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TMI Blog2011 (6) TMI 928X X X X Extracts X X X X X X X X Extracts X X X X ..... which these appeals have been filed. 2. The Board, among others, 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 sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to September, 2008. Since the inaccurate financial results of 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, Chair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing remedial and preventive measures in the interest 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction and it should not mean that this Court has expressed any opinion regarding the conduct of a particular Chartered Accountant 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 fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement or modify the above list as may be required. 4. Statements of the following persons have been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicial: 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 the first time." 4. Mr. Janak Dwarkadas, senior counsel in Appeal no. 8 of 2011 and Mr. Navroz Seervai, senior counsel in Appeal no. 9 of 2011 vehemently argued that the impugned order is in breach of principles of natural justice in as much as there is absolute denial of opportunity to cross-examine the witnesses. Reference has been made to the statement made by Ramalinga Raju Chairman, Rama Raju, Managing Director and Vadlamani Srinivas CFO of Satyam but cross-examination of these witnesses has been denied. It is further alleged that in respect of G. Ramakrishna and Venkatapathi Dhantuluri, althou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lore. 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) B. Surinder Singh Kanda v. Government of the Federation of Malaya 1962 PC 322 (page 337) 7) K. L. Tripathi v. State Bank of India AIR 1984 SC 273 (paras 30-34, 39 and 41) 8) A. K. Roy v. Union of India AIR 1982 SC 710 (para 99) 9) Noor Aga v. State of Punjab and Another, (2008) 16 SCC 417 (para 113) 10) A. K. Dutta v. Union of India (1978) II LLJ Cal 337 (para 5) 11) Middolla Harijana Thimmaiah v. State of A. P. 2005 (1) ALD (Cri) 286 (paras 27-28) 12) S. J. Chaudhary v. CBI (2009) DLT 673 (DB) (para 103) II. Inspection of relevant documents and statements :- 1) State of Madhya Pradesh v. Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding 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 show cause notice. In support of his contentions, learned Advocate General has relied on the following judgments:- 1) Transmission Corpn. Of A. P. Ltd. 7 Ors. Vs. Sri Ramakrishna Rice Mills 2006 3 SCC 74. 2) Krishna Chandra Tandon v. The Union of India 1974 4 SCC 374. 3) Dr. Mahachandra Prasad Singh v. Hon. Chairman, Bihar Legislative Counsil & Ors. 2004 8 SCC 747. 4) Kishanlal Agarwalla v. Collector of Land Customs AIR 1967 Cal 80 5) State of Tamil Nadu v. Thiru KV Perumal AIR 1996 SC 2474, 1996 5 SCC 474 6) State of Uttar Pradesh & Ors. v. Ramesh Chandra Mangalik 2002 3 SCC 433, AIR 2002 SC 1241. 7) State of Andhra Pradesh & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities 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 who may be associated with securities markets in any manner; [(ba) registering and regulating the working of the depositories [, participants], custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf;] (c) registering and regulating the working of [venture capital funds and collective investment schemes], including mutual funds; (d) promoting and regulating self-regulatory organizations; (e) prohibiting fraudulent and unfair trade practices relating to securities markets; (f) promoting investors' education and training of intermediaries of secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ath; (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 reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry., namely:- (a) suspend the trading of any security in a recognised stock exchange; (b) retrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transactions which is under investigation; (e) attach, after passing of an order on an application made fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 measures as provided under clause (a) to (m). Sub-section (3) of Section 11 provides the enabling power of the Board like that of a civil court under the Code of Civil Procedure for trial of the suit is respect to discovery or production of books of account etc. summoning and enforcing the attendance of person and examining them on oath and inspection of any books or register or other documents etc. Section 11B of the Act provides that when the Board is satisfied that it is necessary in the interest of investors or orderly development of securities market or to prevent the affairs of any intermediary or other persons or to secure the proper management of any such intermediary or person, the Board may issue such directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour. 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 difference if these had been observed. 9. Learned counsel on both sides have not disputed the legal position that certain principles had remained relatively immutable in our jurisprudence. One of these is that where action by an authority seriously injures an individual and the reasonableness of the action depends on fact findings, the evidence used to prove the case must be disclosed to the individual so that he has an opportunity to show that it is untrue. In this background the question that arises for consideration in this case is whether the right of cross examination is an integral part of the principles of natural justice. This has been answered by the Apex Court in a number of decisions cited by both parties and we would li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority 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 any risk. There was nothing confidential or privileged in it." The said observations have been quoted with approval in a later decision of the Supreme Court in the case of State of Uttar Pradesh vs. Saroj Kumar Sinha (2010) 2 SCC 772. The Apex Court has further dealt with the argument that no prejudice has been caused to the appellant in the following words:- "12. Be that as it may, even without going into minute details it is evident that the appellant was entitled to have an access to the documents and statements throughout the course of the inquiry. He would have neede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petent 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 areas not covered by any law validly made. In other words they do not supplant the law of the land but supplement it. The concept of natural justice has undergone a great deal of change in recent years. In the past it was thought that it included just two rules, namely (1) no one shall be a judge in his own cause (Nemo debet esse judex propria causa), and (2) no decision shall be given against a party without affording him a reasonable hearing (audi alteram partem). Very soon thereafter a third rule was envisaged and that is that quasi-judicial enquiries must be held in good faith, without bias and not arbitrarily or unreasonably. But in the course of years many more subsidiary rules came to be added to the rules of natural justice. Till very recently it was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lexible 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 of natural justice vary from facts of each case and there cannot be any straight jacket formula. 11. Let us now examine the show cause notice issued to the appellant in the background of the aforesaid legal proposition. Admittedly, there is reference to the statements of Rama Raju and Vadlamani Srinivas in the show cause notice. In the impugned order, cross-examination of these persons has been denied. It is interesting to note that cross-examination of G. Ramakrishna and Venkatapathi Dhantuluri has been allowed by the impugned order but copies of their statements had been denied. We fail to understand how can there be an effective cross-examination without the statement being made available to the appellant which have been recorded behind their back. Admittedly, the allegations in the sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 examination is inbuilt. In K.C. Tandon's case (1974) 4 SCC 374, the Court rejected the plea of denial of natural justice as the inspection of records and copies of documents were denied to the appellant and the Inquiry Officer has not relied upon those documents. In the case of Dr. Mahochandra Prasad Singh (2004) 8 SCC 747, the Court rejected the plea of denial of natural justice as order was passed on the basis of admitted facts. None of the judgments cited on behalf of the respondents deal with a case where the Court might have upheld limited cross-examination or denial of documents or refusal to cross examine the witnesses where the accusation is based on statements of witnesses or documents referred to or relied upon in the show cause notice. 13. The foundation of the show cause notice in the case under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 parallel. The Board carried out investigations and collected evidence, documentary and by recording statement of witnesses. To enable the appellants to defend themselves, they are entitled to inspection of all the material and documents that might have been collected by the Board during the course of inquiry, whether the same has been relied upon in the show cause notice or not. According to learned counsel, in the inquiry proceedings under consideration, the Board is not acting as a prosecutor but as an adjudicator. Any material/evidence collected by it must be made available to the appellants to defend their case. According to him evidence is not confined to proof only but it includes all material collected by the Board. In support of his argument, he referred to the definition of 'evidence' as discussed in the book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... houghtful 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 might have been collected during the course of investigation but has not been relied upon in the show cause notice. In the case law discussed above, it has been abundantly made clear that what particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of the case, the framework of the law under which the inquiry is held and the constitution of the Tribunal or body of persons appointed for the purpose. There is no provision in the Act that all material collected during the course of investigation should be made available to the appellant. Mr. Janak Dwarkadas is right when he argues that this case is sui generis. As per promoter's own admission, the accounts were manipulated/forged for a number of years. A fraud of worst kind was perpetrated in the affa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not already furnished. We further direct the Board to complete the enquiry as expeditiously as possible preferably within four months from the date of this order. The appellants should also cooperate with the Board in conducting enquiry in a time bound manner. No costs. Per : Justice N. K. Sodhi, Presiding Officer 18. I have gone through the order prepared by the learned Members and I agree that both the appeals deserve to be allowed and that the wholetime member has grossly violated the principles of natural justice. I also agree with the directions which the Members propose to issue. However, I have not been able to persuade myself to agree with the observations and findings recorded in paragraphs 15 and 16 of their order particularly when they observe "Be that as it may, there is no rule of law which permit appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use 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 Institute of Chartered Accountants of India. The writ petitions were rejected by the High Court observing that even though it is the Institute of Chartered Accountants that regulates the professional norms to be observed by a Chartered Accountant, "However, in a given case if there is prima facie evidence in connection with the conduct of a Chartered Accountant such as fabricating the books of accounts, etc., the SEBI can certainly give appropriate directions not to utilize services of such a Chartered Accountant in the matter of audit of a listed company." The learned Judges of the High Court further observed: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 no. 8 of 2011 has taken the stand that B. Ramalinga Raju and Satyam's top management orchestrated and conducted a fraud to deceive all including not only the investors but also the auditor, viz., the appellant. The other appellants cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 they cannot be allowed to make a fishing inquiry and, in any case, they had not made a prayer in this regard at any stage of the proceedings. Having heard the learned senior counsel on both sides, I find merit in the arguments raised on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 any risk. There was nothing confidential or privileged in it. It is not even the case of the respondent that there was involved any consideration of security of State or privilege." The aforesaid observations apply with full force to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rari 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 applicant guilty and, in consequence, he lost 90 days' remission. The applicant subsequently discovered that another prisoner had witnessed the fight and that, prior to the hearing before the board of visitors, that prisoner had reported the fact to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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