PwC gets Supreme Court notice on charges of violating Fema, FDI rules

Issues raised in public interest litigation need to be examined, says apex court

The Supreme Court on Friday issued a notice to auditing major PriceWaterhouse Coopers Pvt Ltd (PwC), five of its network firms, the Union government, the Reserve Bank of India (RBI), the Registrar of Companies and the Central Board of Direct Taxes on a public interest litigation (PIL) filed by Centre for Public Interest Litigation (CPIL), an NGO run by senior advocate Prashant Bhushan.

The key theme of the various allegations made in the petition is that the network is infusing foreign funds into local audit firms in violation of Institute of Chartered Accountants of India (ICAI) rules and the foreign direct investment (FDI) policy, which do not permit foreigners to practise the auditing profession in India or invest in Indian audit firms without RBI approval.

CPIL has alleged that to achieve this end, PwC and its network firms have allegedly engaged in falsification of books of accounts, evasion of income tax and violation of FDI rules, RBI guidelines and the Foreign Exchange Management Act, among others.

The move comes at a time when the network is in the process of rebuilding its brand, which suffered a setback following the alleged involvement of one of its associates, Price Waterhouse, in the Rs 8,000-crore Satyam Computer scandal. While cases are on in Indian courts, US regulators have slapped a penalty of $7.5 million on PwC and associates.  

Price Waterhouse (Bangalore), Price Waterhouse (Gurgaon), Price Waterhouse & Co (Kolkata), Lovelock & Lewes and Mumbai-based Dalal & Shah  were the other firms named in the petition.

The bench of Chief Justice P Sathasivam and Justice Ranjan Gogoi issued a notice to the respondents, saying the issues raised needed to be examined. CPIL has also sought systemic changes, including a separate regulator for auditors to look into such irregularities.

It has pleaded that falsification of books of accounts be made a non-bailable offence.

The petition has cited official filings such as balance sheets and annual reports and media reports to allege that some of the entities received close to Rs 240 crore from “undisclosed” sources. “The importance of receipt of these funds in FY11 alone can be appreciated from the table below as without these funds, these entities would have incurred huge losses,” the petition said,  adding that receiving such money from foreign entities would amount to ceding of control, which was in violation of the FDI policy. Quoting media reports, the petition said the matter had already been referred by the ICAI to the RBI.

Other allegations include the creative structuring of an acquisition of Mumbai-based Dalal & Shah through unexplained credits into accounts of its partners and irregularities in accounting insurance policies.

According to the petition, all PwC India entities had a common professional indemnity insurance (PII) cover. However till FY11, only three entities used to pay for the premium in the following ratio: PricewaterhouseCoopers Pvt Ltd (20 per cent), Lovelock & Lewes (28 per cent) and Price Waterhouse (52 per cent). “However, Price Waterhouse, Bangalore, Satyam’s auditor, used almost the full PII cover of $60 million (approximately Rs 280 crore) by FY11 without even paying a single rupee of premium towards it,” the petition said.

The petition quoted a PwC spokesperson’s statement to The Times of India in May 2012 that said, “PwC India entities have not received any query from RBI on this matter. The grants from PwC Network to PwC India entities are not an investment. These are received in order to assist in maintaining the standards required of all member entities of PwC Network in India and were received at our request as outright non-refundable grants facilitating enhancement of the resources and skills. The grants have come through regular banking channels. These are current account transactions which are under the automatic route.”

PwC officials were not available for comment. An email seeking comments sent to the official spokesperson, citing specific allegations in the petition, did not elicit any response. In a text message, a spokesperson said, “If we do (have a statement) will share.”