CA banned for one year for connivance in anti-dated stock invests & irregular share allotment

High Court bans CA for one year for connivance in anti-dated stock invests issued by Bank and irregular share allotment on the complaint of SEBI

CA banned for one year held guilty of misconduct 

ABCAUS Case Law Citation:
ABCAUS 2129 (2017) (11) HC

In a recent judgment, the Hon’ble high Court in a case involving allegation of altering the stock invest and antedating has accepted the recommendations of the Council of ICAI that the name of the respondent chartered accountant (CA) be removed from the register of members for a period of one year.

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. In other words, while subscribing to IPO then instead of paying by cheque stock invest issued by bank can be given. In the event of allotment, the amount of the stock invest is debited to the subscriber bank account otherwise, stock invests gets cancelled. Thus the funds are not available to the issuer company till the shares are allotted and the subscriber is precluded from parting with the security given for issue of stock invests.

ICAI had received a letter from the Securities and Exchange Board of India (‘SEBI’) pointing out several irregularities in the public issue of one company (issuer company). As per the letter investigations were conducted into the buying, selling and dealing in shares of the issuer company and the role of one chartered accountant. It was alleged that the CA and chairman of the issuer company connived with each other in arranging finance/security for purposes of obtaining ante-dated stock invests in the name of the subscribers which were used at higher amount for subscribing to the public issue after the close of its Issue and thus facilitated irregular allotments to the detriment of the general investing public. Also, it was alleged that the issue handling procedures were also vitiated in the case.

To be specific, the SEBI had reported that as per investigations, 27 applications to the Public Issue were accompanied by stock invest issued by Bank. The stock invests were got issued by the said CA from the bank on 23.11.95 whereas the issue of BFSL closed on 5.10.95. Though these stock invest were issued by the bank for amounts ranging between Rs.1.00-1.20 lacs each, they were used at a multiple of Rs. 10 in the applications i.e. stock invest actually issued for Rs.27 lacs was used for Rs.270 lacs, resulting in an irregular allotment of 1,17,200 shares. These allotments were made despite the fact that the said CA had intimated the bank for cancellation of the stock invests and withdrawal of the applications. The shares so allotted were subsequently forfeited and re-allotted to associate concerns of the issuer company.

The ICAI Council agreed with the reasoning of the Disciplinary Committee (DC) and accepted the same. The Council of ICAI noted that the CA had admitted that around 80-90 stock invests were issued by Bank after the close of the issue and later on, the stand taken by the CA as to how the Bank had issued ante dated stock invests did not appear convincing at all. The Council further noted that as a financier to the company for its issue and the role played by the CA in facilitating irregular allotments to the detrimental of general public can not be overlooked at all. The ICAI Council held that the respondent was guilty of `other misconduct’ under Sections 22 read with Section 21 of the Chartered Accountants Act, 1949 (Act). The ICAI Council recommended to the High Court that the name of the respondent be removed from the register of members for a period of one year.

The High Court, considering the nature of the allegations against the CA opined that the important questions was as to who paid the money for availing the stock invest and the statement of the respondent CA recorded by the DC threw enormous light on these aspects and virtually affirms and sealed the case.

The High Court noted that as per the statement of the respondent CA recorded by the DC , the he 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. 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.

It was noted that the respondent CA 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.

The specific allegations of SEBI related to the following two broad issues:

(i) Irregular allotment of 1,17,200 shares involving irregular subscription for 27,00,000 shares with an application money of Rs.2.7 crores by way of stock invests issued by Bank.

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

The High Court observed that the CA’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 the Chairman 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 the Chairman of the issuer company, there was 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 High Court further noted that the DC had noted that when the letter of withdrawal was sent to the company, the stock invests were actually returned to the CA instead of the investors and this was a clear evidence of connivance between the respondent with the company by using the names of the applicants.

The High Court opined that the most glaring fact completely belied the CA was that the fixed deposits which were given as security for issuance of the stock invests belonged to the CA. This was 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 constituted `misconduct’.

Regarding ante-dating stock invests, the High Court noted that the CA, in his statement recorded 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 the company chairman and indulging in ante-dating. He also deprived the general investing public from investing in issuer company. The findings of SEBI were not challenged by the respondent.

It was also noted that the entire chain of events as recorded in the DC’s report pointed to chartered accountant being the centre piece or fulcrum of the transactions as under;

(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 the company and its Chairman

(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 CA after letter of withdrawal was sent.

According to the Court, all these point clearly establish the fact that it was none else but the CA 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.

According to the High Court, though it might had been inclined to increase the nature of punishment, but owing to the fact that more than 22 years had passed it directed that the CA shall be debarred for a period of one year as recommended by the DC.

The High Court stressed 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 requesting to absolve him by saying that his acts were just for his survival. The High Court opined that it clearly proved that the CA was well aware of the misconduct in which he had indulged and was praying for sympathy from the ICAI Council.

The High Court accepted the reference in exercise of powers under Section 21(6) of the Act and directed that the CA shall be suspended from the membership of the ICAI for a period of one year. During this period, he would be restrained from rendering any services as a CA as recognized by the Chartered Accountants Act, 1949. Also, the High Court imposed costs of Rs.10,000/- to be paid by the CA to the ICAI.

CA banned for one year held guilty of misconduct

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