised by them while responding to the observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ependent allegation but is arising out of allegation of manipulating the numbers in the financial statement of ARL and as per their admitted averment, the financials disclosed on the website of the stock exchange for the financial years referred to above have not been disputed. In this respect, the forensic audit conducted by PNB has shown that the financials disclosed through the annual report were not true and correct and were containing highly manipulated figures. Therefore, the aforesaid argument of the Noticees does not hold ground for any further consideration and I can't entertain the only ground of protest made by the Noticees about no action taken to conduct forensic examination of the signatures as sufficient enough as an argument to grant exoneration from the serious allegations of fraudulent misrepresentation of financial statements that have been leveled against the Noticees in the SCN. 15. I note that the investigation has further observed that ARL had inflated both purchases and sales by entering into transactions with certain Controlled / Connected Entities. In its drive to inflate the books, it has been noticed that there were entries in bank statements which were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Debit Amount Credit Amount 05/04/2011 841271906 Preventive Pharmaceuticals Private Limited ARL - 2,11,53,124.00 04/04/2012 0007-W10851-050 Aroma Remedies Private Limited Mascot Machines - 89,40,230.00 04/04/2012 0007-W10851-050 Aroma Remedies Private Limited Elixir life Science - 10,235,950.00 04/04/2012 0007-W10851-050 Aroma Remedies Private Limited ARL 8,735,650.00 - 04/04/2014 602005118053 Holy Remedies Private Limited ARL 10,02,400.00 - 27/04/2011 910020028351986 Zurich Bio Tech Pharma ARL - 54,05,259.00 09/10/2014 603106263960 M/s. Venus International Enterprises Pvt ltd ARL 17,58,350.00 - 27/04/2011 902940702 Cosmic Remedies Private Limited ARL - 51,41,024.00 27/12/2013 112109000133356 Avathar Pharmaceuticals Private Limited ARL - 62,81,182.00 17/12/2011 0511132788 Bright Medicure Private Limited Cosmic Remedies Private Limited - 510,244.00 30/12/2011 0511132788 Bright Medicure Private Limited Matrix Device And Mechanism 6,702,500.00 - 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 Phar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 011 64,25,100 ARL 01-12-2011 42,12,700 ARL 01-12-2011 42,10,650 ARL 15-12-2011 64,78,600 ARL 15-12-2011 64,75,100 ARL 19-12-2011 82,45,600 ARL 19-12-2011 82,50,100 ARL 20. From the aforesaid table, it is noted that on various instances, almost similar amounts paid by ARL to its Controlled / Connected Entities on a particular day were returned back by such entities to ARL either on the same day or within next few days thereafter. For instance, ARL paid INR 75,65,100 /- to one of its Controlled / Connected Entity viz. Elixir Life Science Private Limited on 19.12.2011 and almost similar amount (INR 75,70,600/-) was returned by the aforesaid entity to ARL on the very same day i.e. on 19.12.2011. I further note that during the Investigation, in some of the banking transactions of ARL with the Controlled / Connected Entities, a peculiar pattern of circular transactions has been noticed, wherein funds were first transferred by ARL to a Controlled / Connected Entity (A) and then the funds in turn were transferred to another Controlled / Connected Entity (B) and then, the second Controlled / Connected Entity (B) further transferred the funds back to ARL. With the help o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnected Entities and making relevant entries in bank statements just to fake the purchases and sales figures which were either reversed or routed in a circular manner without actual movement of goods. As a result of the same, the books of account were manipulated for financial years ending March 31, 2012, March 31, 2013, March 31, 2014 and March 31, 2015. In this regard, it is pertinent to mention here that similar charge was levelled against the Company, its MD and Directors vide show cause notice dated June 23, 2020 for which no plausible explanation with supporting documents was furnished by ARL, its MD and its Directors rebutting the allegations made in the aforesaid show cause notice, to justify that the circular transactions that ARL has undertaken with its Controlled / Connected Entities were indeed genuine business transactions. There was also no answer forthcoming from the Noticees before me to the book entries made showing reversal of transactions on frequent basis and there is no explanation from the Noticees about the circumstances and reasons necessitating those transactions and their reversals of such transactions on the same day happening between the Controlled / Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. For instance, it is submitted by the Noticees that AAS4 which refer to "The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements" has been repealed and replaced with Standard on Auditing (SA 240) with effect from April 01, 2009. In this regard, I note that Professional Skepticism covered under para 12 of SA 240 read as under "the auditor shall maintain professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor's past experience of the honesty and integrity of the entity's management and those charged with governance". Further, I also note that para 10.4 of SCN states that "When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of Professional Scepticism throughout the audit.'.... with the audit of ARL. Therefore, the red flags indicated in the SCN 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibilities nothing less than what was applicable under the old standard of conducting audit. In fact, it is important to note here that it is an admitted fact that the Noticee no. 1 had been the statutory auditor of the Company since the year 2002 and was having a long exposure to the accounts of the Company over such a long period. Therefore, no doubt, it must be very well conversant with the business model and working culture of the Company apart from its accounting policies and practices, in a much deeper way than M/s Vivekanandan Associates who was appointed as the statutory auditors after resignation of Noticee no. 1. Therefore, it is expected that the Noticees would at least be aware about the business activities undertaken by the Company, details about its associated / related companies and its business performance over the years. In the backdrop of their long auditing association with the Company, the quantum of sales / 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ology followed by Statutory Auditors and Forensic Auditors. They have submitted that these two audits can never be equated and expected to deliver same results. For instance, a forensic audit is specifically designed for the detection of frauds, whereas a statutory audit is only meant to express opinion as to 'true and fair' presentation of the accounts based on information provided by the management of the company. A statutory audit is not expected to perform with the objective of detecting fraud. I find it important here to make a note about the role that statutory auditors have to play with respect to a listed company in the securities market. A statutory auditor is expected to be an independent entity which ought to act as the conscience keeper of the listed company. It has to act as a guard to inhibit the management or any other employee of such listed company from committing any financial wrongdoing. Its role 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 aud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to comment on the liability on account of excise duty since the same has not been ascertained and provided for. * Besides the above, we are unable to comment on receivables from certain other distributors aggregating to INR 4,958 lacs since the confirmation is not available with the company and their payments being irregular. * Note No 5 regarding non realisation of certain overdue receivables aggregating to Rs. 9,525 lacs in respect of sales to certain distributors which are considered good of recovery due to reasons mentioned therein. 32. From the submissions of the Noticees, I note that they have tried to contend that since they had issued a qualified report for limited period review for the Quarter ended 31.12.2014, they cannot be charged for the malafide intention and connivance with the management of the Company. In this regard, I note from the Investigation Report that ARL claimed to 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, wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra) and an Order passed by SEBI in the matter of Mr. Rashim Tandon (supra), etc. to contend that if it is established that an auditor had no 'mens rea' and did not connive and collude with the management of a company for falsification of financial statements, it cannot be held liable under the SEBI Act, 1992 or any Regulations framed there under on the charges of 'fraud' pertaining to the securities market, only because it had prima facie failed to detect an act of misstatement in the financial statement(s) of a company by the management of the said company. It has been further submitted that even if there had been a breach of Standards of Auditing by the concerned auditor leading to a failure in detection of a fraud perpetrated by the management, in the absence of evidence establishing collusion of the auditor with the management of the said company in the commission of the fraud or any other active 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 Reportin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard is to protect the interest of investors in securities and to promote the development and to regulate the securities marked by taking such measures as it thinks fit while exercising the powers under the SEBI Act, 1992 and rules and regulations made thereunder. In a given case, if there is material evidence against the Chartered Accountant / Statutory Auditor to the effect that the Chartered Accountant / Statutory Auditor or the accounting firm was instrumental in preparing false and fabricated accounts in connivance with the management, then SEBI is entitled to pass appropriate orders under section 11(4) of the SEBI Act, 1992 in the interest of the investors or securities market and is entitled to take measures as prescribed in the said section and such exercise of power by SEBI would not amount to encroaching upon the powers vested with the Institute under the Chartered Accountant Act, 1949 or any 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 consequenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely colluding with the Company. In the present matter, I don't find sufficient evidence from the record to make an assertive statement that there was an agreement or understanding suggesting that the Noticees were acting in connivance and collusion with the Company or its management in executing their fraudulent scheme. However, at the same time, while dealing with the submission of the Noticees for being granted exoneration based on the observations in the peer review conducted by the ICAI, it may be stated that primary objective of peer review is not to find out deficiencies but to improve the quality of services rendered by members of the profession. Under the circumstances, while granting benefit of doubt to the Noticees with respect to alleged commission of fraud by the Noticees, I am of the view that it would sufficient that to meet the end of justice so as to address the gross negligence 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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