Price Waterhouse case: Why SEBI should appeal to SC against SAT order

PALAK SHAH Mumbai | Updated on September 27, 2019

SEBI Chairman Ajay Tyagi on Thursday said the regulator was yet examining if it should challenge an order by Securities and Appellate Tribunal (SAT) involving audit firm Price Waterhouse (PW). If not challenged, the SAT ruling against SEBI in the matter could be setting an ‘unappeasable precedent’ against the regulator wherein it may only be able to proceed on the basis of ‘direct evidence’ against ‘corporate wrongdoers’ who are not directly dealing in securities market, experts told Business Line.

SAT’s key point for rejecting SEBI’s case against PW was that the regulator failed to prove ‘mena rea,’ meaning establishing intent or direct evidence and the regulator relied on a Bombay High Court with regard to SEBI’s jurisdiction over PW as an accounting firm. SEBI mainly moved to punish PW and other entities for their role in the Satyam Computer scam based on a trail of 'convincing evidence.'

There is a view among top legal experts and former SEBI officials that such a ‘precedent’ could go against the spirit of various Supreme Court (SC) judgements, which say that ‘quasi judicial’ regulator like SEBI can proceed on the basis of ‘convincing proof’ against corporate wrong doers rather than trying for evidence similar to proving ‘culpable homicide’ which is key in criminal proceedings. In white collar crimes, it is often next to impossible to get direct evidence and it is mostly the trail of evidence or pre-ponderance of probablities that is followed by regulators like SEBI that could be ‘convincing enough to a prudent mind,’ to issue strictures, experts said.

Observation of current SC chief justice Ranjan Gogai on ‘mena rea’ in SEBI matter

On September 20, 2017, Justice Gogai in a judgement involving SEBI versus Kanaiyalala Baldevbhai Patel versus SEBI observed, “Mens rea is not an indispensable requirement and the correct test is one of preponderance of probabilities. The inferential conclusion from the proved and admitted facts, so long the same are reasonable and can be legitimately arrived at on a consideration of the totality of the materials, would be permissible and legally justified.”

In another benchmark ruling in a civil case, which widely quoted in law journals, involving the case of a Chief Income tax commissioner versus one Durga Prasad More the SC judges A Grover, K Hegde with regard to the evidence said, “Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal, Therefore the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But in that sphere the decision of the final fact finding authority is made conclusive by law.”

Why was PW guilty according to SEBI

In the matter involving a net work of accounting firms including Price Waterhouse were held held guilty by SEBI of gross negligence of duty to follow minimum standards of diligence and care expected from a statutory auditor. In fact, SEBI has gone a step further and even talked about acquiescence and complicity of Price Waterhouse in the case and stated that several red flags, which were all too obvious for any reasonably professional auditor to miss, failed to engender the necessary professional scepticism in the Price Waterhouse team associated with the Satyam Computer audit. By accepting the information provided by the company at face value and performing a perfunctory job (despite warnings), the auditor has failed to live up to the expectations of shareholders, SEBI had observed. SEBI had said that a dispassionate analysis of the whole episode spanning a period of at least eight years would reveal that the perpetration of the fraud could not have been made possible without the knowledge and involvement of the statutory auditors.

What did SAT say

SAT’s main contention against SEBI in the PW matter was that SEBI was “pinning down the engagement partners and the audit firms on a preponderance of probabilities that they had committed a big fraud in a reckless and careless manner cannot in our view lead to a conclusion that there was any intention or mens rea on their part.”

Matter of SEBI’s jurisdication

Experts say, SEBI also has a fair case to challenge SAT’s reliance on Bombay High Court judgement with regard to its jurisdiction over PW. The reason being that the HC order was for limited purpose to determine if SEBI has jurisdiction to conduct ‘enquiry and investigation’ against chartered accountants. The writ petition was dismissed allowing SEBI to proceed with the matter considering the aspect as to whether any directions can be issued by SEBI on the basis of evidence available on record as per the provisions of Section 11 and 12 of the SEBI Act i.e. investor protection and regulating securities market.

Once SEBI proceeded with its investigation against PW the question of its jurisdiction did not arise as the regulator has gone ahead and found certain issue, said two former SEBI officials. Another lacuna in SAT order is that if the tribunal observes that SEBI had no jurisdiction against PW then the decision to uphold disgorgement of a few lakh rupees by SEBI against PW and other entities too is faulty. Disgorgement is mainly collected from wrongdoers in capital market for its further distribution among the shareholders who may have suffered due to the scam or fraudulent scheme, experts say.

Published on September 27, 2019

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