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Synopsis

A full bench of the Supreme Court comprising Chief Justice DY Chandrachud, Justice Pamidighantam Sri Narasimha, and Justice JB Pardiwala has recently set aside an order of the Securities Appellate Tribunal while observing that a compliance officer has to ensure compliance as well as address investor grievance under the Buyback Regulation of SEBI.

The bench was hearing an appeal filed by the Securities and Exchange Board of India (SEBI) against the order of the tribunal setting aside the order of the Whole Time Member of SEBI.

The Whole Time Member (WTM) of SEBI had imposed a penalty of Rs. 10 Lakhs on a former Company Secretary of Deccan Chronicle Holding Limited for violating the provision of the Companies Act 2013, SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations 2003, and SEBI Act 1992.

The WTM of SEBI had issued a show cause notice to the Chairperson, Vice-chairperson, and Company Secretary for violation of regulatory provisions in the year 2010-2011 for buyback worth Rs. 270 crores.

The WTM found held the Company Secretary liable to for contravention of the provision with respect to the buyback of the equity shares without adequate free reserves which had misled the investors. The WTM member in its order said 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.

The former Company Secretary of the company filed an appeal before the tribunal. The Securities Appellate Tribunal set aside the order of the WTM and relied on Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998. The tribunal said that once the offer and balance sheet were approved by the Board of Directors, the company secretary was only required to authenticate the contents of the balance sheet and offer document. The tribunal said that as per the provisions the company was required to nominate a Compliance Officer to redress the grievances of the investors and the role of the Compliance Officer was only limited to redress the grievance to the investors

Regulation n 19(3) of the SEBI (Buyback of Securities) Regulations 1998 reads,

“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.”

Senior Advocate Arvind Datar on behalf of SEBI argued that the interpretation of the regulation was erroneous and that authentication cannot merely be confined to certifying statutory compliance. He submitted that tribunal was not justified in absolving the CS on the ground that it was for the Board of Directors to ensure compliance.

Advocate Somasekhar Sundaresan, appearing on behalf of the Company Secretary argued that Company Secretary cannot be held liable for the default on the part of the Board of Directors. He submitted that the finding that the accounts were erroneous makes the Board liable and the Company Secretary.

The Three Judge Bench said that the purpose of Regulation 19(3) is twofold:

(i) to ensure compliance with the buyback Regulations; and

(ii) to redress the grievances of investors.

The bench while setting aside the order and remitting back the proceedings to the tribunal said that there was a patent error on part of the tribunal. The Supreme Court said that the compliance officer is also required to ensure compliance with buyback regulations.

“The crucial point which has been missed by the Tribunal is that the compliance officer is also required to ensure compliance with the buyback regulations. Regulation 19(3) of the Regulations expressly so stipulates. Since the interpretation which has been placed 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 above on the provisions of Regulation 19(3)”

Case Title: SEBI vs V Shankar

Statue:  Companies Act 2013, SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations 2003, and SEBI Act 1992.