The GTB precedent
But why should SEBI be so interested in intervening in this episode? To understand this, it would be pertinent to revisit the manner in which ICAI had handled the Global Trust Bank (GTB) case.
GTB went belly-up in 2004. Immediately, the ICAI began to look into the role of the auditors of GTB.
It was only in mid-2009 that the Disciplinary Committee of the ICAI was able to conclude the hearing. Subsequently, in early 2010, the Council of ICAI accepted the Report of the Disciplinary Committee and held one of the partners of the audit firm guilty of professional misconduct.
Immediately, the partner concerned filed a writ petition in the Delhi High Court. In April 2010, the Delhi High Court quashed the decision of the Council on technical grounds, saying that the ICAI had all along followed a wrong procedure!
The court ordered that the proceedings against the auditors would now recommence under the amended Section 21 of the Chartered Accountant Act before the Director (Discipline) who would proceed in the matter in accordance with the amended CA Act and CA Rules. To compound the misery of the ICAI, the court ordered as to costs of Rs. 10,000 to be paid by the ICAI within a period of four weeks.
Obviously, the efforts of ICAI over the past several years have come to naught. Once again, the matter has to be heard afresh under the new procedure or, the ICAI has to appeal in the Supreme Court. Either way, we are several years from punishing the guilty.
What is appalling is that the functioning of the GTB (and its auditors) had attracted the attention of the Joint Parliamentary Committee (JPC), set up to investigate the stock market scam in 2001. The fact that we are unable to punish the guilty 10 years later speaks volumes for the functioning of our regulators. No wonder it is a “remarkable co-incidence” that the auditors of GTB and Satyam are the same audit firm!
Questions for SEBI
This experience with ICAI could be disappointing. But does that justify SEBI's actions? Crucially, how competent is SEBI to deal with the issue?
The press note leading to the appointment of the Inspection Officer by SEBI in the Satyam case, points out inter alia, “The Securities and Exchange Board of India (the Board) is satisfied (emphasis supplied) that it is in the interest of investors and public interest to investigate into the affairs relating to buying, selling or dealing in the shares of Satyam Computer Services Ltd and more particularly to ascertain whether the provisions of the SEBI Act, 1992, and following Rules and Regulations made there under have been violated.”
What is crucial to note here is that the Board is “satisfied” to investigate into the affairs of Satyam. But under Section 11C of the SEBI Act an investigating officer can be appointed only when the Board has “reasonable ground to believe” that the emergent situation warrants the appointment of an investigating officer. To a lay reader the difference between “satisfied” and “reasonable ground to believe” may seem polemical. But in the eyes of law it is not. The Supreme Court in S Ganga Saran and Sons (P) Ltd, Calcutta, vs Income Tax Officer (1981 AIR 1363) in similar circumstances (but under the Income-Tax Act) went on to explain the difference between the two.
The apex court observed: “The important words under Section 147(a) are “has reason to believe” and these words are stronger that the words “is satisfied”. The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons, which are relevant and material.” In short, “satisfaction” is subjective and abhorred by law. In contrast “reasonable ground to believe” is objective and is the bedrock of modern administrative law. Therefore, it is doubtful if SEBI's appointment of the investigating officer in the Satyam case will survive even a cursory glance of the higher courts.
Even if it does, experts believe that SEBI under its own regulations can at best levy a penalty of Rs 25 crore on the delinquent firm. Given the magnitude of the scam, that would be small change. Alternatively, SEBI may ban the firm from auditing listed companies.
But even that is legally untenable, as under the Companies Act it is the shareholders who appoint such auditors. Such a ban may well pit SEBI against shareholders! In that case SEBI may be compelled to approach ICAI to cancel the certificate of practice of some partners of the audit firm in question. If that is the most likely outcome, why this rain dance?
Naturally, if ICAI is accused of playing ball with its members, SEBI's track record in regulating errant market players is no better. Nevertheless, we must ensure that strict walls are raised between regulators. But the moot point, given the quality of regulation in recent times is — does this matter?