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September 4, 2021

HC Quashes Appointment by SEBI of Grant Thornton as Forensic Auditor of Company

by Mahesh Mara in Legal Court Judgement, SEBI

HC Quashes Appointment by SEBI of Grant Thornton as Forensic Auditor of Company

Fact and Issue of the case

The facts of the case leading to filing of the writ petition are as follows:-

(a) The writ petitioner is a resident of Hyderabad and a minority shareholder of the respondent No.2/company, holding 790 equity shares in D-MAT form, vide DP ID IN301151.

(b) Respondent No.2 is a Public Limited Company listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) having a paid-up share capital of Rs.97,67,61,310 (Rupees ninety seven crores sixty seven lakh sixty one thousand three hundred and ten only). The respondent No. 2/company was engaged in the business of procurement of milk, manufacturing of milk products and distribution of the same and cattle feed. After sale of its dairy business, the respondent No. 2/company is in the business of cattle feed and nutrition.

(c) The Board of Directors of the respondent No.2/company decided to sell the shareholding of the company in its subsidiary company, namely Sunfresh Agro Industries Private Limited (SAIPL), to Tirumala Milk Products Private Limited (TMPPL), which is a wholly owned subsidiary of French Dairy Multinational Groupe Lactalis. A public disclosure dated 21.01.2019 was issued by the respondent No. 2/company for conducting the said sale and its shareholding to its sister concern.

(d) The respondent No.2/company entered into a Share Price Agreement dated 21.01.2019 for the sale of the entire share capital of SAIPL to TMPPL for a sale consideration of Rs.1,227 crores approximately. It also approved the sale and transfer of its dairy product business to SAIPL, after completion of the transfer of the shares of SAIPL to TMPPL, in terms of the Business Transfer Agreement dated 21.01.2019, for a total consideration of Rs.473 crores approximately.

(e) On 25.03.2019, the respondent No. 2/company made a further public disclosure to the BSE and NSE informing them about setting up of an escrow account to hold the proceeds of the aforesaid sale and constitution of a five member ‘Transaction Committee’ comprising three independent Directors and not more than two other Directors in order to oversee, supervise and manage utilisation of the net proceeds from the aforesaid sale transaction in the escrow account held in trust for the shareholders. The said Transaction Committee was to deliberate upon and evaluate various options available for the distribution of the proceeds of the sale transactions to the shareholders. Mr. Anoop Krishna, an independent Director, appointed in the company on 30.07.2018 was one of the members of the aforesaid Transaction Committee constituted by the respondent No.2/company.

(f) The respondent No.2/company held an Extraordinary General Meeting (EGM) of its shareholders for approval of the aforesaid sale transactions whereby it informed the shareholders that from out of Rs.1700 crores that was likely to be received as proceeds of the sale transaction, Rs.1000-1200 crores (approx) may be available for distribution to them. Around 92% of the shareholders of the respondent No.2/company were present and voted in favour of the resolution of the sale transaction. On 11.04.2019, the respondent No.2/company announced that the sale transactions had culminated and executed. This was informed to the Stock Exchanges on 11.04.2019.

(g) On 04.09.2019, the promoters of the respondent No.2/company, namely Mr. Sarangdhar Ramchandra Nirmal and Mr. Vivek Sarangdhar Nirmal (cumulatively holding around 50.10% of the total shareholding of the company), addressed letters to the respondent No.2/company expressing their intention to acquire 4,87,40,547 shares (i.e., 49.90% of the paid up equity share capital) held by the public shareholders of the respondent No.2/company and voluntarily delist the equity shares of the respondent No.2/company from the BSE and the NSE. Thus, a delisting offer was made by them, giving an exit opportunity to the shareholders. In the meeting of the Board of Directors of the respondent No.2/company held on 10.09.2019, the delisting proposal was deliberated upon and a resolution was passed for appointment of a Private Limited Company to perform the necessary due diligence for the delisting proposal. The floor price of Rs.63.77 per share was set by the Board of Directors for voluntary delisting of the shares. The resolution of the Board of Directors for voluntary delisting was duly approved by the shareholders on 16.10.2019.

(h) Based on some news/information, the respondent No.1/SEBI sought the comments of BSE and NSE on the details of the distribution of the proceeds deposited by the respondent No.2/company in the escrow account, the proposed floor price and the delisting offer price of the respondent No.2/company and its plans to ensure that a fair exit price is given to the minority shareholders. At the end of November, 2019, dissatisfied with the response received from the respondent No.2/company, the respondent No.1/SEBI advised the stock exchanges to conduct an independent critical analysis of the issues based on the disclosures made by the respondent No.2/company. In the month of December, 2019 and January, 2020, BSE and NSE submitted reports where certain issues were raised with regard to the sale transaction and both the exchanges stated that they would not go ahead with the delisting process of the respondent No.2/company without obtaining express permission from the respondent No.1/SEBI. As a result, the entire delisting process was brought to a grinding halt.

(i)  The petitioner has further averred in the writ petition that on 23.07.2020, he became aware of the public disclosure made by the respondent No.2/company wherein it had stated that the respondent No.1/SEBI had appointed GTB as a forensic auditor to conduct forensic audit of the company in respect of the financial years ending on March, 2019 and March, 2020. Following were the terms of reference for the audit assignment of GTB, recorded by the respondent No. 1/SEBI in its order dated 20.10.2020:-

“a. Manipulation of books of accounts;

b. Misrepresentation including of financial and/or business operations;

c. Wrongful diversion/siphoning of company funds by Promoters/Directors/Key Managerial Personnel;

d. Scrutiny of Business Transfer and Share Purchase Agreements;

e. Various disclosure requirements and its compliances;

f. Utilization of funds received out of sale proceeds;

g. Payment made to advisors and their appropriateness;

h. Provision in relation to indemnity obligation, tax liability and their appropriateness;

i. Any other references communicated from time to time during the course of the audit.”

Observation of the court

The submission made on behalf of the respondent No.1/SEBI that the order dated 07.04.2021 passed by the Supreme Court ought to be treated as binding on all the parties including the petitioner herein not only in relation to continuation of the forensic audit but also in respect of the appointment of GTB as a forensic auditor, is wholly devoid of merits as the Supreme Court was not even called upon to examine the issue of objectivity and impartiality of GTB to act as a forensic auditor in respect of the financial affairs of the respondent No.2/company. No such plea was taken by any of the parties before the Supreme Court for it to have ruled either ways.

The question that needs to be examined is whether GTB, tasked with the role of a financial auditor, should be above suspicion, like Caesar’s wife? This is where the principle of Nemo judex in causa sua, the rule against bias comes into play. There are several types of bias, including pecuniary bias, subject matter bias, Departmental bias, Institutional bias, preconceived notion bias etc. The underlying principle is maintaining objectivity in dealing with or deciding a matter. There can be no gainsaying the fact that an auditor, being a professional person/entity has to function with complete impartially and independently. A shadow cast on the independence of a financial audit, need not necessarily be backed with any specific instance of bias or mala fides. The looming cloud of doubt itself would be a persuasive factor for interference. As observed by the Supreme Court in Management of M/s. M.S.Nally Bharat Engineering Company Limited (supra), non-observance of natural justice would itself cause prejudice to a person and independent proof of prejudice, is unnecessary. Due to the blurring of lines between an administrative order and a semi-judicial order, the decision of the respondent No.1/SEBI to appoint GTB as a forensic auditor of the respondent No.2/company would attract the doctrine of natural justice, requiring the authority to act in a just and fair manner. Acceptance by the respondent No.1/SEBI of the clarification offered by GTB on the aspect of bias, without offering any reasons for the same and continuing with GTB would, in our opinion, fall foul of the principles of natural justice. As noted above, the objection taken by the petitioner is not to an active role of Mr. Anoop Krishna in the financial audit to be conducted by GTB. The objection is to his very presence in the sister concern of GTB and the existence of an element of doubt as to the impartiality of GTB, which may result in improper interference, thereby vitiating the audit itself. The test is whether a shareholder of the respondent No.2/company could harbour a reasonable apprehension of bias attributable to the financial auditor and not whether the bias would actually affect the result of the audit.

The submission made by learned counsel for the respondent No.1/SEBI that the rights of a minority shareholder are very limited and include only right the right to dividend, right to participate in the surplus funds during winding up of the company and right to vote at an AGM/EGM, cannot cut any ice when the respondent No.1/SEBI has itself enumerated in the FAQs and guidelines uploaded on its website, several rights that are vested in a shareholder which include the right to receive an offer, in case of a takeover or a buyback under the SEBI Regulations. In the instant case, the respondent No.1/SEBI has itself taken note of the complaints received against the promoters of the respondent No.2/company alleging inter alia that they were trying to hoodwink the investors, by voluntarily deciding to delist from BSE and NSE and offering a pittance as the exit price, i.e., Rs.63.77 ps. per share, which was otherwise listed in the stock market at Rs.113/- in January, 2021 and was discounted at 20% vis-à-vis the earlier day’s closing price. The allegations that are being examined by the respondent No.1/SEBI also relate to whether the exit price fixed by the promoters of the respondent No.2/company for buying back shares from the public shareholders has been depressed to cause them pecuniary loss.

Given the above background, we find merit in the submission made on behalf of the petitioner that what is involved in the present case is not the interest of the petitioner alone. The interest of all the minority shareholders/investors is involved and the issue of lack of confidence in GTB for undertaking the financial audit of the respondent No.2/company ought to be examined from the above perspective.

In view of the aforesaid discussion, court are unable to sustain the order dated 20.10.2020 passed by the respondent No.1/SEBI insofar as it has upheld the decision taken on 07.10.2020, of appointing GTB as a forensic auditor in respect of the financial affairs of the respondent No.2/company which is accordingly quashed and set aside. Respondent No.1/SEBI is directed to appoint any other auditor from its panel for conducting the forensic audit of the respondent No.2/company, as per the terms of reference drawn by it. We may note here that the financial audit was stayed vide order dated 22.04.2021. At that stage, GTB was in the process of calling for documents from the respondent No.2/company. Steps had yet to be taken to examine the said documents, which are stated to be fairly voluminous in nature. Therefore, no undue hardship or delay is likely to be caused if any other auditor is appointed by the respondent No.1/SEBI to audit the accounts of the respondent No.2/company, for the audit assignment. The newly appointed auditor shall pick up threads from the point at which it was left by GTB and complete the audit assignment, in accordance with the terms of the reference. The writ petition is allowed. There shall however, be no order as to costs.


The Court held the order in favour of the court and accordingly allowed the petition

Read the full order from below


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