Supreme Court clarifies the role of Company Secretary in Buyback Compliance: SEBI vs. V Shankar (2023)

Date of the Judgment: 8 February 2023

Citation: Civil Appeal No 527 of 2023

Judges: Dr Dhananjaya Y Chandrachud, CJI, Pamidighantam Sri Narasimha, J, J B Pardiwala, J.

Can a Company Secretary be held liable for a company’s failure to comply with buyback regulations, even if the Board of Directors has approved the relevant documents? The Supreme Court of India recently addressed this question in a case concerning the Securities and Exchange Board of India (SEBI) and a former Company Secretary of Deccan Chronicle Holdings Limited (DCHL). The core issue was whether the Company Secretary’s role is limited to authenticating documents or extends to ensuring the veracity of the buyback offer and compliance with regulations. The Supreme Court bench, comprising Chief Justice Dr. Dhananjaya Y Chandrachud, Justice Pamidighantam Sri Narasimha, and Justice J B Pardiwala, delivered the judgment.

Case Background

The case revolves around a buyback offer made by Deccan Chronicle Holdings Limited (DCHL) during the financial year 2010-11. V Shankar, the respondent, served as the Company Secretary of DCHL for two years, from 2009 to 2011. In 2017, SEBI issued a show cause notice to DCHL, its Chairperson, Vice-chairperson, and the respondent, alleging violations of regulatory provisions in connection with the buyback. The Whole Time Member (WTM) of SEBI found that the company had made a buyback offer worth Rupees 270 crores without adequate free reserves, thereby misleading investors. The WTM held the respondent liable, stating that as a ‘statutory official’, he should have verified the buyback offer documents and ensured legal compliance before signing the public announcement. The WTM imposed a penalty of Rs Ten lakhs on the respondent for violating Sections 68 and 77A of the Companies Act 1956, and 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.

Timeline:

Course of Proceedings

The Whole Time Member (WTM) of SEBI held the respondent liable for the company’s conduct in connection with the buyback of its equity shares without adequate free reserves. The WTM found that the respondent, as a Company Secretary, should have exercised due diligence and checked the veracity of the buyback offer documents and legal compliance before authenticating them. The Securities Appellate Tribunal set aside the WTM’s order, stating that once the Board of Directors approved the offer and balance sheet, the Company Secretary’s duty was only to authenticate the contents. The Tribunal concluded that the respondent was not required to inquire into the veracity of the buyback offer documents. SEBI then appealed to the Supreme Court.

Legal Framework

The case involves several key legal provisions:

• Section 68 of the Companies Act 1956: This section deals with the power of a company to purchase its own securities.
• Section 77A of the Companies Act 1956: This section lays down various requirements for a company to purchase its own securities.
• Section 215 of the Companies Act 1956: This section stipulates that the balance sheet and profit and loss account must be approved by the Board of Directors before they are signed on behalf of the Board and submitted to the auditors.
• Sections 12A (a), (b) and (c) of the SEBI Act: These sections pertain to the prohibition of fraudulent and unfair trade practices in the securities market.
• 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: These regulations prohibit fraudulent and unfair trade practices in the securities market.
• Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998: This regulation states: “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.”

Arguments

Arguments by SEBI (Appellant):

• The interpretation of Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998 by the Tribunal is erroneous.
• Section 77A of the Companies Act 1956, which deals with the power of a company to purchase its own securities, lays down various requirements.
• Section 215 of the Companies Act 1956 requires the Board of Directors to approve the balance sheet and profit and loss account before they are signed and submitted to auditors.
• The duty of authentication cannot be confined to merely signing the relevant statutory documents.
• The respondent, as a Company Secretary, failed to certify statutory compliances, which was his duty.
• The Tribunal was not justified in absolving the respondent on the ground that it was for the Board of Directors to ensure compliance.
• The observation that the role of the Company Secretary is only confined to redressing the grievances of investors is contrary to Regulation 19(3).

Arguments by V Shankar (Respondent):

• The primary finding is regarding the failure of the Board of Directors to ensure statutory compliance.
• The respondent was acting as a Company Secretary and cannot be held liable for the default on the part of the Board of Directors.
• The accounts of the company were found to be erroneous, and the default lies with the Board of Directors, not the Company Secretary.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issue revolved around the interpretation of Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998 and the extent of a Company Secretary’s responsibility in ensuring compliance with buyback regulations.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The following authorities were considered by the Court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on the plain language of Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998 to conclude that the compliance officer’s role includes ensuring compliance with buyback regulations and not just redressing investor grievances.
• The Court noted the prior decisions of the Tribunal in Mr Bhuwaneshwar Mishra Vs SEBI and Brooks Laboratories Limited & Ors Vs SEBI, but did not make a conclusive finding on them, keeping the rights and contentions of the parties open to be urged before the Tribunal on remand.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the plain language of Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998. The Court emphasized that the role of a compliance officer, which the Company Secretary also held, is not limited to redressing investor grievances but also includes ensuring compliance with buyback regulations. The Court found that the Tribunal had erred in interpreting the regulation by focusing only on the grievance redressal aspect and ignoring the compliance aspect. The Court also highlighted that the Company Secretary, being a statutory official, has a responsibility to exercise due diligence and verify the veracity of documents before authentication.

Fact:Law Ratio:

The Court considered the Tribunal’s view that the Company Secretary’s role was limited to authenticating documents and redressing investor grievances. However, the Court rejected this interpretation, emphasizing that the Company Secretary, as a compliance officer, also has a responsibility to ensure compliance with the buyback regulations. The Court’s reasoning was based on the plain language of Regulation 19(3), which clearly states that the compliance officer is responsible for both compliance and grievance redressal. The Court also highlighted the Company Secretary’s position as a statutory officer, implying a higher level of responsibility.

The Supreme Court quoted Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998: “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.”

The Supreme Court emphasized the dual role of the compliance officer by stating: “The purpose of the nomination is twofold, namely (i) to ensure compliance with the buyback Regulations; and (ii) to redress the grievances of investors.”

The Supreme Court also noted the error in the Tribunal’s interpretation by stating: “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.”

There was no minority opinion in this case. The bench was unanimous in its decision.

Key Takeaways

• A Company Secretary, acting as a compliance officer, has a dual responsibility: to ensure compliance with buyback regulations and to redress investor grievances.
• The role of a Company Secretary is not limited to merely authenticating documents; it extends to ensuring the veracity of the documents and compliance with the law.
• The Board of Directors’ responsibility for compliance does not absolve the Company Secretary of their duty to ensure compliance.
• The Securities Appellate Tribunal’s interpretation of Regulation 19(3) was found to be erroneous.
• This judgment clarifies the extent of a Company Secretary’s responsibility in the context of buyback regulations, potentially leading to stricter enforcement of compliance requirements.

Directions

The Supreme Court set aside the order of the Securities Appellate Tribunal and remitted the proceedings back to the Tribunal for fresh consideration in light of the interpretation of Regulation 19(3) provided by the Supreme Court. The Tribunal was directed to decide the case within six months from the date a certified copy of the order is placed on its record.

Development of Law

The ratio decidendi of this case is that a Company Secretary, acting as a compliance officer, has a dual responsibility: to ensure compliance with buyback regulations and to redress investor grievances. This judgment clarifies the scope of the Company Secretary’s role, emphasizing that it is not limited to merely authenticating documents. This is a change from the Tribunal’s view that the Company Secretary’s role was limited to authenticating documents.

Conclusion

The Supreme Court’s decision in SEBI vs. V Shankar clarifies the critical role of a Company Secretary in ensuring compliance with buyback regulations. The Court emphasized that the Company Secretary’s responsibility goes beyond mere authentication of documents and includes ensuring the veracity of the buyback offer and compliance with the law. By setting aside the Tribunal’s order and remitting the case back for fresh consideration, the Supreme Court has reinforced the importance of due diligence and compliance by Company Secretaries in the securities market.