Bombay HC says market regulator can take action to safeguard shareholder interest.
The Bombay High Court has ruled that the Securities and Exchange Board of India (Sebi) can proceed with its inquiry against audit firm Price Waterhouse for its alleged role in the Satyam scam.
The court, however, has directed the regulator to stay the proceedings for four weeks so that Price Waterhouse can file a special leave petition (SLP) in the Supreme Court.
A division bench comprising Justice P B Majmudar and Justice R M Savant heard the petition filed by Price Waterhouse, challenging Sebi’s jurisdiction over audit firms that are registered with The Institute of Chartered Accountants of India (ICAI).
Sebi had issued a show cause notice to Price Waterhouse for allegedly acting “recklessly” and “negligently” while auditing the books of erstwhile Satyam Computers.
“In the case of listed companies, Sebi has the power to take remedial and preventive action to safeguard the interest of the shareholders,” observed the bench. It, however, noted that “if any professional has to be barred, it can be done only by the body that regulates it”.
The observations of the bench assume significance in the backdrop of the debate on whether Sebi can debar Price Waterhouse, if proved guilty, from working with any of the listed companies.
“We are informed that the Hon’ble Bombay High Court has disallowed the writ petition of Price Waterhouse challenging Sebi’s jurisdiction over accounting and auditing professionals. We await the High Court written order, which we will examine to decide our next course of action,” Price Waterhouse said in a statement.
The bench, in its verdict, highlighted the point that it has restricted itself to the question raised in the petition on whether Sebi had jurisdiction over audit firms. “We will add a word of caution here. We have limited ourselves to the question whether there is total lack of jurisdiction or there is some jurisdiction... Sebi has powers to pass orders in the aforesaid manner,” the bench said.
The submission of Price Waterhouse in the court had said “unless the question of jurisdiction is decided, Sebi should not be allowed to proceed against the petitioners (Price Waterhouse) on allegations raised in the show cause notice”.
“If they have violated any norms of the accounting profession, it has to be looked into by ICAI and not Sebi because they lack technical knowledge,” it added.
G Ramaswamy, vice president, ICAI, said the court has not made any mention against ICAI’s powers to regulate the profession. “The case was in connection with alleged violations of Sebi rules by the audit firm. And in such cases, Sebi has the right to issue notices if there is a violation.”
“Whenever there is a complaint against the professional standards of ICAI members, Sebi, as well as all other regulators, always write to us, and we initiate disciplinary action against them,” he said, adding ICAI had already initiated disciplinary action in the Satyam case.
On its part, Sebi said its action was to ensure such episodes do not recur and by issuing a show cause notice, its intention was not to regulate the profession of chartered accountants but to safeguard the interest of shareholders.
“There is nothing wrong in issuing a show cause notice to avoid any such issue in future that can affect the interest of shareholders. Normally, investors are influenced by financial conditions of listed companies and take investment decisions based on it,” it said.
On Wednesday, Sebi counsel Ravi Kadam argued in the court that auditors have a direct relationship with shareholders and in this matter have acted “recklessly” and “negligently”. Shareholders incurred losses due to falsification of the Satyam balance sheet, he added.
