New Developments in Accountability: Implications for Company Secretaries and Chartered Accountants

The role of company secretaries and chartered accountants has always been critical for any organization. These professionals are responsible for ensuring that a company complies with legal and regulatory requirements, and that financial statements are accurate and transparent. However, recent developments have shed light on the shortcomings in the current system of accountability for these professionals. This article will delve into these developments and examine how they could lead to a paradigm shift in the industry. We will explore the implications of these developments for these professions and consider how they could impact the way company secretaries and chartered accountants operate.

The case of Jayant V Kolapkar & Co. v. Securities and Exchange Board of India (SEBI) has brought to light issues of negligence and collusion in the auditing industry. The Securities Appellate Tribunal in Mumbai heard the appeal of Jayant V Kolapkar & Co., an auditor for Blue Bird (India) Limited (BBIL), challenging the directions issued by the Whole Time Member (WTM) of SEBI in its order of June 18, 2021. In this order, the appellant was restrained from issuing any certificate related to the audit of listed companies, compliance obligations of listed companies, and intermediaries registered with SEBI under various acts, including the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, and the Companies Act, 2013, for a period of one year from the date of the order.

The appellant was noticee no. 10 in the proceedings before the WTM, and the allegation against the auditor was negligence in the certification of accounts of listed companies and lack of professional skepticism in audit. The appellant was accused of engaging in dubious accounting practices to defraud investors by manipulating the financial statements, thereby violating the provisions of the SEBI Act, PFUTP Regulations, and Clause 41, 49, and 50 of the Listing Agreement.

The WTM conducted an investigation based on a letter received from the Central Bureau of Investigation (CBI) in relation to the registration of a criminal case against BBIL for cheating banks on the basis of manipulated financial credentials. The letter alleged that BBIL through its CMD had manipulated data of sale and purchase in the balance sheets for the financial years 2004-05 and 2005-06 for its Initial Public Offer (IPO) in 2006. The basic charge against the Company and its directors was that the executive directors had colluded in ensuring that the Company's financials were misstated, thereby defrauding investors, and that the directors were responsible for the affairs of the Company.

The WTM found that the appellant had colluded with noticee nos. 2 and 8, who were the CMD and Director (Finance) (ED) of the two entities that cooked up fictitious purchases and sales figures of BBIL. The WTM noted that since the appellant was the auditor of BBIL and the two entities controlled by noticee no. 2, the appellant did not raise any queries about the transfer of funds, thereby failing to raise red flags with respect to instances of fake transactions without calling for any explanation from the Company or from the two entities. This was not only gross negligence but also showed collusion between BBIL and the appellant, and further showed that the appellant was also involved in the fraud perpetuated by BBIL. The SAT held that the appellant was rightly penalized for these actions for its role in certification of incorrect certificate of capital expenditure, however, the quantum of punishment was reduced to 3 months from 1 year. The allegations of outright collusion were ruled out by the Tribunal with reference to its cases of Mani Oommen vs SEBI[1] and others[2]. This is a landmark decision by the SAT which marks a watershed moment where auditors may find themselves being held liable more often in cases of fraud in the market.

In the recent case of Securities and Exchange Board of India v. V Shankar[3], the Supreme Court of India has admitted an appeal by SEBI against the judgment of the Securities Appellate Tribunal and referred the case back to the Tribunal. The respondent, V Shankar, was a Company Secretary of Deccan Chronicle Holdings Limited for two years, 2009-10 and 2010-11. The Whole Time Member of SEBI had imposed a penalty of Rs Ten lakhs on Shankar for violating Sections 68 and 77A of the Companies Act 1956 and Regulations 3(a), (b), (c), (d), 4(1), 4(2)(f), (k) and (r) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations 2003 read with Sections 12A (a), (b) and (c) of the SEBI Act.

In 2017, a notice was issued to show cause against Deccan Chronicle Holdings Limited, its Chairperson, Vice-chairperson, and Shankar by the Whole Time Member of SEBI. The notice was for violating regulatory provisions related to a buyback offer worth rupees 270 crores. The WTM found Shankar liable for violating the provisions of the Companies Act 1956 and of the provisions of the PFUTP Regulations together with cognate provisions of the SEBI Act. The Tribunal set aside the order of the WTM on the ground that the duty of the Company Secretary was “only to authenticate the contents indicated in the balance sheet and in the offer document”. In other words, according to the Tribunal, Shankar was not required to inquire into the veracity of the buyback offer documents.

The interpretation placed by the Tribunal on Regulation 19(3) was deemed erroneous by the Supreme Court. The provision indicates that the company will nominate a Compliance Officer to redress the grievances of the investors. The appellant being a Company Secretary was also a Compliance Officer, and thus the role of the Compliance Officer was only limited to redress the grievance to the investors. However, the duty of authentication cannot be confined to merely a signature on the relevant statutory documents. As per Section 77A of the Companies Act 1956, which deals with the power of the company to purchase its securities, various requirements have to be met.

Moreover, in terms of Section 215 of the Companies Act 1956, the balance sheet and profit and loss account have to be approved by the Board of Directors before they are signed on behalf of the Board and before they are submitted to the auditors for their report. Therefore, the obligation to comply was essentially placed on the Board of Directors and not on Shankar as Company Secretary. However, as a Company Secretary, it was his duty to duly certify statutory compliances.

The counsel on behalf of Appellant, Mr Arvind Dattar, referred the case of Mr Bhuwaneshwar Mishra Vs SEBI[4] wherein Mr. Mishra was accused of colluding with promoter entities of GHCL to mislead shareholders and investors by disclosing inflated shareholding on the basis of false claims of arrangement by promoter entities with third parties. Mr. Mishra, who was the Company Secretary and Compliance Officer of GHCL since January 2007 and was then the General Manager and Company Secretary, was penalized Rs. 10 lac in accordance with Section 15HA of SEBI Act, 1992 and Section 23A and 23E of SC(R)A, 1956 for violation of Regulation 3(a),(b), (c) and (d), 4(1) and 4(2)(f) of PFUTP Regulations, 2003 read with Section 12A(a), (b) and (c) of SEBI Act. This penalty was imposed on him. Similarly, the case of Brooks Laboratories Limited & Ors Vs SEBI [5]was also relied upon by the counsel, both these cases were opined to be distinguishable from the present case by the learned counsel acting on the behalf of the respondent.

The case raises questions about the role and responsibilities of a Company Secretary in ensuring compliance with regulatory requirements. The judgment of the Tribunal has shifted the onus of compliance from the Company Secretary to the Board of Directors, which may lead to a lack of accountability on the part of the former. However, the Supreme Court's decision to admit the appeal suggests that the Court may take a different view on the issue. It remains to be seen how the Court will interpret the relevant provisions of the Companies Act 1956 and the SEBI Act in this case.

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[1] Mani Oommen vs Securities and Exchange Board of India, Appeal no. 183 of 2020 decided on February 18, 2022

[2] Price Waterhouse & Co. & Ors. vs SEBI, Appeal no. 6 of 2018 decided on September 9, 2019 and in V C G & Co. & Anr. vs SEBI & Anr., Appeal no. 496 of 2020 decided on October 12, 2022.

[3] SEBI vs. V Shankar – Civil Appeal No. 527 of 2023 - Order dated February 08, 2023

[4] Mr Bhuwaneshwar Mishra Vs SEBI (decided on 31 July 2014 in Appeal No 7 of 2014)

[5] Brooks Laboratories Limited & Ors Vs SEBI (decided on 21 March 2018 in Appeal No 266 of 2016)