RBI CAN NOT DISCONTINUE SERVICE OF AUDITOR ON THE COMPLAINT OF BANK WITHOUT FAIR & PROPER ENQUIRY

Gupta & Gupta Chartered Accountants & Anr.  Versus Reserve Bank Of India & Ors. (Delhi HC) -  The Delhi High Court has held as illegal the decision of RBI to discontinue the services of a Statutory Central Auditor (SCA) of Punjab National Bank (PNB) without fair and proper enquiry into the allegations against the firm. The observations came on the plea of accounting firm, Gupta and Gupta Chartered Accountants, alleging arbitrariness on the part of RBI in asking PNB to discontinue it (firm) as an SCA without fair and proper inquiry. RBI, in a letter written on June 24, 2009, permitted PNB to discontinue the firm as an SCA on the allegations of the bankthat it was delaying the audit of accounts. SCAs are appointed by RBI on the recommendations of statutory auditor CAG for a period of four years to audit the accounts of public sector banks.In 2005, five SCAs had been appointed to audit the accounts of PNB. The firm had alleged that it was discontinued as an SCA by PNB apprehending that it can detect some irregularities by the bank in granting loan to somereal estate companies. The firm also contended that it was singled out for being discontinued as SCA and that this amounted to blacklisting of the petitioner firm apart from being mala fide. It also submitted that it was even not served any show cause notice.

Related Paras from the Judgement

23. Where a complaint is made against an SCA by a public sector bank, it would be the duty of the RBI to examine such complaint carefully. In the audit of large public sector banks, there are bound to be queries raised by the SCAs about the accounts of the large account holders of the bank. If there are complaints by the bank, like in the present case, that the audit is getting delayed on account of the bankhaving to answer such queries, the RBI will have to examine the tenability of such claim after seeking an explanation from the SCA. In the present case, the PNB first wrote to the RBI on 24^th April 2009 blaming the Petitioner for the delay in the finalization of the accounts. The Petitioner^’s comments on the said letter were sought by the RBI. The Petitioner then submitted a reply dated 7^th May 2009 explaining that there was no delay on its part. This reply was furnished to the PNB by the RBI for its response. In response thereto, on 27^th May 2009 the PNB made several allegations questioning the Petitioner^’s professional competence and integrity. In other words, the tenor of the allegations by PNB against the Petitioner in the letter dated 27^th May 2009 was not confined to the issue of delay. Specifically, PNB alleged that the intention of the Petitioner was “to malign the reputation and image of the bank”; that the Petitioner was “abrasive ab initio and uncooperative in their approach right from the first audit and are lacking in professionalism.”; that they have been “putting the entire system to undue stress and holding the bank to ransom”; “their objective has been to embarrass the bank and harass its officers. The behaviour and attitude is indicative of cynicism and sadism.” Then came the impugned decision of the  RBI communicated in its letter dated 24^th June 2009 permitting PNB to discontinue the Petitioner as SCA for the limited extended review for the quarter ending 30^th June 2009.

24. It is not as if the letter dated 24^th June 2009 simply states that the Petitioner will be discontinued. It refers to the PNB^’s letter dated 27^th May 2009 and states that the Petitioner could be discontinued as SCA “in view of the circumstances cited in the above letter.” It is therefore not possible to view the said discontinuance as being innocuous and routine and not casting a stigma on the Petitioner. The RBI could not have arrived at the decision without some kind of an inquiry. The RBI was performing an important and sensitive task. Allegations concerning the competence and integrity of an SCA, selected by the RBI through a fairly rigorous process, cannot be permitted to be made lightly and equally accepted on face value without some probe by the RBI. Otherwise it might be easy for a bank to have an inconvenient SCA discontinued. Considering that the accounts of public sector banks are to be audited by employing the best possible standards, the RBI was under a statutory obligation to ensure that the discontinuance of the Petitioner, on a complaint about its professional competence, was preceded by a proper procedure comporting with the principles of natural justice. Admittedly, even a copy of PNB^’s letter dated 27^th May 2009 was not sent to the Petitioner for its comments although it contained serious allegations about the Petitioner^’s conduct and professional competence. Thereby RBI failed to afford the Petitioner an opportunity of defending itself against PNB^’s allegations. Also, neither the RBI nor PNB communicated to the Petitioner the decision to discontinue it as an SCA for the extended review period.

25. The Court holds that the impugned decision of the RBI, as communicated in its letter dated 24^th June 2009 to the PNB, to discontinue the Petitioner as an SCA, even for the limited extended period ending 30^th June 2009, was violative of the principles of natural justice and was, therefore, illegal. However, since the period in question is over no consequential relief can be granted except to clarify that the said decision of the RBI, will not come in the way of the Petitioner being hereafter appointed as an SCA in accordance with the norms devised by the RBI.