Council of the Institute of Chartered Accountants of India v. Ashok Kumar

8. Pursuant to the said decision of the ICAI Council, the present reference was received by this Court on 4th August, 2014. Upon receipt of the reference, notice was issued to the respondent and to the Central Government. Notice to the Central Government stands served. The respondent has appeared through counsel. Arguments have been addressed on behalf of the petitioner by Mr. Rakesh Agarwal and on behalf of the respondent by Ms. Reena Jain Malhotra. Relevant provisions of the Chartered Accountants Act, 1949:

9. The relevant provisions of the Act are set out herein below for ready reference: “Section 21 (1) to (4)……….. (5) Where the misconduct in respect of which the Council has found any member of the Institute guilty is misconduct other than any such misconduct as is referred to in sub-section (4), it shall forward the case to the High Court with its recommendations thereon. (6) On receipt of any case under sub-section (4) or sub-section (5), the High Court shall fix a date for the hearing of the case and shall cause notice of the date so fixed to be given to the member of the Institute concerned, the Council and to the Central Government, and shall afford such member, the Council and the Central Government an opportunity of being heard, and may thereafter make any of the following orders, namely,- (a) direct that the proceedings be filed, or dismiss the complaint, as the case may be; (b) reprimand the member;

(c) remove him from membership of the Institute either permanently or for such period as the High Court thinks fit;

(d) refer the case to the Council for further inquiry and report.

Section 22 - Professional misconduct defined:- For the purposes of this Act, the expression "professional misconduct" shall be deemed to include any act or omission specified in any of the Schedules, but nothing in this section shall be construed to limit or abridge in any way the power conferred or duty cast on the Council under sub-section (1) of section 21 to inquire into the conduct of any member of the Institute under any other circumstances.”

10. The above two provisions vest in the ICAI Council the power to enquire into any misconduct of a member of the ICAI. This legal position is also settled by the Supreme Court in Council of the Institute of Chartered Accountants & Anr v. B. Mukherjea AIR 1958 SC 72, which states as under:

11. The counsel for the petitioner has taken us through the various documents on record to submit that the findings against the respondent, both by SEBI as also the findings of the DC, clearly establish that he has indulged in misconduct. He specifically relies upon the order of Chairman, SEBI dated 12th December, 2002 passed against the respondent under Section 11B of the SEBI Act, 1992 read with Regulation 12 of the SEBI (Prohibition of Fraudulent & Unfair Trade Practices relating to Securities Market) Regulations, 1995. The specific allegations of SEBI relate to the following two broad issues:

(i) Irregular allotment of 1,17,200 shares of BFSL involving irregular subscription for 27,00,000 shares with an application money of Rs.2.[7] crores by way of stock invests issued by Sangli Bank, Karol Bagh, New Delhi.

(ii) Allotment of 7,000 shares against applications accompanied by anti-dated stock invests issued by Sangli Bank.

12. After discussing both the issues, the Chairman of SEBI, in his report, held the respondent guilty of both charges. The petitioner, thereafter, relies upon the investigation report of SEBI which had also clearly concluded that the respondent connived with Shri S. K. Gupta in making irregular allotments and ante-dating the stock invests.

13. The petitioner finally relies upon the conclusion of the investigation report dated 10th December, 2002 which debarred the respondent for a period of 5 years.

14. The petitioner thereafter relies upon the proceedings initiated by the ICAI and the statement recorded during the proceedings before the DC on 5th September, 1997. According to Mr. Agarwal, learned counsel for the petitioner, the statement recorded completely establishes the misconduct of the respondent inasmuch as he has not been able to explain any of the allegations raised against him. Thus, the decision of the ICAI Council to debar the respondent for a period of one year deserves to be upheld. Submissions of the Respondent:

15. Ms. Malhotra, learned counsel for the respondent, submits that the respondent, Mr. Ashok Chawla, is only a CA and not a beneficiary of any of the transactions. He merely introduced Shri S. K. Gupta to his family members and relatives. On both counts i.e. irregular allotment and antedating, Ms. Malhotra submits that the respondent is not guilty.

16. According to Ms. Malhotra, insofar as the allotment of shares is concerned, the irregular allotment is something which BFSL and Mr. Gupta need to explain. In support of this submission, she relied upon the copy of some of the stock invests, which are filed on record, to demonstrate that there was in fact no tampering or irregular allotment. In any event, the issuance of share certificates is by the company and its promoters in which Mr. Chawla plays no part. Insofar as the ante-dating of documents is concerned, Ms. Malhotra submits that he was not responsible for ante-dating the documents. The same were issued by the bank and hence the bank will have to explain how it was dated differently - especially in comparison with the copies which were available with the respondent. Thus, on both counts, it is the submission of the respondent, that he is not liable.

17. It is further submitted by Ms. Malhotra that the respondent’s conduct does not constitute misconduct as stipulated in Schedule-I and Schedule-II of the Act and hence the punishment meted out to him is extremely harsh. Ms. Malhotra, on the merits of the allegations submits that, in any event, letters for withdrawal of the allotment were submitted even prior to the allotment of the shares and hence no benefits were derived from the irregularities in the forms or the so called ante-dating. She further submits that the respondent is not guilty of any professional misconduct and hence his conduct deserves to be viewed sympathetically. Analysis and Findings:

18. Stock invests are monetary instruments that are deposited in banks in order to enable a person to subscribe to shares in a public issue. The amount of the stock invest is held in trust with the bank to pay the amount required for the shares allotted. These stock invests are issued by the bank as a counter guarantee in respect of payment for proposed shares to be allotted to the applicant.

19. Such a system has evolved in order to ensure that once a person subscribes to share capital and shares are allotted to him as part of a public issue process, he or she does not shy away from making payment for the said shares. It also protects the applicant, who does not have to deposit share application money with the application form. Instead of the share application money, the applicant can furnish stock invest. If the shares are allotted, the money available in the stock invests are utilized for payment of the share application money and if no shares are allotted, the money can be released back to the depositor.

20. Considering the nature of the allegations against the respondent, the two questions that arise are as to who paid the money for availing the stock invest. The statement of the respondent recorded by the DC throws enormous light on these aspects and virtually affirms and seals the case against him. Some of the salient facts emerging are:  The respondent appeared before the Committee along with his counsel who was present alone at the time of the statement being recorded;  The respondent admits that all information required by him has been provided;  The respondent admits that he had a copy of the enquiry report of SEBI;  The respondent sought adjournments on a few occasions and the same was granted;  The respondent’s statement was recorded on oath;  The respondent pleaded not guilty qua Regulation 15(2);  The respondent claimed to be a market operator/ professional facilitator;  The respondent used to earn 6% commission from investors for whom he arranged portfolio investments;  In response to a specific query as to who arranged the funds, the respondent gave an evasive answer, the same is extracted below: “President: How this stock invests arranged - by pledging his own FD or what? Counsel for the Respondent: That has to be verified from the Bank, My Lord, the first allegation is that that these stock invests were antedated. The issue was closed on 5.10.95 and when the SEBI enquired about it Bank said according to their records these are issued on 22nd November so they are antedated. I have to submit that for issuing the stock invests somebody had to remit money with the banker then only the stock invests can be issued. SEBI did not have any finding to the effect that the money was received on November and we are sure the money was remitted long long before. It was very much within 5th October and stock invest is valid for three months. So the stock invests has peculiarity, it is a paper just like a pay order or draft, however, its validity has speciality where the drawees name is not filled, it is quite possible that the Bank must have made some mistake in their record or after three years when they informed the SEBI there must be some around part but if it is said that the stock invests were issued on 5th October without corroborating the evidences that the money received against this issue, I think, it would be very prematurity to take that into account number one I have to submit about the antedated point.”  The respondent denied knowledge as to how the stock invests came to be dated 23rd November, 1995 when the public issue closed on 5th October, 1995.  Again on a specific query as to who gave the money as security to the bank before investing in the stock invest, the reply was completely bereft of any facts which reads as under: “Shri Anil Kumar Agarwal, Member: What is the procedure? Does she has to make any payment to the bank? Of course, sir. The bank has to first collect the money as a security before investing in the stock invests. Shri Anil Kumar Agarwal, Member: Just answer me. Do you have to make payment by cheque, by demand draft? Sir, the system is that you have to create fixed deposits in the name of the applicant so that it is a margin. Where is the copies of the FDRs or whatever? That is not annexed. The point is that you can always make friends of the banks and ask them to issue back dated or antedaed. It is not the fact. Let me complete. Ok, Sir. I am not saying it is a fact. I am saying that there is a possibility, it can happen.. Can you find out, can you place before the Committee a copy of the, security that was submitted to the bank in each of the case with date there? Yes, we can. It is possible that Savitri Devi got the FDRs issued because the security of her son or daughter's FDRs also be taken because bank had liberty, 1will go to the bank and apply for it on what basis they have given this.”  The respondent was confronted with the specific allegation in paragraph 4.2.[1] of the SEBI’s investigation report which reads as under: “Vice President: I will draw your attention to the page No. 5 of the SEBI investigation report para 4.2.1. Last para roman one all the stock invests had been issued to Shri Ashok Chawla on 23.11.1995 against the security of his fixed deposits. Sir, that is what I am contesting”  The respondent admits that he has not challenged the SEBI’s investigation report but argued before the DC that the findings in that report were wrong;  The respondent stated that since the promoter of the company did not pay him the money, he backed out from the contract and the investors withdrew their applications. He did not have any explanation as to why the shares have been allotted in his name;  When he was confronted with the fact that in 1997, he had accepted before SEBI that he had ante-dated stock invests and why he was resiling from the same before the DC, the respondent states as under: In 1997 he had agreed antedated and later on he denied that, do you have the date when he denied? In 2001. in 1997, when they started inquiry naturally they had their version and once he got opportunity to oppose it, he is relying upon the stock invests themselves by that the stock invests have come back and then he said that look, these are carrying 5.10.1995 date, how you are saying that the banker is saying something else? So there is nothing more to do on this. I would like to draw Your Honours attention to page No. 11 of this booklet. I would read the second paragraph. The investigations revealed that BFSL acting through its Chairman Mr. S.K. Gupta in connivance with Ashok Chawla made irregular allotments in the public Issue of BFSL involving irregular subscription for shares by way of application accompanied by stock invests issued after closure of the issue. The next sentence is more important that these stock invests issued for Rs. 1 lacs, Rs. 1.[1] lac and Rs. 1.[2] lacs were fraudulently altered to higher amounts of Rs. 10 lacs, Rs. 11 lacs and Rs. 12 lacs respectively. This is factually incorrect conclusion, My Lords. I have six stock invests I can produce My Lords, these do not carry any alterations. I received all stock invests back. The Company manipulated the share applications, I suspect, My Lord because they did not give the share application back. So this is completely erroneous statement based on that they concluded.”  The respondent admits that his FDs, which were securities for stock invests, were released, as can be seen from the following: The stock invests were returned to the Respondent? Yes, Sir. Vice President: How did you get back your FDs that was under lien and since the stock invests is with you? This is valid only for three months. It does not have any validity after that.”  The respondent is practising as a chartered accountant under the trading style A.K. Chawla & Associates since 1985. A submission was made on his behalf to the following effect: You practicing since when? Respondent:

1985. In which name you are practicing? A.K. Chawla & Associates. Is it a proprietorship firm? Yes, Sir. Since 1993, two years before when this issue was opened, we need your financial statement of Mr. Ashok Chawla and your firm, the income-tax assessment till 2000. I have last prayer to make My Lords. My submission is that connivance was not there, his intention was not fraudulent at the same time he wanted to be associated with the capital market to make some fast money perhaps. That has been seen leniently.”  The respondent also admitted that in another case, involving Manu Finlease, he had acted in concert with Sh. S.K. Gupta, in fraudulently altering the stock invests and back dating the application, resulting in illegal allotments. The case is still pending before SEBI.

21. A perusal of the above statement of the respondent and the conclusions derived therefrom are very telling in nature. The effect of the same is discussed hereinbelow.

22. As recorded above, there are two main allegations against the respondent. Issue No. 1: Irregular allotment of 1,17,200 shares of BFSL involving irregular subscription for 27,00,000 shares with an application money of Rs.2.[7] crores by way of stock invests issued by Sangli Bank, Karol Bagh, New Delhi.

23. On this issue, the investigation of SEBI had revealed that there were 27 applications for 1 lakh to 1.[2] lakh shares each, involving the application money of Rs.10 to 12 lakh each. These applications were accompanied by stock invests issued by Sangli Bank, Karol Bagh, New Delhi and were allotted 4,000-4,800 shares each. The public issue of BFSL had closed on 5th October, 1995, but the stock invests were issued on 23rd November, 1995. The stock invests were 10 times more than what they were issued for namely, they were meant for 10,000 to 12,000 shares each involving share application money of 1 lakh to 1.20 lakh but were irregularly converted into higher stock invests i.e. 10 times more, resulting in allotment of 4000 to 4800 shares each. The findings of SEBI are contained in the investigation report and the conclusions therein. SEBI's report was forwarded to the ICAI which conducted its own enquiry and the Disciplinary Committee of ICAI had arrived at the same conclusion. The conclusions of the DC are also summarised above.

24. The respondent’s submission that he was not involved in the tampering of the stock invest on the ground that he had handed over the blank forms to Sh. S.K. Gupta and his staff members, should be disbelieved in light of the evidence and material. Even if one were to believe that the applications and stock invests were tampered with by Sh. S.K. Gupta, there is no reason whatsoever as to why the respondent, a CA by profession, ought to have handed over applications and blank monetary instruments to anyone, so as to enable such a person to not only tamper with the date, but also the number of shares and the amount of share application money. The finding of SEBI is that the respondent connived with Sh. S.K. Gupta. Even the DC of the ICAI categorically records that the respondent had connived with Sh. S.K. Gupta, which finding reads as under: “8.[3] The Committee had perused the documents on record, the written submissions filed by the Respondent and also heard the Respondent and his Counsel in person. It was observed by the Committee that the Respondent had admitted that he was in association with Mr. S.K. Gupta for arranging the finance. It was observed by the Committee that the Respondent was to receive consideration of 6% on the investment. Since, the Respondent did not receive the consideration, he got the applications withdrawn vide withdrawal notices dated 01.12.1995 sent to BFSL. The BFSL vide letters dated 14.12.1995 returned the original stock invests. The Respondent also admitted that these stock invests were returned to him. However, the letters of BFSL show that the stock invests were addressed to the applicants. The returning of stock invests to the Respondent instead of the applicants clearly shows, the association of the Respondent with Mr. S.K. Gupta and establishes his connivance with him.”

25. The DC further notes that when the letter of withdrawal was sent to the company, the stock invests were actually returned to him instead of the investors and this is a clear evidence of connivance between the respondent with Sh. S.K. Gupta by using the names of the applicants.

26. The most glaring fact that completely belies the case of the respondent is that the fixed deposits which were given as security for issuance of the stock invests belonged to the respondent. This is clear from both SEBI's investigation as also the statement recorded by the DC of the ICAI. The respondent admitted that the fixed deposits that were given as security for the issuance of stock invests. Thus there can be no doubt that the respondent was guilty of the misconduct and has failed in his professional duty of maintaining a distance between him and the promoter. His conduct leading upto the irregular allotment of shares is blameworthy and at fault. The conduct clearly constitutes `misconduct'. Issue No. 2: Allotment of 7,000 shares against applications accompanied by ante-dated stock invests issued by Sangli Bank.

27. On this issue there was a clear finding of SEBI that 80-90 stock invests of Rs.10,000/- each were issued to Mr. Ashok Chawla by Sangli Bank, Karol Bagh after the closing of public issue by BFSL. The respondent had also admitted before SEBI that 7000 shares allotted against these applicants were sold through Mr. Gautam Rohatagi, member of Delhi Stock Exchange. The respondent, in his statement recorded on 5th September, 1997 before SEBI, had admitted that he had obtained ante-dated stock invests. Through these irregular investments he earned profit of Rs.40,000/-by conniving with Mr. S. K. Gupta and indulging in ante-dating. He also deprived the general investing public from investing in BFSL. The findings of SEBI are not challenged by the respondent.

28. The DC, on perusal of the documents and written statement of the respondent and after duly hearing the counsel for the respondent, came to the conclusion that the stock invests were issued on 23rd November, 1995. The entire chain of events as recorded in the DC's report points to the respondent being the centre piece or fulcrum of the transactions. The said chain of events and facts are –

(i) the respondent had arranged the investors;

(ii) FDs to secure stock invests were belonging to the respondent;

(iii) the respondent obtained blank forms and submitted it to BFSL and Mr. Gupta;

(iv) Irregularities were committed in the forms by inflating the number of shares and the application money.

(v) The stock invests were returned to the respondent after letter of withdrawal was sent. All these point clearly to the fact that it was none else but the respondent who was conducting all the dealings leading up to the issuance of the stock invests and allotment of the shares - though the applications for allotment of shares were allegedly withdrawn subsequently.

29. Thus, it can be seen that both SEBI and ICAI have found him guilty after following due process. Statement of the respondent has been recorded before both the authorities. He has candidly admitted in his statement that he was to be paid 6% commission on these transactions and that he did not appeal against the order of SEBI, debarring him for 5 years after holding him guilty. Even the DC held him guilty and the ICAI Council of ICAI, in it its meeting on 2nd June, 2013, directed his removal from the register of members of ICAI for a period of one year.

30. This recommendation of the ICAI having been made on 2nd June, 2013, this Court notes that events which relate to the case date back to 1995. More than 22 years have passed since the events have transpired. Though this Court may have been inclined to increase the nature of punishment to the respondent, owing to the long delay, it is directed that the respondent shall be debarred for a period of one year as recommended by the DC.

31. This Court would like to observe that CAs ought to maintain the highest level of ethics and integrity, not only in the interest of their clients but also to ensure that probity and sanctity are not compromised in any manner as CAs are not merely professionals engaged by their clients, but are protectors and guardians of financial markets on which a nation depends. In the present case, after the report of the DC, the respondent made a representation to the ICAI Council to the following effect: “In view of the above it is submitted that the order of the DC suffers from serious errors on facts and consequently on judgment. The only role that I played in BFSL public issue was a finance facilitator and it cannot be treated as an act of misconduct, because it was just for my survival. Kindly absolve me from all charges and oblige.” This clearly proves that the respondent was well aware of the misconduct in which he had indulged and was praying for sympathy from the ICAI Council.

32. The reference is accordingly accepted and in exercise of powers under Section 21(6) of the Act, it is directed that the respondent shall be suspended from the membership of the ICAI for a period of one year. During this period, the respondent is restrained from rendering any services as a CA as recognized by the Chartered Accountants Act, 1949.

33. The reference is allowed in the above terms with costs of Rs.10,000/to be paid by the respondent to the petitioner within 4 weeks.

PRATHIBA M. SINGH, J SANJIV KHANNA, J November 24, 2017/dk/R