The Institute of Chartered Accountants of India (ICAI) is likely to decide soon on the complaints against scam-hit National Spot Exchange (NSEL)’s auditor, Mukesh P Shah & Co.

Earlier this month, the institute told the high court here that its disciplinary committee was looking into the complaints and would take a decision in “four weeks”.

Disposing of a petition by Delhi-based IGL Finance, a bench of Chief Justice G Rohini and Rajiv Sahai Endlaw noted, in an order dated May 5, that institute counsel J S Bakshi had stated, “the allegations made by the petitioner have already been investigated into, along with the first complaint, and the matter is now pending before the Director (Discipline) in terms of Section 21(2) of the Chartered Accountants Act, 1949, for forming a prima facie opinion on the occurrence of the alleged misconduct…counsel also assures that necessary further proceedings will be taken in accordance with law”.

Issue

The assurance by ICAI and the deadline have raised the hopes of several thousand victims of the Rs 5,600-crore NSEL payment crisis, on for about 20 months. The first complaints against the auditor firm, run by Mukesh P Shah, a maternal uncle of Jignesh Shah, the founder of NSEL and its parent, Financial Technologies (FTIL), were made as early as August 2013.

However, there was little response from the institute’s side, according to the investors.

Following this, IGL Finance, a Delhi-based company which had investments in NSEL, moved the Delhi HC.

In its complaint to the disciplinary committee on September 5, 2013, IGL Finance had alleged several irregularities in the audit process of NSEL. It quoted from the auditor report that from “the audit procedures performed for the purpose of reporting the true and fair view of the financial statements and according to the information and explanations given to us by the management, we report no fraud on or by the company has been noticed or reported during the course of our audit”. However, noted the complaint, NSEL had defaulted in payment to its investors, the goods supposedly held in its inventory to back the trades in question were not physically available “and it has resulted in fraud done by the company and gross negligence on the part of the auditor”.

Near-silence

In an email response to this newspaper, Mukesh Shah said, “We have given our detailed response to ICAI” and in line with the Chartered Accountants Act, 1949, “We are not in a position to share any information about the client and, hence, either you may seek information from the client directly or from ICAI.”

An FTIL spokesperson said in an email response, "The matter is pertaining to ICAI and Mr Mukesh P Shah. Hence, we would not like to offer any comment.” An email sent to ICAI on Monday did not elicit a response.

Background

The role of auditors in the payment crisis, which blew up after the discovery that there were not enough goods at NSEL godowns across the country to back the contracts traded on its platform, has come under the scanner of various agencies. A high-level government team under the then economic affairs secretary, Arvind Mayaram, set up by the finance minister in August 2013 to probe the NSEL crisis, had reported “possible violations” by entities like “auditors in due-diligence”.

The panel, which gave its recommendations on September 20, 2013, said action needed to be initiated over “failure to furnish a true and fair view of the state of affairs at NSEL in its balance sheet for the financial year ended March 2013”.

A day after this report was given, on September 21, 2013, Mukesh P Shah & Co informed the company that the accounts of FY13 could not be relied on. When Deloitte, Haskins & Sells, the auditor of NSEL’s parent, FTIL, came to know about this, it informed FTIL that accounts of the parent, too, could not be relied on. On September 24, a day before the scheduled annual general meeting, FTIL informed the exchanges of these developments. It then had to withdraw certain resolutions, related to the approval of accounts and reappointment of Deloitte as auditor, from the AGM.

In December that year, the Forward Markets Commission, which declared Jignesh Shah and FTIL unfit to run any exchange in the wake of these developments, also found lapses by the auditor. “Curiously, in the balance sheet of NSEL for 2012-13, Shah has not been shown to be one of the key management personnel. Such an exclusion of his name from the list of key personnel coincides with the exit of former statutory auditor S V Ghatalia & Co and induction of Mukesh Shah, who happens to be the maternal uncle of Jignesh Shah, as the statutory auditor for FY 2012-13. The appointment as statutory auditor of NSEL was inappropriate and questionable in the prevailing circumstances,” the Commission declared. Despite all these developments, several reminders and substantial lapse of time, ICAI was not concluding the proceedings, the victims of the crisis had represented before the court.

NAVIGATING THE LONG ROAD TO JUSTICE
Jul 2013: NSEL payment crisis breaks out

Aug-Sept 2013: Complaints, including one by IGL Finance, filed with ICAI against Mukesh P Shah & Co, auditor of NSEL

Oct 3, 2013: ICAI’s disciplinary committee writes to Mukesh P Shah, seeking his response to complaints

Feb 6, 2014: IGL Finance submits forensic audit report of E-Series to ICAI’s disciplinary committee

Apr-Nov, 2014: Various updates and reminders from complainants to ICAI

Nov 2014: ICAI writes to IGL Finance that complaint under process at ‘prima facie stage’

Nov-Dec 2014: Further updates sent by complainants to ICAI

Dec 22, 2014: IGLF files an RTI application seeking detailed progress report and expected timelines for decisions

Jan 22, 2015: ICAI responds saying no fixed timeline for such probes

Apr 1, 2015: Petitioner submits copies of written objections filed by ACP & Chief IO, SIT, EOW, CB CID/ Mumbai against anticipatory bail application of Mukesh P Shah

Apr–May, 2015: As further reminders turned futile, IGLF moves Delhi high court; ICAI gives assurance of decision in four weeks