Topic for Group No.

While examining a compliant of fraudulent and unfair trade practices in a blue-chip listed
company "Arihant Computers" having net worth of 20,000 Crore, SEBI issued show cause
notices to a law-firm "XYZ Advocates & Solicitors" and an audit firm "ABC & Sons" along with

their partners.

SEBI’s show cause notice sought to initiate action against law-firm "XYZ Advocates & Solicitors"
and an audit firm "ABC & Sons" under Sections 11, 11B and 11(4) of the SEBI Act and Regulation
11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities
Markets) Regulations, 2003.

• Allegations against Audit Firm: Failure to detect financial wrongdoing within the listed
company that in turn resulted in severe losses to shareholders. There are allegations of
overstatement of cash and bank balances, non-existent accrued interest, overstated

debtor position by listed company.

• Allegations Against Law Firm: Failure to do the legal and compliance due diligence and
examination of records and documents pertaining to due diligence exercised in pre-
issue and post-issue activities of issue management and in the case of take-over, buy-
back and de-listing of securities providing certificate to listed company and SEBI of
having vetted the prospectus as mandated under SEBI ICDR Regulations. Prospectus is
heavily relied upon by the investors.

The SEBI Show Cause Notice was sought to be quashed in a writ petition before High Court on
the basis that SEBI does not have the requisite jurisdiction to initiate action against auditors or
law firms who are discharging their duties as professionals and are regulated by ICAI and Bar
Council of India respectively. SEBI can only regulate the securities markets and audit firm or law
firms, or for that matter even individual accountants or lawyers can never be considered to be
person associated with the securities markets. Failing this, SEBI would be seen as encroaching

upon the powers of the ICAI & BCI.

According to SEBI, auditor’s role is to certify the books of accounts of the company, persons
dealing in the securities markets are likely to place reliance upon those accounts while making
investment decisions. Similarly, SEBI argued that, role of a legal counsel conducting a legal due
diligence of a listed company for certifying adherence to SEBI Act and regulations made there-
under is closely linked with the functioning of the securities markets.

Even though the auditors and law firms are not directly involved in the securities markets or are
registered with SEBI, since investors rely heavily on the audited accounts of the company and
prospectus and offer documents of the company, the statutory duty of the auditors and lawyers
and discharge thereof have a direct bearing in connection with the interest of the investors and
the stability of the securities markets. Further the powers of SEBI are independent of those held
by the ICAI and BCI, hence SEBI cannot be said to encroach upon the powers of the ICAI under
the Chartered Accountants Act or of BCI under Advocates Act.

Therefore, SEBI wishes to put a limited bar on audit-firm and law-firm from advising any entity
regulated by SEBI and wishes to send the matter ICAI and BCI respectively to adjudge whether
any professional obligations have been neglected.

The Case is before High Court. Argue based on Indian Case laws.

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