TMI Blog2011 (6) TMI 928X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, received on January 7, 2009 an email from one B. Ramalinga Raju, the then Chairman of Satyam Computer Services Limited (for short Satyam ) revealing that statements of accounts of Satyam furnished to the stock exchanges were not true and fair. The email, inter alia , stated that balance-sheet of Satyam as on September 30, 2008 had inflated (non-existent) cash and bank balances of ₹ 5040 crores as against ₹ 5361 crores reflected in the books, accrued interest of ₹ 376 crores which was non-existent, understated liability of ₹ 1230 crores on account of funds arranged by him and overstated debtor position of ₹ 490 crores as against ₹ 2651 crores reflected in the books. The email also mentioned about the artificial cash and bank balances for the quarter ending September 30, 2008 and that the gap in the balance-sheet had arisen on account of inflated profits over a period of last several years. On receipt of this email, the Board ordered investigations into the affairs of Satyam in order to ascertain whether the provisions of the Securities and Exchange Board of India Act, 1992 (for short the Act) and the rules and regulations made thereunder had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Satyam were being published quarter after quarter, this, according to the Board, distorted the decision of millions of investors and induced them to trade in the securities of Satyam. It is, therefore, alleged that the appellant had not properly audited the financial statements of Satyam and there was no reasonable basis for the opinion expressed by it in its report in view of the serious irregularities. The financial statements presented, did not present fairly and accurately the financial position of Satyam which was manipulated and false. It is further alleged that the appellant did not maintain control over the process of sending and receiving confirmations, ignored the differences between the two sets of confirmations and the discrepancies in the indirect confirmation, did not make any examination or enquiry in this regard in violation of stipulated norms and practices which indicates its complicity or acquiescence in misreporting and manipulating the books of accounts of Satyam. It is further alleged that the appellant is liable to be treated as having participated in the fraud perpetrated by Ramalinga Raju, Chairman of Satyam and others or as having aided and abetted the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investors and for regulating the securities market, if any steps are taken by the SEBI, it can never be said that it is regulating the profession of the Chartered Accountants. So far as listed Companies are concerned, the SEBI has all the powers under the Act and the Regulations to take all remedial and protective measures to safeguard the interest of investors and securities market. So far as the role of Auditors is concerned, it is a very important role under the Companies Act. As posited in Section 227 of the Companies Act, every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the Company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the Company such information and explanations as the auditor may think necessary for the performance of his duties. The auditors in the Company are functioning as statutory auditors. They have been appointed by the shareholders by majority. They owe a duty to the shareholders and are required to give a correct picture of the financial affairs of the Company. It is not uncommon nowadays that for financial gains even small ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved in the case. However, in order to find out whether there is total lack of jurisdiction or whether SEBI has jurisdiction to adjudicate the matter and in order to examine this question that these observations have been made by us. Since the inquiry has not commenced, we have merely confined ourselves to the allegations made in the show cause notices to find out as to whether SEBI has jurisdiction to proceed further with the inquiry and nothing more. However, on conclusion of inquiry, if no evidence is available regarding fabrication and falsification of accounts, etc., then naturally SEBI cannot give any direction in any manner and ultimately its jurisdiction will depend upon the evidence which may be available in the inquiry and SEBI has to decide as to whether any directions can be given on the basis of available evidence on record. In our view, such a question is required to be considered only after the evidence is available during the enquiry but surely it cannot be said that SEBI has no power even to inquire about the same and that on the face of it the jurisdiction is barred, as submitted by the learned counsel for the petitioners. It is seen from the records that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded by SEBI and have been sought to be interpreted and relied upon in the Show Cause Notices and the Applicant seeks the right to examine/cross-examine the said persons: (a) Mr. Srinivas Talluri, PW partner (b) Mr. C. H. Ravindranath, PW engagement team (c) Mr. P. Siva Prasad, PW engagement team (d) Mr. Prekki Srinivasa Sudhakar, PW engagement team (e) Ms. Madduri Negi Venkata Gayatri, PW engagement team (f) Mr. Samvit Durga, PW engagement team (g) Mr. Girish Bala Kishore Tallam, PW engagement team (h) Mr. N. Ramu, PW engagement team (i) Shri V.V. K. Raju, Senior Vice President (Finance), Satyam; (j) Shri Srinivas Kishan Anapu, head of Internal Information Systems, Satyam; 5. You will appreciate that the refusal to grant examination/cross examination of all these persons would result not only in a denial of natural justice but to a denial of a fair trial now interpreted by the Supreme Court as being a facet of the right to life under Article 21 of the Constitution. Needless to say, this would severely impair and prejudice the ability of the Applicant to defend itself in the proceedings before SEBI. 6. It is therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. P. Siva Prasad Paragraph 14(f) Page 36 Mr. N. Ramu Paragraph 14(g) Page 36 d) statements relied upon in the SCN and provided; cross examination curtailed restricted to such portions of the statement which in the opinion of SEBI are prejudicial: Mr. P.S. Sudhakar Paragraph 14(e)(iii) Page 34 Ms. M. Gayatri Paragraph 14(e)(iv) Page 35 Mr. Samvit Durga Paragraph 14(e)(v) Page 35 Mr. Girish Tallam Paragraph 14(e)(vi) Page 35 Mr. V.V.K. Raju Paragraph 14(h) Page 36 Mr. Anapu Paragraph 14(i) Page 36 e) statements of undisclosed persons relied upon in the SCN; cross examination denied Impugned Order does not disclose the identities. For example, Mr. Venkatapathi Dhantuluri referred to in (b) above is one such undisclosed person, whose identity came to light in the Impugned Order, for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an independent partnership firm registered under the relevant laws of the State in which their office is situated. It was the Banglore office of the Price Water House, an independent partnership, which was assigned the work of auditing by the Satyam. The whole time member, while passing the order, has not dealt with this aspect of the matter and has rejected the argument without recording any reasons. He, therefore, argued that the whole time member has grossly erred in issuing show cause notice to other offices of the Price Water House which are independent entities vis-a-vis Price Water House, Bangalore. On the issue of right to cross-examination, learned counsel for the appellants have relied on the following judgments:- I. Necessity and importance of cross-examination:- 1) State of Mysore v. Shivabasappa AIR 1963 SC 375 (paras 3, 6 and 9) 2) Meenglas Tea Estate v. Workmen AIR 1963 SC 1719 (para 4) 3) Bareilly Electric Supply Co. v. Workmen AIR 1972 SC 330 (para 14) 4) New India Assurance Co. Ltd. v. Nusli Neville Wadia Anr. AIR 2008 SC 876 (paras 44-46) 5) Bharat Jayantilal Patel v. Securities and Exchange Board of India Appeal no. 126 of 2010 (para 7) 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examination with only some witnesses whose statements have been recorded and relied upon is permissible in law and does not constitute violation of principles of natural justice. It was further argued by him that unless the appellants can point out the prejudice caused to them, the permission/refusal to supply documents specifically obtained in the course of the investigation though relevant to the enquiry, but not specifically relied upon by the Board in the show cause notice or the supplementary show cause notice to make their case against the appellants does not vitiate the enquiry. It was further submitted by him that deliberately withholding the documents which have not been relied upon by the Board in the show cause notice would not constitute a breach of natural justice and would not vitiate the proceedings. He forcefully argued that the Board is entitled to refuse cross-examination of the witnesses if no prejudice is caused to the appellant. He also made a reference to the judgment of the Bombay High Court in the case referred to above, and submitted that jurisdiction of the Board in the present case would depend on the evidence available on record and relied upon in the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. The Board issued show cause notice in exercise of powers under sections 11 and 11B of the Act to the appellants to show cause as to why directions should not be issued prohibiting them from issuing certificate regarding compliance of obligations of listed companies and/or restraining them from accessing the securities market. Before the rival contentions of the parties are examined, it is necessary to refer to the provisions of Section 11 and 11B of the Act. 11. (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. (2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for- (a) regulating the business in stock exchanges and any other securities markets; (b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market. (3) Notwithstanding anything contained in any other law for the time being in force while exercising the powers under [clause (i) or clause, (ia) of sub-section (2) or sub-section (2A)], the Board shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:- (i) the discovery and production of books of account and other documents, at such place and such time as may be specified by the Board; (ii) summoning and enforcing the attendance of persons and examining them on oath; (iii) inspection of any books, registers and other documents of any person referred to in section 12, at any place;] [(iv) inspection of any book, or register, or other document or record of the company referred to in sub-section (2A); (v) issuing commissions for the examination of witnesses or documents. (4) Without prejudice to the provisions contained in sub-section (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer document or advertisement soliciting money for issue of securities. 11B. Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,- (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or (iii) to secure the proper management of any such intermediary or person, it may issue such directions,- (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matter specified in section 11A, as may be appropriate in the interests of investors in securities market. A perusal of the aforesaid provisions shows that the Board is enjoined with the duty of protecting the interest of investors in the securities market and to promote the development of and regulate the securities market by such measures as it thinks fit. Subsection (2) of Section 11 provides that Board may undertake various me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de, only, if it hears; b) It cannot be a judge in its own cause; c) A party should have an opportunity of adducing evidence on which it relies; the evidence of his opponent should not be taken on his back and he should be given a right of cross-examination; and d) The authority itself should not produce evidence on the basis of which the matter is decided. These rules are required to be followed not only by the Tribunals but also by the administrative authorities and bodies conducting enquiries. The charges against the delinquent should be made known to him, the authority should listen to him, give him a fair chance to contradict any statement prejudicial to him and offer a fair opportunity to adduce evidence in his favour. The witnesses appearing against him should be examined in his presence and he should be permitted to cross-examine them. The question whether in any particular case, these rules have been violated can be answered in the context of that case, the statutory provisions and the material circumstances brought to the notice of the competent authority. The principles of natural justice know no exclusionary rule dependent on whether it would have made any di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e opportunity to meet the charges against him in an effective manner. And no one facing a departmental enquiry can effectively meet the charges unless the copies of the relevant statements and documents to be used against him are made available to him. In the absence of such copies, how can the employee concerned prepare his defence, cross-examine the witnesses, and point out the inconsistencies with a view to show that the allegations are incredible? It is difficult to comprehend why the disciplinary authority assumed an intransigent posture and refused to furnish the copies notwithstanding the specific request made by the appellant in this behalf. Perhaps the disciplinary authority made it a prestige issue. If only the disciplinary authority had asked itself the question: What is the harm in making available the material? and weighed the pros and cons, the disciplinary authority could not reasonably have adopted such a rigid and adamant attitude. On the one hand there was the risk of the time and effort invested in the departmental enquiry being wasted if the courts came to the conclusion that failure to supply these materials would be tantamount to denial of reasonable opportu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scheme of the Act and with the subject-matter of the case. It is further observed that in the application of the concept of the fair play there must have been real flexibility. The requirement of natural justice must depend on the facts and the circumstances of the case, the nature of the inquiry, the rules under which the authority is acting and the subject-matter to be dealt with. In Bareilly Electric Supply Co. vs. Workmen AIR 1972 SC 330 , this is what the learned Judges have held:- the application of the principles of natural justice does not imply that what is not evidence can be acted upon. On the other hand what it means is that no material can be relied upon and to establish a contested fact which are not spoken to by persons who are competent to speak about them and are subjected to cross-examination by the party against whom they are sought to be used. The scope of the rules of natural justice has also been summarized by M P Jain in his book on Administrative Law (1994 Edition) in the following words:- The aim of the rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. These rules can operate only in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 558 , the Apex Court had observed that the principles of natural justice have an important place in administrative law. They have been defined to mean fair play in action . An order of an authority exercising judicial or quasi-judicial functions passed in violation of principles of natural justice is procedurally ultra vires and, therefore, suffers from a jurisdictional error. That is the reason why, in spite of finality imparted to the decision of the Speaker/Chairman by paragraph 6(1) of the Tenth Schedule of the Constitution, such a decision is subject to judicial review on the ground of non-compliance with rules of natural justice. The Apex Court has observed that while applying the principles of natural justice it must be borne in mind that they are not immutable but flexible and they are not cast in a rigid mould and they cannot be put in legal straight jacket. Whether the requirements of natural justice have been complied with or not has to be considered in the context of the facts and circumstances of a particular case (emphasis supplied). There are catena of decisions on the aforesaid subject and the law settled on the point. The ingredient of principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons in the impugned order even before the examination-in-chief, the whole time member has not only violated the principles of natural justice, but also acted contrary to law laid down by the Apex Court. 12. Learned Advocate General appearing on behalf of the Board has tried to justify the limited cross examination and non supply of certain statements to the appellants and relied on certain judgments referred to above. We do not find ourselves in agreement with the submissions made by him in this regard. The judgments relied upon by him were given on different facts and justified the stand taken in the facts and circumstances of those cases and not in the facts and circumstances of the present case. Let us look at some of the judgments cited on behalf of the respondents. In the case of Transmission Corporation (2006) 3 SCC 74 , the inquiry was into alleged pilferage of electricity which was based on the report of disinterested officers of the department. Hence the Court held that it could not be laid down as a rule of universal applications that whenever the statements of departmental officers were pressed into service for the purpose of adjudications a right of cross examinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts of Satyam which were found to be deficient in accordance with laid down norms. Here, we are concerned with the basic issue of principles of natural justice to be followed by the whole time member of the Board while conducting an inquiry. We are not going into the merits of the case at all. It will, therefore, be appropriate for the appellants to put up their defence before the whole time member of the Board and let him decide the issue on the basis of material/evidence that may be placed before him. If the appellants find themselves aggrieved by the order that may be passed by the Board they are free to avail the legal remedies available to them. 15. We may now deal with another argument of learned counsel for the appellants that they should be allowed to inspect all the material/documents that might have been collected by the Board during the course of investigation. Mr. Dwarkadas, learned senior counsel for the appellants in Appeal no. 8 of 2011, contended that this case is sui generis . The ratio of the judgment of the Bombay High Court in this case has to be followed. The nature of inquiry will decide the scope of principles of natural justice. This case has no parall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l asking for inspection of all the material that Board might have collected during the course of investigation. This letter too was replied by the Board on June 24, 2009. There is some further correspondence on record which indicate that as and when request was made by the appellant asking for certain information relating to the show cause notice, the Board had responded to the same. It is for the first time before this Tribunal and that too during the course of argument that the learned counsels have made a prayer that inspection of all the documents should be allowed. Be that as it may, there is no rule of law which permit appellants to have access to all the material available with the Board which has not been relied upon or referred to in the show cause notice issued to the appellants. 16. We have given our thoughtful consideration to the prayer made by the appellants. After hearing both the parties and perusing the record, we are inclined to agree with learned Advocate General that in the facts and circumstances of this case, it is not appropriate nor it is the requirement of principles of natural justice that appellant should be allowed inspection of all the material that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the authority to set the law into motion. Supply of relied on documents based on which the law has been set into motion would meet the requirements of the principles of natural justice. The situation may be different in a criminal case where the investigation report is placed before the court and the accused person asks for copy of the material collected during the course of investigation. This is not so here. In the facts and circumstances of the present case, we are of the considered view that the appellants are not entitled to the material collected during the course of investigation by the Board which has not been relied upon in the show cause notice. This prayer of the appellants is, therefore, rejected. 17. In the result, the appeals are allowed and the impugned order set aside. The question formulated in paragraph one is answered in the affirmative. The prayers made in paragraph 7(b) and (c) of the memorandum of appeal are allowed. In addition the Board is directed to allow the appellants to cross-examine the persons whose names are mentioned in paragraph 4 of the application dated November 22, 2010 and also furnish copies of their statements to the appellants, if n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practices, which in turn has led to misleading investors in the company. On the basis of their alleged acts of omission and commission as referred to in the show cause notice, the appellants are said to have violated Section 12A of the Act and Regulations 3 and 4 of the FUTP Regulations. These provisions prohibit persons from indulging in manipulative, fraudulent and unfair trade practices. The appellants filed an application dated March 13, 2009 seeking inspection of a number of documents and records referred to and relied upon in the show cause notice that did not form part of the annexures to that notice. Only partial inspection of the documents and records sought for by the appellants was given to them and some of the material was supplied to them in a compact disc as it was quite voluminous. On receipt of the show cause notice and the supplementary show cause notices, the appellants challenged the initiation of proceedings against them by filing writ petitions no.5249 and 5256 of 2010 in the High Court of Bombay questioning the jurisdiction of the Board to proceed against them on the ground that they were chartered accountants by profession which is regulated by the Institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against a particular Chartered Accountant as envisaged by Sections 11 and 12 of the SEBI Act and Regulations in this behalf. On the basis of detailed evidence on record, this aspect is required to be considered by SEBI. The question of jurisdictional fact depends upon the facts which may be available at the time of evidence before the SEBI. SEBI will have to answer the question as to whether on the basis of evidence on record, it has any power to give directions as provided under the SEBI Act. This aspect will depend upon the evidence which may be available at the time of Inquiry. All these aspects are therefore left to the consideration of SEBI at the time of passing final order in enquiry. (emphasis supplied) It is thus clear from the aforesaid observations and findings recorded by the High Court that the Board has first to determine the jurisdictional fact as to whether the appellants had connived with the then management of Satyam to fabricate and fudge its books of accounts. Only if the finding on this issue is recorded in the affirmative that the Board will get jurisdiction to proceed against the appellants. It is pertinent to mention that the appellant in Appeal n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect the entire material that has been collected by the Board during the course of the investigations irrespective of the fact whether the same has been referred to or not and whether relied upon or not in the show cause notices issued to the appellants. It is urged that the appellants do not know what material the Board has collected during the course of the investigations some of which may even support their case and unless they are allowed to inspect the whole of that material, the principles of natural justice would be grossly violated. The learned senior counsel for the appellants vehemently argued that the Board in the show cause notices would rely only on the material that goes against the appellants and withholding the material, if any, that may support the appellants would be most unfair and unjust. The learned Advocate General appearing on behalf of the Board has been equally vehement in opposing the prayer made on behalf of the appellants. He argued that the rules of natural justice do not require that the appellants be allowed an examination of the entire material collected by the Board and that they are entitled to only such material upon which the Board relies and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority is or is not relying upon the same. The authority may not rely upon it but the delinquent could in support of his case. The reason is that every enquiry has to conform to the basic rules of natural justice and one of the elementary principles is that every action must be fair, just and reasonable. Withholding evidence whether exculpatory or incriminatory is neither fair nor just. In Kashinath Dikshita v. Union of India AIR 1986 S.C. 2118 the Supreme Court in similar circumstances very aptly observed in para 9 of their order as under: If only the disciplinary authority had asked itself the question : What is the harm in making available the material? and weighed the pros and cons, the disciplinary authority could not reasonably have adopted such a rigid and adamant attitude. On the one hand there was the risk of the time and effort invested in the departmental enquiry being wasted if the Courts came to the conclusion that failure to supply these materials would be tantamount to denial of reasonable opportunity to the appellant to defend himself. On the other hand by making available the copies of the documents and statements the disciplinary authority was not running ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of certiorari to quash the conviction, Lord Widgery C.J. of the Divisional Court with whom May and Tudor Evans JJ concurred, held that there was a clear denial of natural justice to a defendant which had deprived him of a fair trial and certiorari was the appropriate remedy even when it was the prosecution and not the tribunal which had erred by failing to observe the rules of natural justice. The learned Judges held that when a defendant was deprived of the elementary right to be notified of material witnesses known to the police, certiorari should issue to quash the conviction. This view was followed in R v. Blundeston Prison Board of Visitors, ex parte Fox-Taylor (1982) 1 All ER 646 where, as a result of a fight with a fellow prisoner, the applicant was charged with an offence against discipline and brought before the board of visitors of the prison. He denied that he was guilty of the charge. He gave evidence in his defence but called no witnesses to support his account of what had happened because he was unaware that there were any. After hearing evidence from the other prisoner involved in the fight and the prison officer in charge of the case, the board found the applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of the investigations while giving them inspection leaving it to them to use that material in whatever manner they wanted to. In this view of the matter, I hold that the Board was not justified in allowing partial inspection of the material to the appellants and that they should have been given access to the entire material collected during the investigations. Not having done this, the principles of natural justice have been violated. While allowing the appeals and in addition to the directions proposed by the learned Members, I direct the Board to allow to the appellants full inspection of the material collected by it during the course of the investigations. Order of the Tribunal : The appeals are allowed and the impugned order set aside. The prayers made in paragraphs 7(b) and 7(c) of the memorandum of appeals are allowed. The Board is directed to allow the appellants to cross examine the persons whose names are mentioned in paragraph 4 of the application dated November 22, 2010 and also furnish copies of their statements to the appellants, if not already furnished. The Board is further directed to complete the enquiry expeditiously preferably within four months fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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