Mumbai: The Securities and Exchange Board of India (Sebi) on Monday directed Embassy Office Parks Management Services Pvt Ltd (EOPMSPL), the manager of Embassy Office Parks Real Estate Investment Trust (Embassy Reit), to suspend its CEO, Aravind Maiya.
This decision follows an August order from the National Financial Reporting Authority (NFRA) that imposed a ten-year debarment on Maiya from audit activities due to serious lapses in his professional conduct. NFRA initiated a suo motu examination into the professional misconduct of statutory auditors of Coffee Day Enterprises Ltd (CDEL) after Sebi’s order of January 2023 penalizing the parent company of Café Coffee Day for alleged fund diversion.
Sebi’s Whole Time Member (WTM) Ashwani Bhatia observed in the order that the regulator was duty-bound to ensure that the management of a registered intermediary is not dependent on an individual who has been found guilty of professional misconduct. “The management of a registered intermediary is not dependent on an individual who has been hauled up for professional misconduct which contributed to concealment of a very large securities market fraud of a listed company under his watch,” the order reads.
Audit failures
The NFRA’s order of 19 August cited grave audit failures during Maiya’s tenure as the engagement partner of a statutory audit for a listed company, which ultimately failed to identify a substantial fraud. Following this order, Sebi initiated a review to assess whether Maiya met the “fit and proper person” criteria as outlined in the Sebi (Intermediaries) Regulations, 2008.
The crux of the issue hinged on whether the NFRA’s punitive action against Maiya disqualifies him under the Sebi regulations. Sebi has made it clear that violations of audit norms, especially those affecting securities laws, are critical in determining an individual’s fitness to hold key positions within financial institutions.
The regulator was prompted by the NFRA’s findings, which raised substantial concerns about Maiya’s integrity and competency. It emphasized that the responsibility of ensuring that a CEO is deemed fit and proper rests with EOPMSPL.
Fit and proper
Given the magnitude of the misconduct, Sebi deemed it necessary to enforce the fit and proper criteria stringently, especially in managing large pools of investor funds, such as those held by Embassy Reit, which is approximately ₹400 billion.
“It is evident that Maiya’s serious professional misconduct during the audit of a listed public company, as held by the NFRA, displays a complete failure to act in public interest. Therefore, he cannot be reasonably considered competent to supervise Embassy Reit as CEO of its Manager, which requires prudent discharge of fiduciary duties, protection of unitholders’ interest, compliance with valuation and audit requirements and disclosure of material facts. The risk arising out of the NFRA order needs to be mitigated and not remain in the system, to instill confidence in the ecosystem,” the regulator noted.
Sebi underscored that no entity declared unfit by the NFRA can claim immunity from scrutiny. Allowing Maiya to continue in his role, despite the serious nature of the NFRA’s findings, could pose significant risks to investors and compromise the integrity of the Reit.
Sebi directed EOPMSPL to suspend Maiya and appoint an interim CEO immediately in compliance with the fit and proper person criteria. The order is effective until further notice or until the NFRA ruling is stayed or overturned.
Bhatia emphasized that EOPMSPL’s continued non-compliance regarding Maiya’s status reflects a deliberate retention of a potential risk factor within the Reit ecosystem. “In the face of persistent non-compliance by EOPMSPL 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, I am of the view that Sebi is required to intervene urgently in the interest of investors and issue interim directions to stop the ongoing non-compliance by EOPMSPL,” the WTM said.
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