Supreme Court Stays SAT’s Order Restoring SEBI’s Power to Restrain Erring Auditing Firms

The Supreme Court has stayed a provision in a Securities Appellate Tribunal (SAT) order which had stopped the Securities & Exchange Board of India (SEBI) from barring auditors from auditing listed companies.

In January 2018, the Securities and Exchange Board of India (SEBI had slapped a two-year ban on Pricewaterhouse (PwC), an arm of PricewaterhouseCoopers India, from auditing any listed company for its role in the Rs 7,800-crore Satyam scam.

However, the SAT quashed that two-year ban on PWC.

In its September 9 order, the SAT allowed disgorgement of the Rs 13-crore fee from auditors, but observed that SEBI lacks powers to bar auditors from auditing listed companies. The SEBI questioned this approach adopted by the SAT, since the order virtually made it a “toothless” institution.

A Supreme Court bench comprising Justice Arun Mishra and Justice Indira Banerjee also issued notice on the appeal filed by SEBI against the SAT's September 9 order.

The SAT had observed that the powers conferred on SEBI under Section 11 and provision 11B, are to protect investors’ interests, to promote the development of the stock market and to regulate it. Therefore, the measure to be adopted by SEBI is remedial and not punitive.

“Thus, the role of debarment is beyond the scope and powers under Section 11 and 11B of the SEBI Act. Such directions can only be remedial. If such person is not dealing in securities, only then remedial direction could be issued. Preventive directions cannot be issued. In our opinion, debarment is punitive,” the SAT had stated in its order.

Later, SEBI’s counsel contested this observation of the SAT in the Supreme Court and stated that SAT’s approach was equivalent to making it a toothless body.

The SEBI stated in its plea that “An auditor's certificate ought not to be issued casually and must be issued after carrying out absolute and complete diligence and caution. SEBI has the power to issue directions (with respect to debarment from the securities market or otherwise) against any person associated with the securities market”.

The SEBI also insisted in its plea that accounting manipulations went on for more than eight years.

According to the SEBI plea, there was gross negligence and recklessness in conducting an audit in accordance with accounting standards. Failure of the audit function in terms of professionalism, diligence and requisite application of mind on the part of the auditors led to dissemination of spurious and false data in the market which was certified as true, the SEBI plea stated.

The SAT had stated that only the Institute of Chartered Accountants of India (ICAI) could take action against auditors, and frauds cannot be proved on the ground of negligence in auditing.