Securities and Exchange Board of India v. V Shankar

SECURITIES AND EXCHANGE BOARD OF INDIA v. V SHANKAR (Civil Appeal No. 527 of 2023) FEBRUARY 08, 2023 [DR. DHANANJAYA Y CHANDRACHUD, CJI, PAMIDIGHANTAM SRI NARASIMHA AND J B PARDIWALA, JJ.] SEBI (Buyback of Securities) Regulations, 1998 – Regulation 19(3) – Interpretation of – Notice to show cause was iss ued by the Whole Time Member (WTM) of SEBI to Deccan Chronicle Holdin gs Limited (DCHL), its Chairperson, Vice-chairperson a nd Company Secretary-respondent herein – A penalty of Rs.10 lakhs was imposed on the respondent – Respondent was held liable on the ground that he was the Company Secretary when a buyback offer worth Rs.2 70 crores was made by the company in violation of regulatory provisions – Order set aside by the Securities Appellate Tribunal – On a ppeal, held: Regulation 19(3) requires the company to nomi nate a compliance officer and an investors’ service centre – The purpose of the nomination is twofold-to ensure compliance with the b uyback Regulations; and to redress the grievances of investors – The re is a patent error on the part of the Tribunal in interpr eting the Regulations – The Tribunal held that the role of th e respondent, who was a Company Secretary, compliance officer, was limited to redressing the grievances of investors – In arriving at the finding, the Tribunal relied upon the latter part of Regulation 19(3) which deals with redressal of the grievances of investors – However, the Tribunal missed the crucial point that the compliance officer is also required to ensure compliance with the buyback regu lations, as expressly stipulated in Regulation 19(3) – Interpre tation of Regulation 19(3) by the Tribunal is contrary to its plain terms – Impugned order set aside – Proceedings remitted back to the Tribunal for fresh consideration in the light of the interpretation as aforesaid– Securities and Exchange Board of India Act 1992 – s.12A(a), ( b) &

(c), s.15HA – Companies Act 1956 – ss.68, 77A – Secu rities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations 2003 – Regulations 3(a)-(d), 4(1), 4(2)(f), (k) and (r). Mr Bhuwaneshwar Mishra v. SEBI (decision of Securities Appellate Tribunal dtd. 31 st July 2014 in Appeal No 7 of 2014) ; Brooks Laboratories Limited & Ors v. SEBI(decision of Securities Appellate Tribunal dtd. 21 March 2018 in Appeal No 266 of 2016) – referred to. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 527 of 2023. From the Judgment and Order dated 01.11.2022 of the Securities Appellate Tribunal, Mumbai in Appeal No. 283 of 2022. Arvind P. Datar, Sr. Adv., Pratap Venugopal, Ms. Surekha Raman, Akhil Abraham Roy, Abhishek Anand, Ms. Unnimaya S., M/s. K J John and Co., Advs. for the Appellant. Somasekhar Sundaresan, Lakshmeesh S. Kamath, Ms. Samriti Ahuja, Advs. for the Respondent. The Judgment of the Court was delivered by DR. DHANANJAYA Y CHANDRACHUD, CJI

¶1Admit.

¶2The appeal by the Securities and Exchange Board of India 1 under Section 15Z of the Securities and Exchange Board of India A ct 19922 arises from a judgment dated 1 November 2022 of the Securities Appellate Tribunal3.

¶3The Tribunal, while allowing the appeal by the respondent, set aside an order dated 22 March 2022 of the Whole Time Member4 under Section 15HA of the SEBI Act by which a penalty of Rs Ten lakhs was imposed on the respondent for violating of Sections 68 and 77A of the Companies Act 1956 and Regulations 3(a), (b), (c), (d), 4(1), 4(2)(f), (k) and (r) of the Securities and Exchange Board of India (Prohibi tion of Fraudulent and Unfair Trade Practices relating to the Securities Market) 1 “SEBI” 2 “SEBI Act” 3 “Tribunal” 4 “WTM” Regulations 20035 read with Sections 12A (a), (b) and (c) of the SEBI Act.

¶4The respondent was a Company Secretary of Deccan Chronicle Holdings Limited6 for two years, 2009-10 and 2010-11.

¶5On 3 August 2017, a notice to show cause was issued by the WTM of SEBI to DCHL, its Chairperson, Vice-chairperson and the respondent to show cause as to why an enquiry should not be held against them, followed by the imposition of a penalty. The respondent participated in the enquiry. The WTM proceeded to hold the respondent liable on the ground that he was a Company Secretary during the Financi al Year 2010-11 when a buyback offer worth Rupees 270 crores was made by the company in violation of regulatory provisions.

¶6The WTM found that the respondent had ascribed his signatures on the public announcement for buyback in his capacity as a Company Secretary. The finding against the respondent was that as a ‘statutory official’ of the company, he should have exercised due diligence and checked the veracity of the buyback offer documents and legal compliance before authenticating them and signing the public announcement which was found to have violated the provisions of the Companies Act 1956. The WTM held the respondent liable for the conduct of the company in connection with the buyback of its equity shares without adequate free reserves which was found to have misled the investors/shareho lders. The respondent was held liable for violating the provisions of Sections 68 and 77A of the Companies Act 1956 and of the provisions of the PFUTP Regulations together with cognate provisions of the SEBI Act.

¶7In appeal, the order of the WTM has been set aside by t he Tribunal on 1 November 2022. The findings which have been arrived at by the Tribunal are encapsulated in paragraphs 14 and 15 of the impugned order. The Tribunal has, during the course of its decision held that once the offer and the balance sheet were approved by the Board of Directors, the duty of the Company Secretary was “only to authenticate the contents indicated in the balance sheet and in the offer document”. In other words, according to the Tribunal, the respondent was not required to enquire into the veracity of the buyback offer documents. In comin g to the conclusion that the obligation to comply was essentially plac ed on the 5 “PFUTP Regulations” 6 “DCHL” SECURITIES AND EXCHANGE BOARD OF INDIA v. V SHANKAR [DR. DHANANJAYA Y CHANDRACHUD, CJI] Board of Directors and not on the respondent as Company Secretary , the Tribunal has relied on the provisions of Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998 which is in the following terms: “19(3) The company shall nominate a compliance officer and investors service centre for compliance with the buy -back regulations and to redress the grievances of the investors.”

¶8The manner in which the Tribunal has construed the above regulation is indicated in paragraph 18 of the impugned order which reads as follows : “18. The aforesaid provision indicates that the company w ill nominate a Compliance Officer to redress the grievances of the investors. The appellant being a Company Secretary was al so a Compliance Officer and thus the role of the Compliance Officer was only limited to redress the grievance to the investors.”

¶9Mr Arvind Datar, senior counsel appearing on behalf of the appellant urges that :

(i) Ex facie , the interpretation which has been placed on Regulation 19(3) is erroneous;

(ii) Section 77A of the Companies Act 1956 which deals with the power of the company to purchase its own securities lays down various requirements;

(iii) In terms of Section 215 of the Companies Act 1956, the balance sheet and profit and loss account have to be approved by the Board of Directors before they are signed on behalf of the Board and before they are submitted to the auditors for their report;

(iv) The duty of authentication cannot be confined to merely a signature on the relevant statutory documents;

(v) There was a patent failure on the part of the respondent since as a Company Secretary, it was his duty to duly cert ify statutory compliances;

(vi) The Tribunal was not justified in absolving him on the ground that it was for the Board of Directors to ensure compliance; and

(vii) The observation in paragraph 18 of the impugned order t o the effect that the role of the Company Secretary is only confined to redressing the grievance of investors is plainl y contrary to Regulation 19(3).

¶10On the other hand, Mr. Somasekhar Sundaresan, counsel appearing on behalf of the respondent submitted that :

(i) The primary finding that has been arrived at is in r egard to the failure of the Board of Directors to ensure statutor y compliance;

(ii) The respondent was acting as a Company Secretary and cannot be held liable for the default on the part of the Board of Directors;

(iii) Moreover, the finding is that the accounts of the companies were found to be erroneous and the default lies with the Board of Directors and not with the Company Secretary.

¶11Regulation 19(3) of the SEBI (Buyback of Securi ties) Regulations 1998 requires the company to nominate a compliance officer and an investors’ service centre. The purpose of the nomination is twofold, namely (i) to ensure compliance with the buyback Regulations; and (ii) to redress the grievances of investors. There is a patent error on the part of the Tribunal in interpreting the Regulations. The Trib unal held that the role of the respondent, who was a Company Secretary, compliance officer, was limited to redressing the grievances of investors. In arriving at the finding, the Tribunal has relied upon the latter part of Regulation 19(3) which deals with redressal of the grievances of investors. The crucial point which has been missed by the Tri bunal is that the compliance officer is also required to ensure comp liance with the buyback regulations. Regulation 19(3) of the Regulations expressly so stipulates. Since the interpretation which has been pla ced by the Tribunal on the interpretation of 19(3) is contrary to the plain terms of Regulation 19(3), we set aside the impugned decision and remit the proceedings back to the Tribunal for consideration of the facts afresh in the light of the interpretation which has been placed ab ove on the provisions of Regulation 19(3).

¶12Mr Arvind Datar, senior counsel, has placed reliance on the prior decisions of the Tribunal in Mr Bhuwaneshwar Mishra Vs SEBI (decided on 31 July 2014 in Appeal No 7 of 2014) an d Brooks SECURITIES AND EXCHANGE BOARD OF INDIA v. V SHANKAR [DR. DHANANJAYA Y CHANDRACHUD, CJI] Laboratories Limited & Ors Vs SEBI (decided on 21 March 2018 in Appeal No 266 of 2016). Mr Somasekhar Sundaresan, counsel appearing on behalf of the respondent has urged that these de cisions are distinguishable. Since we are remitting the proceedings back for a fresh consideration, we keep the rights and contentions of the parties including on the prior decisions which have been relied upon in the present appeal open to be urged before the Tribunal on remand.

¶13For the above reasons, the appeal is allowed and the impugned order of the Tribunal dated 1 November 2022 is set aside. Ap peal No 283 of 2022 shall stand restored to the file of the Tribunal for a decision afresh.

¶14The Tribunal shall endeavour to decide the case withi n a period of six months from the date on which a certified co py of this order is placed on its record.

¶15Pending applications, if any, stand disposed of. Divya Pandey Appeal allowed. (Assisted by : Roopanshi Virang, LCRA)