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Sebi can pull up auditors, says Bombay high court

Sebi can pull up auditors, says Bombay high court
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First Published: Fri, Aug 13 2010. 10 45 PM IST
Updated: Fri, Aug 13 2010. 10 45 PM IST
Mumbai: The Bombay high court ruled on Friday that capital market regulator Securities and Exchange Board of India (Sebi) has the jurisdiction to question auditors of listed companies and proceed against them.
The high court upheld Sebi’s powers to issue show-cause notices to auditors in the pursuit of remedial or preventive measures to protect the interests of investors and the securities market. A division bench comprising justices P.B. Majmudar and R.M. Savant was disposing of writ petitions filed by Price Waterhouse, the auditors of Satyam Computer Services Ltd.
The court said the regulator’s jurisdiction cannot be interpreted in a “restrictive manner” and that the Sebi Act gave the watchdog body enough powers to proceed against entities “not related to securities”.
It also allowed Sebi to decide, based on the evidence it comes across during the adjudication process, whether it needs to proceed against other partners of Price Waterhouse who were not directly responsible for auditing Satyam.
“On the Price Waterhouse network...it is a matter of investigation whether there were omissions without mens rea or connivance,” justice Majmudar said. “The facts of the show-cause notice have to be adjudicated as per the evidence available. Based on such evidence, Sebi can decide if it has jurisdiction to proceed against the petitioners.”
However, the bench allowed Price Waterhouse, a unit of PricewaterhouseCoopers that is one of the Big Four accounting firms globally, four weeks to appeal against the order in the apex court. It directed Sebi not to proceed with the case during this period.
A spokesperson for Price Waterhouse said: “We are informed that the honourable Bombay high court has disallowed the writ petitions of Price Waterhouse challenging Sebi’s jurisdiction over accounting and auditing professionals. However, further proceedings of Sebi have been stayed by the high court for four weeks. Meanwhile, we await receipt of the high court written order, which we will examine to decide our next course of action, including the option of filing an appeal to the honourable Supreme Court.”
In 2009, then Satyam boss B. Ramalinga Raju admitted to mis-stating earnings to the tune of Rs7,136 crore. Price Waterhouse had been Satyam’s auditors for several years (2001-08) before the admission.
After preliminary investigations, Sebi had found evidence against Price Waterhouse auditors S. Gopalakrishnan and Srinivas Talluri. Following this, it asked Price Waterhouse and 20 of its partners to show-cause why they should not be prohibited from auditing listed firms for their alleged role in concealing the Satyam scam. Gopalakrishnan and Talluri, who were arrested, are currently out on bail.
Price Waterhouse had tried to resolve the case with Sebi through so-called consent proceedings, where the accused party is allowed to settle the matter through the payment of a sum of money, without admission or denial of guilt.
However, Sebi had rejected this proposal, following which Price Waterhouse moved the high court.
In July, Price Waterhouse filed the writ challenging Sebi’s jurisdiction over chartered accountants. It claimed that Sebi was encroaching on the jurisdiction of the Institute of Chartered Accountants of India (Icai), which is the sole regulatory body for the profession, according to the Chartered Accountants Act, 1949.
Sebi had argued that auditors have a “direct, fiduciary” relationship with shareholders and they had incurred losses due to decisions based on Satyam’s balance sheet. The show-cause notice was issued under Fraudulent and Unfair Trade Practices Regulations.
The court held that Sebi asked the firm to show-cause why it should not be prohibited from auditing a listed firm and that it did not reflect any intention to regulate the profession.
While barring auditors from the profession would be the Icai’s call, Sebi was not encroaching onto that jurisdiction, the court observed.
n.subramanian@livemint.com
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First Published: Fri, Aug 13 2010. 10 45 PM IST