Company Secretary's Liability : Supreme Court Says Compliance Officer Should Ensure Compliance With SEBI's Buyback Regulations

A Bench of Chief Justice DY Chandrachud, Justices P Narasimha and JB Pardiwala was hearing an appeal plea moved by SEBI challenging an order passed by the Securities Appellate Tribunal.

The respondent was a Company Secretary of Deccan Chronicle Holdings Ltd. for two years, 2009-10 and 2010-11. The SEBI held the respondent liable as he was a Company Secretary during a particular year when a buyback offer worth Rupees 270 crores was made by the company in violation of its regulatory provisions.

The SEBI found that the respondent had ascribed his signatures on the public announcement for buyback in his capacity as a Company Secretary. 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, it opined.

It, therefore, held the respondent liable for the conduct of the company in connection with the buyback of its equity shares without adequate free reserves which had misled the investors/shareholders. 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.

This order was set aside by SAT last year. The Tribunal 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. For this, it relied on Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998.

"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."

When an appeal against this order was moved before the Top Court, it took a closer look at this provision. The Court was of the view that Regulation 19(3) requires the company to nominate a compliance officer and an investors’ service centre. This, the Court said, has two purposes: one, to ensure compliance with the buyback Regulations; and two, to redress the grievances of investors. Therefore, the Tribunal’s interpretation was contrary to the Buyback Regulations, the Supreme Court said.

“There is a patent error on the part of the Tribunal in interpreting the Regulations. The Tribunal 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 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”.

On these grounds, it set aside the SAT’s decision and remitted the proceedings back to the Tribunal for consideration of the facts afresh in the light of the Top Court’s interpretation of Regulation 19(3).

“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. Matter to be considered in 6 months”.

Senior Advocate Aravind Datar appeared for SEBI and Advocate Somasekhar Sundaresan appeared for the respondent.

Case Title: SEBI i vs V Shankar | Civil Appeal No 527 of 2023

Citation : 2023 LiveLaw (SC) 101

For Appellant(s) Mr. Arvind P. Datar, Sr. Adv. Mr. Pratap Venugopal, Adv. Ms. Surekha Raman, Adv. Mr. Akhil Abraham Roy, Adv. Mr. Abhishek Anand, Adv. Ms. Unnimaya S., Adv. M/S. K J John And Co, AOR

For Respondent(s) Mr. Somasekhar Sundaresan, Adv. Mr. Lakshmeesh S. Kamath, AOR Ms. Samriti Ahuja, Adv. 

Headnotes

Summary - Supreme Court sets aside SAT order absolving Company Secretary of liability relating to violations of buyback regulations- says Compliance Officer has to ensure compliance- Asks SAT to reexamine liability.

 SEBI (Buyback of Securities) Regulations 1998- Regulation 19(3)- There is a patent error on the part of the Tribunal in interpreting the Regulations. The Tribunal 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 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 - Para 11