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SAT order on PwC a wake-up call for SEBI over jurisdiction

SAT ruling is a clear reminder that institutions here have still not been clearly defined with regard to their power.

May 11, 2020 / 02:09 PM IST

The jury is out on the Securities Appellate Tribunal (SAT) setting aside SEBI's ban on PwC for the global audit firm’s role in the decade-old Satyam scandal.

The development may raise eyebrows because the fraud in the Satyam case was quite apparent and auditors of the firm deserve punishment for not performing their duties, “quarter after quarter over the period of eight years”.

This becomes interesting when for the same fraud, the US Securities Exchange Commission (SEC) had imposed a fine of $17.5 million because the firm was also listed in the US. It’s an irony that Indian authorities have not been able to do anything worthwhile in this regard.

It is the basic job of the auditors to keep a tab on the books of the firm they are auditing and accordingly, report. Therefore, in auditing, the primary wrongdoing can only be in the form of ‘omission’ and no express ‘commission’ of a wrongful act. Hence, a mere ignorance of a particular irregularity on part of the auditor is a wrong-doing in itself.

The charge in the current case stems from ‘involvement in the fraud’ and not ‘professional negligence’. This yields a jurisdictional issue for SEBI (Securities and Exchange Board of India).


According to the SAT, SEBI has no authority to pass an order banning an auditing firm from practising. This authority rests with ICAI. SEBI is a market regulator and is duty bound to protect interests of investors, the SAT said, adding that barring an audit firm from doing business is not in its domain.

The SAT also examined the culpability of PwC (PricewaterhouseCoopers) on the question of negligence. It’s of the view that there was no explicit involvement of the firm in fudging of the account books and subsequent bungling. That means that the firm lacked the necessary mens rea (wrongful intention) to establish its culpability.

This is a very problematic finding. It is hard to believe that there was no collusion of any sort when the fraud went on for almost a decade. SEBI had charged PwC with not independently verifying bank account statements with the lenders in question rather than just relying on the statements supplied to it by Satyam. This is a fair charge and certainly an evidence of mens rea.

The key takeaway is there is still no exoneration of the global auditor from the wrong-doing. The judgment is based on technicalities -- In other words, the actions of the firm do not fall within the ambit of fraud as defined under Section 12A of the SEBI Act.

That no way suggests absence of culpability, it can be found elsewhere in other legislations. The verdict affirms this position and has tacitly left an option with ICAI to issue an order like the one SEBI issued.

The decision also highlights one of the perils of Indian legal system -- Institutions have still not been clearly defined with regard to their power. The decision clearly shows that SEBI is very different from SEC where the former does not have jurisdiction over auditors of listed companies. This is something SEBI should have known by itself, and it should not have taken an order from the SAT nine years later to figure out it lacked basic jurisdiction.

The delay in itself is a problem. A partnership firm is very different from a company. In a firm, the partners are jointly and severally liable whereas in a company, the liabilities of individual persons are protected by a corporate veil. In PwC, today there are 98 partners, of which 70 are new who were not partners during 2000-09. They, therefore, can’t be made liable for the acts that were committed before they came on board. The inference is their fundamental right to carry on business under Article 19(1)(g) of the Constitution is also being wrongfully restrained as they themselves did not do any wrongful act.

Because of the delay, precious time has been lost, and it is very likely that there cannot be any genuine action against the firm even by an authority that does have jurisdiction.

There is a lot SEBI can learn from this case. First of all, it should know its powers and functions and stick to them, and not compare itself to similar authorities like the SEC. Second, it should discount this general habit of the Indian legal system operating with delay because the costs can be too pricey in the realm of financial markets.

Raghav Pandey is an Assistant Professor of Law at Maharashtra National Law University, Mumbai. He tweets @raghavpandeyy. Views are personal.
Raghav Pandey is an Assistant Professor of Law at Maharashtra National Law University, Mumbai.
first published: Sep 10, 2019 11:49 am

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