S. Sukumar v. Institute of Chartered Accountants of India & Ors. with Centre for Public Interest Litigation v. Union of India & Ors.

By: Kanishka Dasmohapatra


On 23rd February, the Apex Court declared the activities of Multi-National Accounting Firms (hereinafter ‘MAFs’) in India, as ‘illegal and unethical’[1]. The 75-page landmark judgement culminated in directions that the Centre constitute a three-member expert committee, to analyse whether activities of MAFs are in conformity with The Chartered Accountants Act, 1949 (hereinafter ‘CA Act’)[2] and Code of Professional Conduct under the Chartered Accountants Act, 1949 (hereinafter ‘Code of Conduct’)[3]. This comment examines the backdrop of the said ruling, and the implications it may have on firms in India.


  1. Sukumar v. Secretary, ICAI & Ors., Special Leave Petition (appeal from Karnataka HC)
  • The writ petition filed under Article 226 of the Constitution sought directions for exercise of power under Section 21 to initiate an investigation against MAFs for breach of the CA Act and Code of Conduct.
  • The “Big 4” – PwC, Deloitte, EY, KPMG– were added as Respondents.
  • HC disposed of the petition citing para 4 of Institute of Chartered Accountants of India (hereinafter ‘ICAI’)’s status report which stated that the “institute has already taken necessary initiatives pursuant to the recommendations contained in the Report on Operation of MAFs in India”.
  • An appeal was admitted to the Supreme Court by way of Special Leave Petition.
  1. Writ Petition filed by Centre for Public Interest Litigation (NGO)

Since the issues raised in both writ petitions were identical, they were clubbed to clarify “whether MAFs are operating in India in violation of law…and no effective steps are being taken to enforce the said law”.[4]


The petition levelled accusations against leading MNC auditor Price WaterhouseCoopers Pvt. Ltd. (hereinafter ‘PwC’) and its allied network of auditing firms. The global conglomerate has previously been fined $2 billion and banned from auditing listed companies, for its failure to detect the 2009 Satyam fraud.[5]


The current petition alleged malpractice on part of both ICAI and PwC by way of:

  1. Infusing foreign money in violation of FDI Norms
  2. Engaging in illegal accounting insurance policies
  3. Acquiring another auditing firm ‘irregularly’


Summary of the Petitioner’s Case

  1. The MAFs violated Sections 25 and 29 of the CA Act, the Code of Conduct laid down by the ICAI, the Companies Act, the FDI Policy as per the ICAI Study Group Report (15/09/03) and the ICAI Expert Group Report (29/07/11).
  2. PwC, Netherlands (hereinafter ‘PwC Netherlands’) made an investment of Rs. 41.42 crores through PwC, Kolkata to acquire Dalal & Shah, Mumbai, an audit firm, by giving interest-free loans to its partners. This violated the Benami Transactions Prohibition Act, Foreign Exchange Management Act (hereinafter ‘FEMA’), the CA Act and RBI Master Circulars.
  3. PwC Netherlands remitted Rs. 240 crores to various PwC entities in India for ‘enhancement of skills’ in 2010-11, as confirmed by PwC India Chairman. This is evidence of foreign company control over Indian Firms. PwC is thus indirectly running chartered accountancy business in India and getting its return on the said amount.
  4. Both, the Serious Fraud Investigation Office and Central Bureau of Investigation have found PwC guilty. However, PwC firms have not been prosecuted, but rather have been awarded subsequent Government contracts.

ICAI’s Response

  • The function of the institute was to regulate the profession of chartered accountancy and take action against the misconduct of its members under the 2007 CA Rules, in which accounting professionals had a significant role.
  • In response to the grievance that no action was taken against PwC or other MAFs in India, ICAI submitted that its Disciplinary Directorate had already taken cognizance of the information to vide a news article.[6] Letters requesting explanation were written to large PwC firms (New Delhi, Chennai, Bangalore, Kolkata) on 9th March 2012. A letter was also written to the RBI. Three firms stated that the news item did not contain specific references and no clarification was necessary. The only referenced firm, PwC Kolkata, said it received a grant of Rs.28.97 crores for maintaining quality standards from PwC Netherlands in 2011 as an outright, non-refundable grant – as was reflected in “Sundry Income” of their Annual Accounts.
  • The Disciplinary Directorate even sent a reminder to the RBI and sent a letter to the Commissioner of Income Tax, Kolkata and the Joint Secretary (Revenue), Ministry of Finance.

Other Petitioners’ Response

  • Deloitte stated that Indian network firms pay global network charges to their parent organization towards sharing common global costs of human resources and other infrastructure, technology cost labelling this “standard practice across jurisdictions”. They further said that MAFs are not multinational entities, as there is no foreign control through ownership or management. Network partners are run, controlled and managed by Indian nationals.
  • PwC Netherlands works on no profit no loss basis. Network charges are paid by all member entities including the Indian member entities. The network felt the need of enhancing the standards and capacity of Indian network entities for which non-refundable grants were provided. The grants are not in the nature of the investment. These are current account transactions and not capital account transactions.
  • Further, since all the partners are Indians and are registered with ICAI, they are personally accountable to the ICAI for any professional misconduct. PwC Netherlands does not have any stake in the partnership or profits of the firms. Thereby asserting no violation of Section 25 of the CA Act.
  • The RBI’s position was that it only issues circulars and frames Regulations under the FEMA but does not conduct any investigation for compliance thereof.


  1. The Code of Conduct prohibits fee sharing and advertisements. However, MAFs are using international brands to mix other services with services provided exclusively as part of the practice of chartered accountancy. While there are Indian firms using similar brand names registered with the ICAI, the real entities are MAFs. This violates the said Code of Conduct for which there is no regulatory regime as the MAFs do not register themselves with ICAI.
  2. In addressing the need to amend existing laws, the Court recommended the pattern of two American legislation, namely, The Sarbanes–Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This was to separate regulatory regime for auditing services on the rendering of a foreign public accounting firm preparing audit reports and requires corporate leaders to personally certify the accuracy of their company’s financials. This is to ensure more transparency and accountability of financial institutions to decrease the risk of investing needs consideration. Specifically, the 2002 Act lays down rules for the functioning of audit companies with a view to preventing the corporate analysts from benefitting at the cost of public interest. Further, the 2010 Act sets up an oversight body with varied responsibilities.
  3. In dealing with FDI Policy and the RBI Guidelines, it was clear that they prohibited the investment by a person outside India to make an investment by way of contribution to the capital of a firm or a proprietary concern without permission of the RBI. It is an undisputed fact that there are remittances from outside India. The same could be termed as investments but the partners claim they are interest-free loans. The amount could also be for taking over an Indian chartered accountancy firm. It is not possible to rule out the violation of FDI policies, FEMA Regulations and the CA Act. Thus, appropriate action may be taken in pending proceedings or initiated at the appropriate forum
  4. The Court did not rule on Section 25 of the CA Act, noting that the ICAI has not completed its enquiry into whether the chartered accountancy firms, by receiving remittances from outside India or remitting licence fee/network charges outside India, have allowed participation of a company or a foreign entity in the accountancy business.
  5. It directed the ICAI to constitute an expert panel to update its enquiry. Though the Committee found that MAFs were involved in violating ethics and law, it took the hyper-technical view that non-availability of complete information and the groups as such were not amenable to its disciplinary jurisdiction in absence of registration. The Court resoundingly responded, “a premier professionals body cannot limit its oversight functions on technicalities and is expected to play a proactive role for upholding ethics and values of the profession by going into all connected and incidental issues.”
  6. The Court applied the principle of lifting the corporate veil calling out an attempt to circumvent the law and calling the partnership firms a mere farce to defy the law. The Court referred to the Expert Committee report in finding that MAFs comply only in form and not in substance. By having registered partnership firms with the Indian partners, the real beneficiaries of transacting the business of chartered accountancy remain the companies of the foreign entities. It went on to requisition a separate oversight body for auditing work and updating existing legal framework appears to be necessary.
  7. Finally, the Court dealt with investment in CA firms, in violation of FDI policy, by using a circuitous route of “interest-free loans to partners”. The fact that the income tax authorities have taken the grants received as revenue receipts and taxed the same as such is not conclusive to hold that the receipt is not an investment which is impermissible. If the investment is impermissible, the law cannot be defeated by terming such investment “a grant for quality control”, especially when the grant has been used to acquire a chartered accountancy firm.


  1. Union of India to constitute a 3 member expert committee to regulate MAF action
  • Highlighted the need for a new legislation (based on Sarbanes Oxley, 2002 and Dodd Frank Wall Street Reform, 2010) and to take steps for effective enforcement of the provisions of the FDI policy and FEMA regulations.
  • May identify remedial measures, to be considered by appropriate authorities, and call for suggestions from all concerned.
  • Committee to be constituted within 2 months, and the report to be submitted within 3 months thereafter.

2. Enforcement Directorate to complete the investigation within 3 months

3. ICAI may further examine all related issues at the appropriate level as far as                       possible within 3 months and take further steps as may be necessary.


The judgement of the apex-court strikes a discordant note with the erstwhile smooth functioning of MAFs in India. The effect of the present judgement will be a complete halt on the transfer of funds by subsidiary companies amongst themselves, under the aegis of the parent company. To the untrained eye, the judgement is seemingly lenient as it results in a mere investigation, with the Court highlighting the dearth of concrete evidence. That is, while it is clear that there are fund remittances (violation of RBI/FEMA guidelines) from a foreign entity, it cannot be ascertained whether such funds were investments or loans. However, the Court unequivocally stated that compliance must be in substance, and it would accordingly disallow foreign accountancy firms from ‘operating as Indian accountancy firms’. It mandated RBI approval for all related fund-transfers, thereby inducing statutory liability. This resounding judgement amounts to the Supreme Court putting its foot down with MAFs attempting to ‘pull a fast one’. Lastly, this cements PwC, and its allied network of accounting firms, as harbingers of controversy – remaining pathologically shrouded in allegations of malpractice and corruption.

[1] S Sukumar v Institute of Chartered Accountant of India & Ors (Civil Appeal No 2422 of 2018) [47].

[2] The Chartered Accountants Act 1949.

[3] Code of Professional Conduct under the Chartered Accountants Act 1949.

[4] Sukumar (n 1) [2].

[5] Corinne Abrams, ‘India Bans PricewaterhouseCoopers from Auditing Listed Firms for Two Years’ The Wall Street Journal (New York, 11 January 2018).

[6] Pankaj Dovall, ‘Sundry Income Cushions PwC India’ The Times of India (17 January 2012).

(Kanishka is currently a student at National Law Institute University, Bhopal.)

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