The Ministry of Corporate Affairs (MCA) and the Serious Fraud Investigation Office (SFIO) is in the process of filing a special leave petition (SLP) in the Supreme Court, against a Bombay High Court order that quashed criminal prosecution of IL&FS Financial Services (IFIN) auditors — BSR & Associates (a KPMG-affiliated firm) and Deloitte Haskins and Sells, said sources.
Last month, the high court upheld the constitutional validity of section 140(5) of Companies Act, 2013, which deals with removal and banning of auditors for five years, but said the provision does not apply to auditors who have resigned.
Deloitte was the auditor of IFIN, till it was rotated out in financial year 2018. Subsequently, BSR & Associates took over as the auditor of IFIN and resigned only in June 2019.
The government’s SFIO has accused the auditors of connivance in the IL&FS financial fraud case.
The SLP will challenge the interpretation of section 140(5) by the high court. It will contend that the government asked the SFIO to launch prosecution against the auditors within 30 hours of getting the SFIO investigation report, as the officers in-charge of reading the report were aware of the issues at IFIN and had applied mind before taking the decision. The high court had in its order said it was “highly improbable” for the government officers to read the SFIO report that contains 730 pages of observations alongwith 32000 pages of annexures in 30 hours. The petition, sources said, is likely to point out that the high court does not have jurisdiction to decide if there was “application of mind” by its officers as it is a subject matter of the trial court.
The government in its petition to SC will also challenge the observation of the high court that SFIO has not detailed the nature of fraudulent activities by the auditors before charging them. The MCA has said the SFIO investigation report detailing the fraudulent activities of the auditors was duly submitted to the high court but the court did not go into the facts of the case.
The petition will also listed instances of the alleged “fraudulent” activities of the auditors of IFIN in its SLP before the Supreme Court. It is likely to say that the auditors were aware of IFIN loans to C Sivasankaran, self funding within the IL&FS Group and the 2017 inspection report of the Reserve Bank of India (RBI), which found that IFIN had extended loans to group companies in violation of norms.
The financial affairs of the IL&FS group came under scrutiny in the year 2018 after it defaulted on short-term and long-term debt obligations allegedly to the tune of Rs 91,000 crore.
The SFIO probe had revealed that auditors colluded with IFIN executives and concealed information about wrongdoings of the management.
Following SFIO findings, MCA moved a plea before NCLT seeking removal of auditors and a five-year ban for allegedly conniving with the IFIN management.
Thereafter, former IL&FS auditors moved the Bombay High Court challenging the constitutional validity of section 140 (5) of the Companies Act, 2013 and also contested MCA’s move of filing a plea before National Company Law Tribunal seeking a ban on auditors for five years.
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines