Market regulator Securities & Exchange Board of India (SEBI) has ordered the suspension with immediate effect of Aravind Maiya, chief executive officer (CEO) of Embassy REIT's (real estate investment trust's) manager Embassy Office Parks Management Services Pvt Ltd, and his appointment as an interim CEO. Mr Maiya was the engagement partner (EP) for the audit of Coffee Day Enterprises Ltd (CDEL).
In an order, Ashwani Bhatia, whole-time member (WTM) of SEBI says, "In the face of persistent non-compliance by Embassy Office Parks Management as the operational arm of a registered intermediary, grave violations of law touching upon the competence and integrity of the CEO of the Manager of Embassy REIT, and considering that the interest of unitholders and investors is at stake due to deliberate retention of a source of weakness in the REIT ecosystem by Embassy Office Parks Management, I am of the view that SEBI is required to intervene urgently in the interest of investors and issue interim directions to stop the on-going non-compliance by Embassy Office Parks Management."
"Embassy Office Parks Management is directed to suspend Aravind Maiya from acting as its CEO and appoint an interim CEO with immediate effect, in compliance with applicable laws including 'fit and proper person' criteria, till further directions, or till the NFRA order dated 19 August 2024 is stayed or set aside, whichever is earlier. Embassy Office Parks Management is directed to ensure compliance with 'fit and proper person' criteria," the SEBI WTM says in the order.
When NFRA issued an order, SEBI communicated with Embassy Office Parks Management, stating that Mr Maiya was ineligible for appointment as CEO of the manager to the Embassy REIT due to disqualification in terms of the fit and proper person criteria. However, Embassy Office Parks Management refused to replace him.
"The complete abdication of responsibility and professional misconduct by the statutory auditors of CDEL, including Mr Maiya who was EP for the audit, frankly begets the question, 'Quis Custodiet Ipsos Custodes?'. As to who will guard the guards themselves, SEBI has a statutory duty to protect the interest of investors in the securities market and promote the development of, and to regulate, the securities market. Section 11 of the SEBI Act has empowered SEBI to take such measures as it thinks fit for achieving its legislative mandate. Further, the issue acquires even more relevance for a sector as nascent in India as the REITs," Mr Bhatia from SEBI says.
In April 2022, SEBI informed NFRA about its investigation into the diversion of funds worth Rs3,535 crore (as of 31 July 2019) from seven subsidiary companies of CDEL to Mysore Amalgamated Coffee Estate Ltd (MACEL), an entity owned and controlled by the promoters of CDEL.
During the relevant period, the late VG Siddhartha (VGS) was the chairman & managing director (CMD) of CDEL and his father, the late SV Gangaiah Hegde, held 91.75% shares of MACEL.
As per the SEBI investigation and NFRA examination, the outstanding balance payable by MACEL to subsidiary companies of CDEL, which represented the funds diverted from the subsidiaries, was Rs2,549 crore as of 31 March 2019.
To hide the diversion of funds, MACEL, in March 2019, issued cheques of Rs1,706.51 crore without adequate balance in its bank account, based on which the subsidiaries reduced the outstanding balance to Rs842.49 crore as of 31 March 2019. CDEL's subsidiaries made mere book entries for these cheques received from MACEL as repayment of loans given but did not encash the cheques before 31 March 2019.
To appreciate the role of the statutory audit firm in the fraudulent diversion of funds by CDEL, SEBI says it is useful to note that CDEL had argued that even its auditors did not note any exception in connection with the identification of material subsidiary by CDEL during the relevant period. CDEL had also argued that its statutory auditors had certified the compliances made by the company with respect to transactions disclosed in its consolidated financial statements.
The SEBI order indicates that the statutory auditor had a role in facilitating the fraud executed by CDEL, which was subsequently examined in detail by NFRA. It says, "Aravind Maiya thoroughly failed the listed company, users of its financial statements, standards of his profession as well as public interest, by failing to audit and report a fraud which was evident in all the financial information he was supposed to vet as EP of the statutory auditor of the company."
"By failing to fulfil the fiduciary duties entrusted to him, he has displayed professional incompetence and lack of integrity. The NFRA examination and directions are limited to the remit of the Companies Act, 2013. However, that does not preclude SEBI from taking into account the seriousness of his violations and their implications for the securities laws and financial markets while determining whether he is a fit and proper person to helm the management of Embassy REIT, a registered intermediary managing Rs40,000 crore of unitholders' money," it added.
During the hearing, Embassy Office Parks Management argued that it obtained legal opinion regarding its obligation to comply with fit and proper person criteria and it is in compliance with all regulatory requirements.
SEBI, however, says it must be noted that NFRA, in its order, has unequivocally stated that Mr Maiya was guilty of professional misconduct due to gross negligence, failure to exercise due diligence and failure to disclose material facts and report material misstatements known to him. "It cannot be the case that an entity declared persona non grata by NFRA is able to claim diplomatic immunity from SEBI. Doing so would erode the credibility of regulation."
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