Facts of the Case

A complaint was filed by Shri G. D. Chandrasekhar, Deputy General Manager, State Bank of India, Hyderabad, against CA K. Ranganathan, Partner of M/s P. Srinivasan & Co., Secunderabad. The complaint related to credit facilities sanctioned by SBI to M/s Sreevasa Spinners Limited (SSL) for establishment of a spinning mill.

During the relevant period, SBI disbursed term loan amounts directly to M/s Seven Hills Colonizers Limited (SHCL) towards civil works of SSL. SHCL was owned and controlled by the Respondent and his family members, who collectively held the entire shareholding of SHCL. The Respondent was the statutory auditor of SSL for Financial Years 2012–13 and 2013–14 and was also a director and shareholder in SHCL at relevant times.

It was alleged that substantial amounts disbursed by the bank were routed through SHCL and immediately remitted back to SSL, and that equity shares of SSL were allotted to SHCL without adequate financial capacity. The Respondent signed audit reports and certificates submitted to the bank while being in a position to exercise significant influence over both entities.

Issues Involved

Whether the Respondent, while acting as statutory auditor of SSL, failed to maintain independence and objectivity due to family-controlled shareholding in SHCL, whether he exercised significant influence over related party transactions involving bank funds, and whether such conduct amounted to “Other Misconduct” under Item (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949.

Petitioner’s Arguments

The complainant bank contended that the Respondent was instrumental in diversion of bank funds by routing loan proceeds through SHCL, a family-controlled entity, and that such transactions violated sanctioned terms. It was argued that the Respondent, being both auditor of SSL and a person in control of SHCL, was under an irreconcilable conflict of interest and failed to act independently.

The complainant relied upon bank statements, audited financial statements, ROC records and movement of funds to demonstrate that SHCL did not have the financial strength to invest in SSL and that the transactions lacked commercial substance.

Respondent’s Arguments

The Respondent denied the allegations and contended that there was no diversion of funds, as amounts advanced to SHCL were returned to SSL. He submitted that SHCL did not hold equity shares in SSL during the relevant period and that discrepancies in records were due to clerical errors. The Respondent also argued that the bank had not raised objections during the tenure of the loan and that no loss was caused to SBI. He further cited his age and health conditions and sought leniency.

Court / Authority Order and Findings

The Board of Discipline examined bank statements, ROC filings, audited financial statements, shareholding patterns and the Respondent’s submissions. The Board noted that as per statutory records, SHCL held 45.5% and 10.27% shareholding in SSL during Financial Years 2012–13 and 2013–14 respectively, and that the entire shareholding of SHCL was held by the Respondent and his immediate family members.

The Board observed that the Respondent, while acting as statutory auditor of SSL, was in a position to exercise significant influence over SHCL and the transactions between SSL and SHCL. The Board further noted a clear pattern of funds being disbursed to SHCL and immediately remitted back to SSL, indicating diversion of funds contrary to sanctioned terms.

The Board held that the Respondent failed to produce satisfactory documentary evidence to disprove diversion and chose to give evasive explanations despite being best placed to clarify the transactions. Acting as auditor in such circumstances was held to be a serious breach of independence, integrity and professional ethics. The Board concluded that the Respondent used his professional position to provide undue benefit to related entities.

Important Clarification

The Board clarified that a Chartered Accountant must not audit an entity where he or his immediate family members exercise significant influence or control over related parties involved in substantial transactions. Conflict of interest and failure to maintain independence, especially in bank-funded projects, constitutes grave professional misconduct.

Final Outcome

The ICAI Board of Discipline held CA K. Ranganathan (M. No. 010842) guilty of “Other Misconduct” under Item (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949 read with Section 22. In exercise of powers under Section 21A(3) of the Act, by order dated 22 May 2023, the Board directed removal of the name of the Respondent from the Register of Members for a period of fifteen (15) days.

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