Facts of the Case:
The CFO, along with other officials, was accused of misrepresenting the financial statements of Cox and Kings Financial Services Ltd. for certain quarters i.e., September’2018 and December’2018. SEBI, the regulatory body, imposed a penalty of Rs. 5 lakhs on the CFO for violating SEBI rules related to fraudulent practices in the securities market.
The case originated from a complaint about insider trading received in June 2019. SEBI conducted an
investigation and discovered that the company had presented false financial results. The CFO and other
noticees were issued a notice asking them to explain why an inquiry should not be conducted and a penalty imposed? The case revolves around the CFO’s alleged involvement in the misrepresentation of financial accounts for specific quarters.
Observation and Conclusion:
In a significant development, the Securities Appellate Tribunal (SAT) has quashed the Securities and Exchange Board of India’s (SEBI) order imposing a penalty of Rs. 5 lakhs on the Chief Financial Officer (CFO) of Cox and Kings Financial Services Ltd. The penalty was imposed on the CFO, who was a signatory to an Information Memorandum, for misrepresenting the financial statements of the company for the quarters ending September 30, 2018, and December 31, 2018.
SAT remarked that simply being a signatory to the Information Memorandum does not automatically make the CFO responsible for any misrepresentation. It highlighted the fact that the financial statements in question were prepared by another CFO and that the appellant was appointed as CFO only in January 2019, after the period in question. SAT observed that the appellant was not involved in the preparation and misrepresentation of the financials.
SAT further criticized SEBI’s approach in holding the appellant guilty, stating that the responsibility of presenting incorrect financial statements cannot be solely based on the CFO’s signatures. The tribunal relied on its previous decision in G.V. Films, emphasizing that there must be additional evidence to establish liability.
SEBI had released the Executive and Independent Directors of the company, despite them also being signatories to the Information Memorandum. The tribunal found this inconsistent and concluded that the impugned order cannot be sustained against the appellant.
Consequently, the order imposing the penalty on the CFO was quashed by SAT.
| SW Point of View: In this case law tribunal relies on its decision in G.V. Films to remark that “There has to be something more than just his signatures in the absence of any other evidence, the liability cannot be fastened only on this ground.” |
Gaurav Sankhla, Audit Associate, SW India
