Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Appellate Tribunal (SAT): Tarun Agarwala, J. (Presiding Officer) and Dr C. K. G. Nair, Member quashed an order passed by the Securities and Exchange Board of India (‘SEBI’) which imposed a ban on auditing firm, however, upheld the punitive damages awarded for wrongful gain.

In the present case, the appellants being the auditing firm, Price Waterhouse Coopers (‘PWC’) had challenged an order passed by the SEBI wherein a two-year ban was imposed on the firm from auditing any listed company due to its involvement in the 2009 Satyam Scam. The auditing firm had been the auditor of the Satyam Computers Services Limited (‘Satyam’) during the period 2000-2009 and in the year 2009, the Chairman of Satyam stated that the books of accounts of Satyam were not true and the company was involved in large scale financial irregularities and misappropriation of funds. SEBI, upon an investigation of the books of Satyam, found out that PWC was the statutory auditor of the company and there were fabrication, falsification and misrepresentation in the books of account and financial statements of Satyam.

The senior counsels representing the appellants, Janak Dwarkadas along with Mukul Rohatgi questioned the jurisdiction of SEBI in banning an audit firm and submitted that the impugned order deals with the roles of an auditor and its contravention which are prescribed by Institute of Chartered Accountants of India (‘ICAI’) and thus, having the jurisdiction to deal with matter relating to contravention by audit firms. It was contended that as on the date of the impugned order there were 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 PWC firms is wholly arbitrary and illegal.

The senior advocates representing the respondents, Ravi Kadam being assisted by Kevic Setalvad, submitted that the impugned order does not suffer from any illegality since the Satyam scam had a direct and adverse effect on the securities market. They also urged that failure to comply with the basic auditing standards constituted fraud and thus it was ideal to impose a ban on the auditing firm.

The Appellate Tribunal upon perusal of facts and circumstances of the case stated that it was true that the network of firms under PWC alleged to have been involved in the scam was not under the PWC hence had no stake and vicarious liability of a chartered accountant cannot be extended to a firm. The Appellate Tribunal stated that “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 Satyam Computers, and in view of the clear cut directions of the Bombay High Court, no directions could have been issued by the Whole Time Member against the ten firms.” Dealing with the issue of jurisdiction the Tribunal said SEBI did not have any authority to look into the quality of audit and auditing services and it can only take remedial and preventative action. The direction issued is neither remedial nor preventive, but punitive in nature and thereby quashing the order passed by the SEBI. However, the Appellate Tribunal upheld SEBI’s direction on disgorgement of Rs 13 crore from the auditor along with interest of 12% since 2007 for the wrongful gain.[Price Waterhouse & Co. v. Securities and Exchange Board of India, 2019 SCC OnLine SAT 165, decided on 09-09-2019]

NewsTreaties/Conventions/International Agreements

Securities and Exchange Board of India (SEBI) signed a Memorandum of Understanding (MoU) today with the Insolvency and Bankruptcy Board of India (IBBI) at Mumbai. The said MoU was signed by Shri Anand R. Baiwar – Executive Director, SEBI and Shri Ritesh Kavdia – Executive Director, IBBI.

SEBI and IBBI being interested in the effective implementation of securities laws and Insolvency and Bankruptcy Code, 2016 (‘Code’) including the SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018 (Administrator Regulations) have agreed under the MoU to co-operate with each other.

The MoU, inter alia, provides for: (a) sharing of information between SEBI and IBBI subject to the limitations imposed by the applicable laws; (b) panel of Insolvency Professionals (IPs) to be appointed as Administrators underAdministrator Regulations; (c) periodic meetings to discuss matters of mutual interest, including regulatory requirements that impact their responsibilities, research and data analysis, information technology and data sharing; (d) cross-training of staff; (e) capacity building of insolvency professionals and financial creditors; (f) joint efforts towards enhancing the level of awareness among IPs about the importance and necessity of swift administration process under the provisions of the Administrator Regulations, promoting entrepreneurship, availability of credit and balancing the interests of all stakeholders under the Code, etc.

[Press Release dt. : 19-03-2019]

Securities Exchange Board of India

Legislation UpdatesNotifications

Circular on Mutual Funds

[SEBI/HO/IMD/DF2/CIR/P/2017/35  dated April 28, 2017]

1.Please  refer  to SEBI  Circular  No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated 18 March 2016.

2.In partial modification of the above mentioned circular, para C of the circular pertaining to disclosure of executive remuneration shall read as under:

“With the  underlying objective to promote transparency in remuneration policies so that executive remuneration is aligned with the interest of investors, MFs/AMCs shall make the  following disclosures pertaining to a financial year on the MF/AMC website under a separate head–’Remuneration‘:

1. Name, designation and remuneration of Chief Executive Officer (CEO), Chief  Investment  Officer  (CIO) and Chief Operations Officer (COO) or their  corresponding equivalent by whatever name called.

2. Name, designation and remuneration received by top ten employees in terms of remuneration drawn for that financial year.

3. Name,  designation  and  remuneration of  every  employee of  MF/AMC whose :

a. Annual remuneration was equal to or above one crore and two lakh rupees for that financial year.

b. Monthly remuneration in the aggregate was not less than eight lakh and fifty thousand rupees per month, if the employee is employed for a part of that financial year.

4. The  ratio  of  CEO’s  remuneration  to  median  remuneration  of  MF/AMC employees.

5. MF’s total AAUM, debt AAUM and equity AAUM and rate of growth over last three years. For  this  purpose,  remuneration  shall  mean  remuneration  as  defined  in clause  (78)  of section  2 of the Companies Act, 2013.

The AMCs/MFs shall disclose this information within one month  from  the  end  of  the  respective financial year (effective from FY 2016-17).”

3. This   circular   is   issued   in   exercise   of   the   powers   conferred   under Section 11 (1) of the Securities and Exchange Board of India Act 1992, read with the provision of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996 to  protect  the  interests  of  investors  in  securities  and  to  promote  the development of, and to regulate the securities market.

Securities and Exchange Board of India