In the matter of Fortis Healthcare Limited (“FHL”), SEBI in its ad-interim ex-parte order dated October 17, 2018, prima facie concluded that Malvinder Mohan Singh and Shivinder Mohan Singh and eight of their related companies (“Noticees”) had manipulated the books of accounts of the FHL to divert funds amounting to approximately Rs. 403 crore from FHL for the benefit of FHL’s parent and other group companies. In the order, SEBI prima facie alleged that the Noticees have violated Section 12A(a),(b) & (c) of the SEBI Act, 1992 and Regulations 3(b),(c) & (d), and 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”). All the Noticees have been directed to repay Rs. 403 crore along with interest to FHS within a period of three months from the date of the order.
The aforesaid order reflects SEBI’s resolve to take strict action against the offenders of financial misrepresentation and fraud. Financial fraud entails fudging of books of accounts of a company with the intent to report misleading financial positions of the company. In the past, SEBI has taken cognizance of cases involving financial frauds. For instance, in the matter of United Spirits Limited (“USL”), SEBI in its order dated January 25, 2017, had prima facie concluded that there was diversion of funds from USL to group companies of United Breweries Ltd. In the said matter, SEBI had prima facie alleged that the noticees had undertaken fraudulent and unfair activities prohibited under the SEBI Act, 1992, and the PFUTP Regulations. It is pertinent to note that the report of the Fair Market Conduct Committee (“Report”) has also deliberated upon the issue of financial statement frauds and highlighted the broad powers of SEBI to address such matters. The Report recommends the insertion of specific provisions in the SEBI Act, 1992 and the PFUTP Regulations to provide further clarity on SEBI’s existing powers to take steps for manipulation of financial statements and/ or diversion of funds.
The impact of SEBI’s enforcement actions in matters involving financial frauds has already been felt in the market. For instance, SEBI in thematter of Satyam Computer Services Limited, had passed an order in January 10, 2018, prohibiting eleven accountancy firms associated with PricewaterhouseCoopers from issuing a certificate of audit for 2 years to listed companies in India for violating the PFUTP Regulations. Pursuant to the order, several auditors of listed companies resigned as they did want to risk being associated with companies potentially engaged in manipulation of books of accounts.
The interim order passed by SEBI is a move in the right direction as it will discourage manipulation/misrepresentation of the books of accounts of listed companies, which are relied upon by investors to make informed investment decisions.
