LIABILITY OF COMPANY SECRETARY FOR VIOLATION OF PROVISIONS OF BUY BACK OF SHARES

[Mr. M. GOVINDARAJAN]

Buy back Regulation

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-

• to ensure compliance with the buyback Regulations; and
• to redress the grievances of investors.

Issue

The issue to be discussed in this article is as to whether the Company Secretary of a Company which goes in for buy back of its share for violation of the provisions of buy back regulations, SEBI Act and other regulations with deciding case law.

Investigation

SEBI conducted an investigation on Deccan Chronicle Holdings Limited (‘DCHL’ for short) for the violations of the company in various aspects under the Companies Act, 1956 and regulations made by SEBI against the Board of Directors of DCHL and officers, Company Secretary. DCHL announced a buyback of shares on 06.05.2011 to the tune of Rs.270 crores from the open market at a price not exceeding Rs.180/- per share. But the maximum limit available for buyback of its shares was only Rs.116.02 crore after adjusting for understatement of interest/finance cost. The allegation in the show cause notice is that without having adequate free reserves DCHL carried out buyback of its shares which misled the uninformed investors / shareholders about the perceived valuation / strong financials / adequate free reserves of the company which actually was not true and might have influenced / induced the decision of investors / shareholders, particularly when the price of the share was declining since May 2010. The DCHL has carried out the buyback of shares beyond the prescribed limit and also did not make any disclosure about change in its shareholding consequent to the buyback.

Allegation against Company Secretary

Shri V. Shankar was appointed as the Company Secretary of the DCHL on 21.04.2009 and resigned from the services of the Company vide resignation letter dated May 1, 2012. He had stopped attending the office and discharging his official duties at DCHL from June 1, 2012. The Company has filed Form No. 32 showing relieving of Company Secretary on August 31, 2012.

Reply to the show cause notice by the Company Secretary

The Company Secretary replied to the show cause notice. In this reply he stated that-

• He was not invited to the meetings of the board of directors of the Company. The promoters/directors used to meet prior to the scheduled time on the board meeting date (for approval of results, etc.) and would direct him to send the financial results to the stock exchanges. He is not aware as to what transpired in those meetings. Based on the requirement for loan/borrowings any resolutions to be passed were discussed in the meeting.
• With regard to non-disclosure of encumbrance/pledge of shares it has been stated that neither he was involved in the transactions nor he had knowledge of the same. Further, the responsibility to make disclosure under regulation 31(1) read with regulation 31(3) of the Takeover Regulations, 2011 is solely on the promoters.
• With regard to alleged mis-statement in books of accounts, it has been stated that at no point of time he was entrusted with any duties or responsibilities relating to the accounting or finance function of the Company by the management and as such he had no knowledge of the loan, bank correspondences, pledge etc.
• The presumption as to correctness of the Audited Financial statement is established immediately upon signing of the same by the Statutory Auditors and if any understatement of outstanding loans is noticed upon investigation then a person who is merely a company secretary may not be held liable as he was not involved in preparation and finalization of annual accounts. He had signed the financial statements of the Company under the provision of section 215 of the Companies Act, 1956 with a view only to authenticate that the documents were approved by the board of the Company.
• He had ascribed his signature on the public announcement for buyback in his capacity as a Company Secretary. It was only in relation to the compliances of procedural formalities for the buy-back of shares and not in respect of financial statements and information contained therein.
• The alleged non-compliances with certain clauses of the Listing Agreement by DCHL have taken place after he had resigned from the Company as Company Secretary. Therefore, he may not be held responsible for the same.

Order of AO

The AO analyzed the provisions of section 215 of the Companies Act, 1956. The AO observed that section 215 of the Companies Act, 1956, which deals with ‘authentication of accounts’ should be treated as a preamble to the other provisions spelt out in the Act following the said title on the subject of authentication of accounts. The AO relied on the circular No. 7/72, dated 12.05.1972. In this circular the Department clarified that the authentication by the Secretary is ‘on behalf of the board of directors’ and not in his personal capacity, secretary can be held responsible regarding errors, as an ‘officer’ of the company within the meaning of section 628 of the Companies Act, 1956 and not because of authentication by him under section 215 as such.

The AO observed that the Company Secretary has attested the Balance Sheet and Profit and Loss accounts of DCHL for two of the three financial years in which the accounts have been allegedly fraudulently understated. He cannot plead innocence by stating that he has merely fulfilled a statutory duty by signing the audited accounts which were prepared by the auditors and approved by the board of directors of the Company. The job of a Company Secretary to the board of directors is to aid and advice and assists the board in ensuring that the accounts contained all the true information before the same were approved. Further, he was not merely supposed to attest the accounts but was required to authenticate the Balance Sheet and Profit and Loss account of the Company, which cannot be undermined as a mere routine attestation job but has to be taken up as a serious responsible job of declaring the authenticity of the contents of the accounts and all the information contained therein.

The AO held that Sri V. Shankar has failed to act diligently and responsibly while acting as the company secretary of DCHL at a time when the Company and its directors understated outstanding loans and interest and finance charges in the annual reports for FYs 2008-09, 2009-10 and 2010-11 and thereby overstated the profits of the Company for all the three successive financial years.

The AO in his order directed that Shri V. Shankar, Company Secretary shall not directly or indirectly provide company secretarial services for a period of one year to any listed company or offer services pertaining to compliance of obligations of listed companies and intermediaries registered with SEBI in terms of the requirements under the SEBI Act, 1992, the Securities and Contracts Regulation Act, 1956, the Depositories Act, 1996, those provisions of the Companies Act, 2013 which are administered by SEBI under section 24 thereof and the Rules, Regulations and Guidelines made under those Acts which are administered by SEBI. A penalty of Rs.10 lakhs was imposed.

Appeal before SAT

Being aggrieved against the order of AO, the Company Secretary filed an appeal before the Securities Appellate Tribunal (‘SAT’ for short). The SAT analyzed the provisions of Section 68 and 77A of the Companies Act, 1956. SAT observed that Section 68 provides that where any person knowingly or recklessly makes a statement which is false, deceptive or misleading he would be punishable with imprisonment for a term which may extend to five years or with fine or both. Section 77A provides that a company may purchase its own shares provided the buyback is authorized by its articles and that a special resolution is passed in a general meeting of the company authorizing the buyback.

Clause 6 provides, that where the company has passed a special resolution or where the Board has passed a resolution to buy back its shares it shall, before making such buyback, file it with the Registrar and SEBI a declaration of solvency in the forms as may be prescribed and verified by an affidavit. Clause 11 provides that if a company makes default in complying with the provision of Section 77 or any rules made under the company or any officer of the company who is in default shall be punishable with imprisonment or fine or both.

The SAT also analyzed the provisions of section 215 of the Companies Act, 1956. It observed that section 215 clearly indicates that there is a fiduciary responsibility upon the Board of Directors of the Company to verify the contents of the balance sheet before approving it. Once the balance sheet and the profit and loss is approved by the Board of Directors then the ministerial task falls upon the secretary and two of the directors to sign the balance sheet under Clause (1) of section 215.

The SAT observed that Once the offer document and the balance sheet is approved by the Board of Directors the Company Secretary, as part of his duty and responsibility, is only to authenticate the contents indicated in the balance sheet or in the offer document and is not required to go into the veracity of the buyback offer document and its legal compliances before authenticating such document. Such duty is not part of the responsibility of the appellant as a Company Secretary. The appellant as a Company Secretary had no role to play except comply with the resolution made by the Board of Directors. The appellant was nowhere responsible for the false or misleading open offer made by the company and therefore cannot be made guilty of Section 68 of the Companies Act.

The SAT held that merely because the appellant as a Company Secretary is also an officer in default under Section 5 of the Companies Act does not automatically make him an officer in default for noncompliance of the provisions of Section 77A of the Companies Act.

Then the SAT analyzed the Regulation 19(3) of SEBI (Buy Back of Securities) Regulations, 1998. The SAT observed that according to the above regulation 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. Therefore SAT allowed the appeal filed by the Company Secretary.

Appeal before Supreme Court

Being aggrieved by the order of SAT, SEBI filed an appeal before the Supreme Court in Civil Appeal No. 527 of 2023, decided on 08.02.2023. The SEBI contended the following before the Supreme Court-

• Ex facie, the interpretation which has been placed on Regulation 19(3) is erroneous;
• The duty of authentication cannot be confined to merely a signature on the relevant statutory documents;
• There was a patent failure on the part of the respondent since as a Company Secretary, it was his duty to duly certify statutory compliances;
• The Tribunal was not justified in absolving him on the ground that it was for the Board of Directors to ensure compliance; and
• The observation in paragraph 18 of the impugned order to the effect that the role of the Company Secretary is only confined to redressing the grievance of investors is plainly contrary to Regulation 19(3).

The Company Secretary contended the following before the Supreme Court-

• The primary finding that has been arrived at is in regard to the failure of the Board of Directors to ensure statutory compliance.
• He was acting as a Company Secretary and cannot be held liable for the default on the part of the Board of Directors.
• 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.

The Supreme Court observed that 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. There is a patent error on the part of the Tribunal in interpreting the 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 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), the Supreme Court 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). The Supreme Court further directed that SAT shall decide the case afresh within six months from the date of receipt of the order.