SUPREME COURT HELD COMPANY SECRETARY LIABLE TO ENSURE COMPLIANCE OF THE BUYBACK REGULATIONS UNDER REGULATION 19(3) OF THE SEBI (BUYBACK OF SECURITIES) REGULATIONS 1998

Supreme Court Civil Appeal No 527 of 2023 Securities and Exchange Board of India Versus V. Shankar filed by the Securities and Exchange Board of India under Section 15Z of the Securities and Exchange Board of India Act 1992 arises from a judgment dated 1 November 2022 of the Securities Appellate Tribunal.

The Securities Appellate Tribunal, while allowing the appeal by the respondent, set aside an order dated 22 March 2022 of the Whole Time Member 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 (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations 2003 read with Sections 12A (a), (b) and (c) of the SEBI Act.

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

On 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 Financial Year 2010-11 when a buyback offer worth Rupees 270 crores was made by the company in violation of regulatory provisions.

The 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/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.

In appeal, the order of the WTM has been set aside by the 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 coming to the conclusion that the obligation to comply was essentially placed on the 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."

Supreme Court took note of the manner in which the Tribunal construed the above regulation  indicated in paragraph 18 of the impugned order which reads as follows:

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

And Supreme Court set aside the impugned decision of SAT and remited the proceedings back to the Tribunal for consideration of the facts afresh and held that Regulation 19(3) of the SEBI (Buyback of Securities) 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 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.