SECURITIES AND EXCHANGE BOARD OF INDIA versus V SHANKAR on 8 February 2023

1. Admit.

2. The appeal by the Securities and Exchange Board of India[1]under Section 15Z of the Securities and Exchange Board of India Act1992[2] arises from a judgment dated 1 November 2022 of the SecuritiesFAppellate Tribunal[3].

3. The Tribunal, while allowing the appeal by the respondent, setaside an order dated 22 March 2022 of the Whole Time Member[4] underSection 15HA of the SEBI Act by which a penalty of Rs Ten lakhs wasimposed on the respondent for violating of Sections 68 and 77A of theGCompanies 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 (Prohibition ofFraudulent and Unfair Trade Practices relating to the Securities Market)

1 “SEBI”

2 “SEBI Act”

3 “Tribunal”H4 “WTM”

Regulations 2003[5] read with Sections 12A (a), (b) and (c) of the SEBIAct.

4. The respondent was a Company Secretary of Deccan ChronicleHoldings Limited[6] for two years, 2009-10 and 2010-11.

5. On 3 August 2017, a notice to show cause was issued by theWTM of SEBI to DCHL, its Chairperson, Vice-chairperson and therespondent to show cause as to why an enquiry should not be held againstthem, followed by the imposition of a penalty. The respondent participatedin the enquiry. The WTM proceeded to hold the respondent liable on theground that he was a Company Secretary during the Financial Year2010-11 when a buyback offer worth Rupees 270 crores was made bythe company in violation of regulatory provisions.

6. The WTM found that the respondent had ascribed his signatureson the public announcement for buyback in his capacity as a CompanySecretary. The finding against the respondent was that as a ‘statutoryofficial’ of the company, he should have exercised due diligence andchecked the veracity of the buyback offer documents and legal compliancebefore authenticating them and signing the public announcement whichwas found to have violated the provisions of the Companies Act 1956.The WTM held the respondent liable for the conduct of the company inconnection with the buyback of its equity shares without adequate freereserves which was found to have misled the investors/shareholders.The respondent was held liable for violating the provisions of Sections68 and 77A of the Companies Act 1956 and of the provisions of thePFUTP Regulations together with cognate provisions of the SEBI Act.

7. In appeal, the order of the WTM has been set aside by theTribunal on 1 November 2022. The findings which have been arrived atby the Tribunal are encapsulated in paragraphs 14 and 15 of the impugnedorder. The Tribunal has, during the course of its decision held that oncethe offer and the balance sheet were approved by the Board of Directors,the duty of the Company Secretary was “only to authenticate the contentsindicated in the balance sheet and in the offer document”. In other words,according to the Tribunal, the respondent was not required to enquireinto the veracity of the buyback offer documents. In coming to theconclusion that the obligation to comply was essentially placed on the 5 “PFUTP Regulations”

6 “DCHL”

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ABoard 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 andinvestors service centre for compliance with the buy-backBregulations and to redress the grievances of the investors.”8. The manner in which the Tribunal has construed the aboveregulation is indicated in paragraph 18 of the impugned order which readsas follows :

“18. The aforesaid provision indicates that the company willCnominate a Compliance Officer to redress the grievances of theinvestors. The appellant being a Company Secretary was also aCompliance Officer and thus the role of the Compliance Officerwas only limited to redress the grievance to the investors.”

9. Mr Arvind Datar, senior counsel appearing on behalf of theDappellant urges that :

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

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

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

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

(v) There was a patent failure on the part of the respondent sinceGas a Company Secretary, it was his duty to duly certifystatutory compliances;

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

(vii) The observation in paragraph 18 of the impugned order tothe effect that the role of the Company Secretary is onlyconfined to redressing the grievance of investors is plainlycontrary to Regulation 19(3).

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

(i) The primary finding that has been arrived at is in regard tothe failure of the Board of Directors to ensure statutorycompliance;

(ii) The respondent was acting as a Company Secretary andcannot be held liable for the default on the part of the Boardof Directors;

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

11. Regulation 19(3) of the SEBI (Buyback of Securities)Regulations 1998 requires the company to nominate a compliance officerand 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 thepart of the Tribunal in interpreting the Regulations. The Tribunal heldthat 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 ofRegulation 19(3) which deals with redressal of the grievances ofinvestors. The crucial point which has been missed by the Tribunal isthat the compliance officer is also required to ensure compliance withthe buyback regulations. Regulation 19(3) of the Regulations expresslyso stipulates. Since the interpretation which has been placed by theTribunal on the interpretation of 19(3) is contrary to the plain terms ofRegulation 19(3), we set aside the impugned decision and remit theproceedings back to the Tribunal for consideration of the facts afresh inthe light of the interpretation which has been placed above on theprovisions of Regulation 19(3).

12. Mr Arvind Datar, senior counsel, has placed reliance on theprior decisions of the Tribunal in Mr Bhuwaneshwar Mishra Vs SEBI(decided on 31 July 2014 in Appeal No 7 of 2014) and Brooks A

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ALaboratories Limited & Ors Vs SEBI (decided on 21 March 2018 inAppeal No 266 of 2016). Mr Somasekhar Sundaresan, counsel appearingon behalf of the respondent has urged that these decisions aredistinguishable. Since we are remitting the proceedings back for a freshconsideration, we keep the rights and contentions of the parties includingon the prior decisions which have been relied upon in the present appealBopen to be urged before the Tribunal on remand.

13. For the above reasons, the appeal is allowed and the impugnedorder of the Tribunal dated 1 November 2022 is set aside. Appeal No283 of 2022 shall stand restored to the file of the Tribunal for a decisionafresh.

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14. The Tribunal shall endeavour to decide the case within aperiod of six months from the date on which a certified copy of thisorder is placed on its record.

15. Pending applications, if any, stand disposed of.

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Divya Pandey

Appeal allowed.

(Assisted by : Roopanshi Virang, LCRA)

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