10-Year Delay Invalidates Imposition of Penalty and Issue of SCN for False Auditor Certification: SAT

Case Details: R. Mugunthan v. Securities & Exchange Board India - [2023] 148 taxmann.com 336 (SAT-Mumbai)

Judiciary and Counsel Details

• • Justice Tarun Agarwala, Presiding Officer & Ms Meera Swarup, Technical Member
  • Surasika, Adv. for the Appellant.
  • Vyom Shah, Abhiraj Arora, Shourya Tanay & Deepanshu Agarwal, Advs. for the Respondent.

Facts of the Case

In the present case, the appellant filed an appeal against the order passed by the SEBI that imposed a penalty of Rs. 1 lakh for violating provisions of the Disclosure and Investor Protection (DIP) Guidelines and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

The Company ‘PSTL’ had allotted 36.40 lakh convertible warrants to its promoter/director i.e., PSS on preferential basis on 22-10-2007. Later, a show cause notice (SCN) was issued to the statutory auditor of company (i.e., the appellant) alleging that the certificate given by him regarding receipt of money from ‘PSS’ for the warrant was allegedly false. Subsequently, SEBI imposed a penalty of Rs. 1 lakh on the appellant.

It was noted that the books of account of the company reflected that an amount of Rs. 11.28 crore with respect to 10% upfront money was received by the company towards the share warrant application account of ‘PSS’ on 15-10-2007, and the company had received the balance of 90% of the allotment money on various dates up to 28-2-2009.

A show cause notice was issued on 3-6-2011 and the impugned order was passed on 7-7-2021 after a period of ten years from the issue of the SCN. The appellant contended that the AO had erred in holding the certificate issued by him as false and that the inordinate delay in concluding the proceedings had caused prejudice to him.

Subsequently, an appeal was made to the Securities Appellate Tribunal (SAT) against the order passed by the SEBI.

SAT Held

The SAT observed that the Respondent had issued notice of hearing on January 10, 2018, after a gap of more than six years from the date of reply filed by the appellant.

The SAT held that a considerable amount of time had elapsed since the impugned transactions took place in year 2007, and in determining the quantum of penalty, the Tribunal had held that adjudication proceedings must be completed in a timely manner.

Therefore, the impugned order by the SEBI imposing penalty on the appellant could not be sustained and was to be set aside.

List of Cases Reviewed

• • Sanjay Jethalal Soni v. SEBI [2020] 113 taxmann.com 486 (SAT – Mum.) (para 9)
  • ICICI Bank Ltd. v. SEBI [2020] 117 taxmann.com 798 (SAT – Mum.) (para 10) followed.

List of Cases Referred to

• • Rakesh Kathotia v. SEBI [Appeal No. 7 of 2016, dated 27-5-2019] (para 8)
  • Ashok Shivlal Rupani v. SEBI [Appeal No. 417 of 2018, dated 22-8-2019] (para 9)
  • Sanjay Jethalal Soni v. SEBI [2020] 113 taxmann.com 486 (SAT – Mum.) (para 9)
  • ICICI Bank Ltd. v. SEBI [2020] 117 taxmann.com 798 (SAT – Mum.) (para 10).