TMI Blog2023 (4) TMI 1269X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, as per Section 11C of SEBI Act, SEBI can initiate investigation at any point of time, for any period of alleged violation or any period of alleged transactions. In this regard, we note that SEBI initiated the investigation as soon as information regarding the issue came to its notice. Examination relating to this case are complex and time consuming process, which may require detailed analysis of the case facts as the current case involves multiple layers of transactions between multiple entities including entities situated in foreign jurisdictions. Subsequently, pursuant to the completion of examination, SCN was issued on October 18, 2021. Thereafter, we note that all the relevant information relied on for crystallizing the allegations against the Noticees have been provided to them and there was no delay the way it has been argued by Noticee No.1. Further, Noticee No.1 has also not specified how the delay, if any, has caused prejudice to it. Whether inspection and copies of certain documents sought was not provided? - As all relevant material relied upon in the instant proceedings have been provided to Noticee and exhaustive reply has also been filed by Noticee No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed with Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) on August 20, 2019, disclosed the outcome of its Board meeting held on August 19, 2019. From the said disclosure, it was inter alia noted that the total liabilities of the Company and the Group might have been potentially understated by approximately ₹ 1053.54 Crore and ₹ 1,608.17 Crore respectively, as on March 31, 2018 and by ₹ 601.83 Crore and ₹ 401.83 Crore, respectively as on April 1, 2017. It was also noted that advances to related and unrelated parties of the Company and the Group might have been potentially understated by ₹ 1,990.36 Crore and ₹ 2,806.63 Crore respectively, as on March 31, 2018 and by ₹ 1,479.34 Crore and ₹ 1,331.47 Crore respectively, as on April 1, 2017. 2. Pursuant to the above, Securities and Exchange Board of India (hereinafter referred to as SEBI) sought information in the matter in order to examine as to whether or not there were any violations of the provisions of securities laws, etc. by the Company and its Directors / Promoters, during the period 2016-2019. In this regard, vide a letter dated August 26, 2019, the Company submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the matter and observed that M/s Chaturvedi Shah (hereinafter referred to as CAS/ Noticee No. 1) was the joint statutory auditor of CG Power along with M/s Sharp Tannan for the FY 2016-17 and subsequent to its resignation, on April 27, 2018, KKM was appointed as the statutory auditor of CG Power on April 28, 2018 to fill the casual vacancy, who completed the statutory audit of CG Power for the FY 2017-18. Investigation further observed and alleged that CAS and KKM had been acting against the fiduciary capacity, and that instead of working in the interest of shareholders of CG Power, they facilitated the scheme of cleaning up the books of accounts of CG Power, despite being aware of the irregularities and misstatements in the financial statements of CG Power. Accordingly, it was alleged that CAS and KKM have violated the provisions of section 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003. 6. Thus, based on the aforesaid findings, SEBI decided to initiate Adjudicating Proceedings under Section 15HA of the SEBI Act for the above mentioned alleged violations by the Noticees. APPOINTMENT OF ADJU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonal hearing was granted to Noticee No.1 on January 31, 2023. The AR of the said Noticee attended the hearing and reiterated the submission made by the said Noticee. Subsequently, it submitted additional replies vide letters dated January 31, 2023 and February 13, 2023. 12. Since Noticee No.2 did not attend the personal hearing scheduled on November 11, 2022, one more opportunity of personal hearing was granted to it on February 14, 2023, vide mail dated February 03, 2023. However, Noticee No. 2 did not attend the said hearing as well. 13. The summary of the replies dated January 20, January 31, and February 13, 2023 submitted by Noticee No. 1, are as under: a) The principle of natural justice not followed b) These proceedings deserve to be disposed of forthwith without any action against us, owing to the inordinate delay c) The information about the 'unauthorized transactions' pertaining to 'Nashik property' and 'Kanjurmarg property' was not known to them i.e. no 'mens rea'. d) While levying allegations against them, the SCN overlooked the contemporaneous documents on record with SEBI which demonstrates their innocence. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 19.08.2019 submitted by the company. c) Mr. Ashwin Mankeshwar was inducted as an additional director in the said companies on 25.01.2017 and he resigned from the said companies on 14.03.2017. During this period, he did not attend any meeting of both the companies nor was he privy to any transaction entered into by these companies. d) No remuneration was drawn by him during the period he was appointed as a director. e) Mr. Mankeshwar's previous directorship is not in conflict with the statutory or any other laws. f) No payments were received by him other than in the course of his statutory audit. 15. In view of the above, I note that principles of natural justice have been duly complied with, as SCNs/Hearing Notices were duly served upon the Noticees and sufficient opportunity was also granted to the Noticees to reply to the SCN and appear for hearing. ISSUES FOR CONSIDERATION, EVIDENCE AND FINDINGS 16. After perusal of the replies made by the Noticees and material available on record, I have the following issues for consideration: ISSUE I: Whether Noticee No. 1 and 2 have violated provisions of Sections 12A(a), (b) and (c) of the SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here under. 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of Regulation 3, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities markets. Explanation - For the removal of doubts, it is clarified that any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company shall be and shall always be deemed to have been considered as manipulative, fraudulent and an unfair trade practice in the securities market. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely: - (f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (decided on March 22, 2006) held that, As regards the plea of delay and latches and submission that the show cause notice is barred by limitation, I do not find any merit in these contentions as the time and efforts involved in an investigation though may vary from case to case, generally investigations per-se is a time consuming process which invariably involve collection, scrutiny and careful examination of voluminous records/ order-trade details of all the concerned including the exchanges/recording of statements etc. and therefore no time limit can be fixed in this regard to enable a regulator to take appropriate disciplinary action for the safeguard and improvement of the system/market . 22. In view of the above, and considering the facts and circumstances, I find that the said contention of Noticee No.1 in this regard is without merits. 23. With regard to the other contention of Noticee No.1 that inspection and copies of certain documents sought was not provided and its reliance on the judgment of Hon'ble Supreme Court in the matter of T. Takano vs SEBI, I note that the relied upon and relevant documents in the present matter were duly provided to Noticee during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd are without merits. 25. Now that all the preliminary objections have been dealt with, I am now proceeding with the merits of the case. ISSUE I. Whether Noticee Nos. 1 and 2 have violated provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003? 26. I note that CG Power, vide a corporate announcement filed with Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) on August 20, 2019, had disclosed the outcome of its Board meeting held on August 19, 2019. In the aforementioned disclosure, it was inter alia noted that the total liabilities of the Company and the Group were understated by approximately ₹ 1053.54 Crore and ₹ 1,608.17 Crore respectively, as on March 31, 2018 and by ₹ 601.83 Crore and ₹ 401.83 Crore, respectively as on April 1, 2017. It was also noted that advances to related and unrelated parties of the Company and the Group were understated by ₹ 1,990.36 Crore and ₹ 2,806.63 Crore respectively, as on March 31, 2018 and by ₹ 1,479.34 Crore and ₹ 1,331.47 Crore respectively, as on April 1, 2017. 27. I further n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ha Holdings (₹ 145 Crore) and Acton Global Private Limited ( Acton ) (₹ 53 Crore) without any interest. c) The majority shareholder of Avantha Holdings was Gautam Thapar (approximately 87%) and it also had Gautam Thapar, Ramni Nirula and B. Hariharan as its Directors at the relevant time. The aforementioned three individuals are/were Directors of CG Power. d) Blue Garden is an entity incorporated in March 2016 and at the time of execution of the Assignment Agreement, its shareholders were Acton, Nagendra Sayyaparaju and Abhishek Kabra (employees of CG Power). e) Acton is an entity incorporated in March 2016 and at the time of execution of the Assignment Agreement, its shareholders were Nagendra Sayyaparaju and Abhishek Kabra (employees of CG Power). f) The amount so raised by Blue Garden and the onward lending to Avantha Holdings and Acton were not reflected/recorded in the financial statements of the Company. .... .... ii. Sale of Kanjurmarg property to Blue Garden a) CG Power had earlier entered into an Agreement ( Evie Sale Agreement ) to sell a property it owned in Kanjurmarg ( Kanjurmarg Property ) to Evie Real Estate Private Limited ( Evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following - a. Manipulation of Books of Accounts; b. Misrepresentation including of financials and/or business operations; c. Wrongful diversion/siphoning of company funds; d. Any other related matter. 30. I note that pursuant to the aforesaid directions made in the SEBI order dated September 17, 2019, BSE appointed MSA for conducting the forensic audit of the books of accounts of CG Power. Incidentally, SEBI passed a Confirmatory Order in the matter on March 11, 2020, pending receipt of the forensic audit report from MSA, wherein inter alia it was suggested to examine the role of MD CEO, Risk and Audit Committee, Board and other employees of CG Power as well as that of Mr. Ashwin Mankeshwar i.e. Managing Partner of KKM, in the matter. In this regard I note that KKM was the Statutory Auditor of the Company as appointed in 81st Annual General Meeting of the Company dated September 28, 2018, till January 25, 2020. 31. I further note that subsequent to the above, SEBI conducted investigation in the matter and observed as under: CAS was the joint statutory auditor of CG Power along with M/s Sharp Tannan for the FY 2016-17. CAS was inducted as the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had made such payment towards supply of consultancy services. CAS further stated vide aforesaid letter dated March 06, 2020, that they were provided with balance confirmation from Blue Garden as on March 31, 2017 and a copy of the agreement dated March 27, 2017 entered into by CG Power with Blue Garden for provision of consultancy services, and that they did not suspect any non-genuineness in this transaction between CG Power and Blue Garden. c) Further, on perusal of the balance confirmation dated March 31, 2017, I note from the IR that it was signed by Mr. Bhimrao Venkataramana Rao on behalf of Blue Garden and Mr. Madhav Acharya on behalf of CG Power. Similarly, the agreement dated March 27, 2017 was signed by Mr. Bhimrao Venkataramana Rao on behalf of Blue Garden and Mr. V. R.Venkatesh on behalf of CG Power. However, it is contrary to the fact that Mr.V.R. Venkatesh had never been a director of CG Power. Further, he had taken charge as Chief Financial Officer of CG Power from Mr.Madhav Acharya only on August 11, 2017 i.e. subsequent to the aforesaid agreement stated to have been executed on March 27, 2017. Even Mr. Bhimrao Venkataramana, who had signed the agreement dated M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Venkatesh. It was also observed that there were no signatures of maker and/or checker on the aforesaid vouchers. Further, supplier advances amounting to ₹ 440 crore as mentioned in the note dated January 16, 2018, also appeared to be fake as Mr. Venkatesh intended to cancel these advances and enter into fresh agreements with suppliers for ₹ 440 Crore. He also attempted to reduce the liability of CG Power Solutions Ltd, a wholly owned subsidiary of CG Power, in the books of CG Power from ₹ 1,370 Crore as on January 16, 2018 to ₹ 30 Crore as on March 31, 2018 by way of conversion of loans into equity, capital expenditure and cash movements, but it appears that he could not execute it. f) In this regard, I further note that Mr. Venkatesh during the statement recording by SEBI on February 05, 2021 admitted that there had been a meeting held in this regard at the premises of CAS which was attended by Mr. Gagan Chaturvedi, Mr. Parag Mehta and another senior Partner of CAS. It was found that the proposal of Mr. Venkatesh was partly implemented by writing off fake inventory and debtors. However, the attempt to reduce the balance of CG PSOL from ₹ 1,370 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer were not giving true and fair view of their state of affairs and they did not want to complete the statutory audit for the FY 2017-18. B. Observations w.r.t. M/s K K Mankeshwar Co.: a) With regards to Noticee No. 2, I note from the IR that the statutory audit of CG Power for the FY 2018-19 was completed by KKM jointly with SRBC Co. LLP after CG Power made an announcement in respect of various irregularities in the nature of fraud on August 20, 2019. While reviewing payments made in the past years, the Company came across certain unexplained payments from the Company and its subsidiaries made to KKM as well as association of Mr.Ashwin Mankeshwar, Managing Partner of KKM, as a Director of Blue Garden and Acton. In this regard, the RAC of CG Power issued a show cause notice to KKM under Section 140(1) of the Companies Act, 2013 and provided KKM with an opportunity of being heard. However, no submissions were made by KKM in respect of the aforesaid show cause notice.. After due consideration, the Board of Directors of CG Power determined that KKM could not be considered unrelated party to the company. Accordingly, the Board decided to seek approval of the Central Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial statements of CG Power, while issuing the audit report for the FY 2017-18, gets established by the following facts and events: Mr. Ashwin Mankeshwar had been a Director of Blue Garden and Acton which were incorporated for effecting the transactions relating to Nashik Property and Kanjurmarg Property. The advances against the sale of properties received from Blue Garden to the extent of ₹ 245 Crore were adjusted against the amount transferred as loans to Acton by passing journal entries on March 30, 2017 without any agreement entered into by CG Power, Blue Garden and Acton to this effect. The fact that Mr. Ashwin Mankeshwar did not receive any remuneration from Blue Garden and Acton during the period of January 25, 2017 to March 14, 2017, while he was holding the position of Director in these companies, showed his close proximity with these companies and the nature of transactions in which these companies were involved. As stated in the Forensic Audit Report dated March 18, 2020, KKM provided multiple services to Avantha Group and CG Power Group entities during the FY 2016-17 and the FY 2017-18 apart from the statutory audit and recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself brings out this fact. In this regard, I note that the SCN specifically mentions that the aforesaid property transactions were executed during 2016-17 and were not reflected in the audited financial statements of CG Power. The SCN further mention that the said transactions were done without any agreement between CG Power, Blue Garden and Acton and the advances against sale of properties received from Blue Garden to the extent of ₹ 388 Crore were adjusted by netting off against the amount transferred as loans to Acton and AHL by passing journal entries on March 30, 2017 and March 31, 2017. The above said facts cannot be denied by Noticee No.1. 34. Further, it is also evident that all the entries of the transactions were made in such a way to net off the assets and liabilities of different entities i.e. debit balance of one entity netted off with credit balance of other entity in the books of account of CG Power which may not show the correct financial position of CG Power. In accounting norms, generally the netting of balance i.e. debit and credit of the same entity is permitted and not between the different entities. But in the present matter, the auditor did not rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely, were executed during 2016-17 as well as irregularities w.r.t. the signatories of the aforesaid agreement dated March 27, 2017 for Rs.28 crore between CG Power and Blue Garden, stated to have been executed for providing consultancy services, were not reflected in the audited Financial statements of CG Power. As already established that the said transactions were not genuine and created with some purpose and also considering the amount involved in the said transactions that too in the end of the financial year, this would have generally strike the statutory auditor like CAS to examine such transactions during the audit and question the irregularities as stated above. However, I note that in the present matter, CAS, the statutory auditor of the company, despite being aware of the aforesaid irregularities, certified the financial statements of the company as true and fair which shows the auditor's direct involvement on such misstatements of the company. Therefore, I find no merit in the above contention of the Noticee. 38. It is also imperative to note that no approval/consent of MIDC was obtained before sale of the Nashik property. Further, the land at Nashik was not a ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. With regards to the handwritten note as mentioned at para 32A(c) above, Notice No. 1 has submitted that they deny the knowledge or meeting as stated in handwritten note dated January 16, 2018, and the same seems to be a forged document, they have not been shown the original of the handwritten note, the hand written note does not indicate the time, date and venue of the purported meeting and there are no signed minutes of the purported meeting. Noticee No. 1 has further submitted that SCN relied upon the statement of Mr. V R Venkatesh and a note written by hand on such an important issue from an organization such as CG Power itself does not inspire confidence about the genuineness of the note and its contents. In this regard, I note that neither the said handwritten note has the date, time and place of the said meeting nor there is any signed minute of the meeting. Further, there is no supporting documents on record, establishing that the suggestions mentioned in the said handwritten note were actually recommended by Mr. Gagan Chaturvedi of CAS. I further note that in the order no. WTM/AB/CFID/CFID_1/20149/2022-23 dated October 4, 2022 in the same matter, Hon'ble Whole Time M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the company having written back certain amounts which were written off in the year 2017-18. In this regard, I note that all the said points were made only in the audit report of 2018- 19 and not in the audit report of 2017-18 during which all the aforesaid fraudulent transactions were carried out by the company. I further note that the said audit report was submitted only on August 30, 2019 i.e. after CG Power made an announcement in respect of various irregularities in the nature of fraud on August 20, 2019. It did not report any of the aforementioned irregularities in financial transactions of CG Power in its report for 2017-18. I also note that KKM was appointed by CG Power, immediately after resignation of CAS and without holding any Board Meeting. Further, after its appointment on April 28, 2018, KKM submitted audit report for 2017-18 on May 30, 2018 i.e. almost in a month. In view of the aforesaid facts, I find no merit in the submissions made by Noticee No. 2 that it highlighted certain points w.r.t. the irregularities in its audit report of 2018-19. 44. Noticee No. 2 has further contended that Mr. Ashwin Mankeshwar (Managing partner of Noticee No. 2) was induct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hand written note dated January 16, 2018 of Mr. V R Venkatesh, was written off on March 31, 2018 by making fake journal voucher approved by Mr. V R Venkatesh and that there was no signature of maker and/ or checker on the aforesaid voucher. 46. The aforesaid discussions and observations in the preceding paragraphs pertaining to Noticee No. 1 and 2, clearly establish that despite being an expert in the field of accounting and finance and also being aware of the said irregularities and misstatement, Noticee No. 1 and 2, facilitated the irregularities and misstatements in the financial statements of CG Power for the year 2016-17 and 2017-18 respectively and accordingly acted against the fiduciary capacity knowing that the same when published would be relied upon by the investors to be true and fair and accordingly, instead of working in the interest of shareholders of CG Power, facilitated the scheme of cleaning up the books of accounts of CG Power. These facts cannot be construed as mere negligence in part of the Noticees as a statutory auditor. I note that the act of facilitating in such a way to show the books of account of CG power as true and fair which is contrary to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to knowing misrepresentation, concealment of material fact, suggestion to an untrue fact, active concealment of fact with knowledge, promise without intention to perform, reckless and careless representations, deceptive behaviour, false statement, etc., as listed in points (1) to (8) of Regulation 2(1)(c). 48. Being fraudulent, unfair and manipulative, the above acts and omissions attract the prohibitions contained in regulation 3 and 4 of the PFUTP Regulations read with sections 12A of the SEBI Act. The following rulings of the Hon'ble Securities Appellate Tribunal in matter of V. Natarajan vs. SEBI (Order dated June 29, 2011 in Appeal no. 104 of 2011) would also be relevant in the context of this case:- ... we are satisfied that the provisions of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market), Regulations, 2003 were violated. These regulations, among others, prohibit any person from employing any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on an exchange. They also prohibit perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir actions, as heavy reliance is placed on their credibility by the general public consisting of investors, banks, financial institutions, governments etc. The Chartered Accountants duty is not merely to his client, but extends to various segments of society, more particularly in the commercial field, on whose expertise, integrity and impartiality they rely on in taking various decisions. 51. The findings narrated in the preceding paragraphs clearly establish that despite being aware of the irregularities and misstatements in the financials of CG Power, Noticee No. 1 and 2 facilitated the scheme of cleaning of the books of account by the company and allowed to show the financials of the company as true and fair by certifying the same in its audit report for 2016-17 and 2017-18 respectively. Accordingly, I note that by doing so, they have violated the provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003. ISSUE II: Does the violation, if any, on part of the Noticees attract penalty under Section 15HA of the SEBI Act? 52. I note from the above findings that the alleged violati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I needs to send a stern message to professionals who associate themselves with securities market so as to prevent them from indulging in such acts of omissions and commissions as found in this case. In the facts and circumstances as discussed hereinabove, I find that material available on record are adequate enough to establish contravention of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003 by the Noticees as alleged in the SCN. ORDER 56. In view of the above, after considering all the facts and circumstances of the case and the factors mentioned in the provisions of Section 15-J of the SEBI Act, and in exercise of the powers conferred upon me under section 15-I of the SEBI Act, read with Rule 5 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, I hereby impose following penalty on the Noticees viz. M/s Chaturvedi Shah (Noticee No.1) and M/s K. K. Mankeshwar and Co. (Noticee No. 2) in the proceedings initiated vide Show Cause Notice No. SEBI/EAD- 2/PB/AS/OW/ 28953/1/2021 and SEBI/EAD-2/PB/AS/OW/ 28954/1/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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