The Securities Appellate Tribunal (SAT) recently imposed a cost of Rs1 lakh on market regulator Securities and Exchange Board of India (SEBI) for passing a 'mechanical order" against SRBC & Co LLP, the auditor of Infibeam Avenues Ltd. SAT also asked SEBI to 'examine facts holistically and exercise restraint in passing mechanical orders'.
In an order, the bench of justice PS Dinesh Kumar (presiding officer), Meera Swarup and Dr Dheeraj Bhatnagar (technical members) says, "The contention urged on behalf of SEBI that once the violation is admitted, the adjudicating officer (AO) had no choice but to impose penalty is illogical and liable to be rejected. If this argument were to be accepted, it would result in absurd consequences and therefore the said contention is only noted to be rejected."
"We trust and hope that while imposing the penalty, the SEBI authorities shall examine the facts in a holistic manner and exercise restraint in passing mechanical orders," SAT says while imposing a cost of Rs1 lakh on SEBI.
In an order on 29 June 2022, the AO of SEBI imposed a penalty of Rs10 lakh under Section 15G(ii) of the SEBI Act on SRBC & Co, the joint auditor of Infibeam.
SRBC & Co received an email from a whistle-blower alleging that Infibeam had committed certain irregularities. After discussing the matter with Infibeam's managing director (MD), SRBC sought certain information from the Company. Instead of providing the information, Infibeam officials allegedly threatened to remove SRBC as the company's auditor and asked the auditor to resign.
SRBC & Co did not comply with Infibeam's request to resign. As a counterblast, Infibeam filed a complaint with the SEBI, alleging violation of provisions of the SEBI Act and SEBI (PIT) Regulations by SRBC. SEBI initiated proceedings against SRBC and passed an order imposing a penalty of Rs10 lakh on the auditor.
During the hearing before the SAT, senior counsel PN Modi, representing SRBC & Co, submitted that in February 2017, one of the audit team members forwarded two emails containing financial information to the finance team personnel of Infibeam, i.e. Sunil Bhagat and Shamshuddin Valani. "While forwarding this email, the concerned team intended to mark a copy to Hiren Padhya, chief executive officer (CEO) of Infibeam, however, while doing so, inadvertently the email got marked to one Hiren Patel, who is a director of some other company which was also SRBC's client."
He further submitted that it was a case of inadvertence and there was no intention behind sending the email to Mr Patel. However, SEBI held that the auditor firm failed to have a mechanism to prevent such inadvertent acts and had violated Regulation 3(1) of the PIT Regulations.
Referring to the SEBI order, the Tribunal observed that the AO has recorded SRBC's explanation in paragraph no35. The AO also noted that SRBC sent one of its employees personally to meet Mr Patel and requested him to delete the email and the attachment from his mailbox and accordingly, Mr Patel had deleted the said email.
However, in paragraph No.37 of the order, the AO held that SRBC is an auditor entrusted with the task of auditing financial statements, which are price-sensitive information and therefore, the auditor had a duty to take appropriate care. The AO further noted that SRBC ought to have had a mechanism in place to ensure that unpublished price-sensitive information (UPSI) is not leaked, but SRBC did not have any such mechanism as mandated under note to Regulation 3(1) of the PIT Regulations.
SAT says Regulation 3 of the PIT Regulations indicates that UPSI shall not be communicated to anyone except for legitimate purposes. "The Regulation does not indicate any particular mechanism in express terms. Therefore, the reason recorded by the AO that 'note to Regulation 3 of PIT Regulations mandated SRBC to have a mechanism' is imaginary and therefore unsustainable."
The bench also noted that SRBC took immediate prompt action by contacting Mr Patel to get the email and the attachment deleted. "Thus, in our view, this is not a case of communication of UPSI in violation of Regulation 3(1) of PIT Regulations."