Securities
and Exchange Board of India (SEBI)
is a regulatory body established under the Securities and Exchange Board of India Act, 1992 (“the Act”). That one of the main
functions of SEBI is to regulate the securities and commodities market which is
also mentioned in the Preamble of SEBI and is reproduced hereinbelow:
"...to protect the interests
of investors in securities and to promote the development of, and to regulate
the securities market and for matters connected therewith or incidental
thereto.”
To carry out the said function SEBI
has issued various regulations such as prohibition of fraudulent and unfair trade
practices, issue and listing of securitized debt instruments and security
receipts, prohibiting insider trading, issue of capital and disclosure
requirements, etc. for the purpose of closely monitoring the companies
and the way they handle and use these securities. The Act and the related
regulations provide for the directors’ liability (whether managing/ nominee/ independent director) in cases generally where fund was
illegally mobilized, secretly or illegally inside crucial information of a
company was revealed to any outsider or where public announcement of new issue
of listed securities was not made.
Important provisions pertaining
to directors’ liability.
·
Section 27 of the SEBI Act provides where an offence has
been committed then person in-charge of the said activity or having specific
individual involvement will be held liable unless the person proves otherwise
that he was not involved in such act and that he had no knowledge or had not
consented to the act and should not be held liable. This person can be any
officer, director, manager or secretary and their involvement shall be treated
and punished in the same exact manner.
·
Regulation 25 of SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 provides for the duties of
independent directors as they review the performances of the remaining board
and shall only be held liable in cases when the independent director had the knowledge,
and the act was performed with his consent/lack of diligence/connivance and not
otherwise.
·
Regulation 26 of SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 prohibits any director or
officer or shareholder to enter into any contract by himself or on behalf of
another person related to securities of listed entity without prior approval.
·
Regulation 3 of SEBI (Prohibition
of Insider Trading) Regulations, 2015
prohibits revealing of any unpublished price sensitive information regarding
the securities to anyone including other insiders as well until and unless it
is for legal obligations. The person doing so even if a shareholder or a
director shall be held liable for contravention. Setting a code of conduct for
fair disclosure as per Regulation 8 and formulating and getting approved the
trading plan along with making the unpublished price sensitive information
generally available to public also set upon the liability of persons disobeying
the provisions.
·
SEBI (Issue and Listing of Debt
Securities) Regulations, 2008
provides for a stronger and closely monitored debt securities market where in
order for the issuer (company, public sector undertaking or statutory
corporation) to issue debt securities to the public at large (public issue), it
has to issue an offer letter (prospectus or shelf-prospectus) whereby
subscription to debt securities are invited from the public. The issuer can
never be a defaulter or a person “debarred
by the SEBI” be it any officer, promoter, shareholder or a director.
·
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices
Relating to Securities Market), Regulations, 2003
prohibits any kind of act which is fraudulent or deceptive and which induces
any person generally a potential investor to deal or apply with the securities
of that company whether directly or indirectly. Misleading prospectus or
announcements for the same are also covered under this Regulation. The
directors and officers must not fail from the duties assigned to them and they
are collectively held responsible/liable so far, their involvement in the said
act is concerned.
The
board of directors needs to exercise more control and monitoring wherein funds
are being raised by the public so that unfair practices and trading is not
followed. It is not just the managing or executive director who is responsible
to look after the affairs of the company but also the entire the board of
directors as the board represents the interest of the company, shareholders and
promoters which make them the trustees and in-charge of the company. Any
disobedience of the duties shall attract liability which is although limited
but can land them in prison if committed under the personal capacity such as
fraud or willful misrepresentation.
Relevant
Judgments
Following
case laws have discussed a director’s liability under the SEBI Act and related
regulations.
·
Sayanti Sen v. SEBI (2019): - The
said case dealt with the issue of secured redeemable non-convertible debentures
and whether the company Silicon Projects India Limited “SPIL” made public issue
of securities without complying the provisions of the Companies Act, 1956 and
SEBI Act, 1992. The company made an offer of non-convertible debentures which
was in violation of SEBI Act and Companies Act. The directors of the company
were found to be indulging in fund mobilizing activities and following this
SEBI released its order against the directors of the company regarding their
debarment and refunding the monies to the investor. These directors included
appellant and several other directors. The appellant, however, in the show
cause notice said that she was never made any signatory to the board meetings
and never attended one. The other director was, however, directly responsible
for the said allegations and the whole-time director asked the faulty director
to first pay off the amount found to be illegally raised and afterwards called
appellant and other directors also to do the same. To this appellant used her
defense of non-involvement and succeeded where the court held that a director
can only be made liable when he/she is directly involved and had the knowledge
of the act which appellant did not have and therefore, calling her to pay off
the liability will be violating Section 27 and 11B of the SEBI Act. The section
only involves those who were in-charge of the said act. There is no vicarious
liability automatically on the directors (whether managing/
nominee/ independent director)
when the company is an offender.
Only the directors at default can be called to pay for the alleged amount.
·
Pranab Kumar Roy v. The Securities Exchange
Board of India (2023): - This
case deals with the non-compliance of the regulations mentioned in Companies
Act, 2013 and 1956 and of SEBI Act and SEBI Regulations by company’s directors.
The accused no. 1 is this case is the company which neither filed the
prospectus of public issue of security nor the Draft Red Herring Prospectus. The DRHP is a comprehensive document
companies have to file when they wish to get the shares listed on the stock
exchange via an Initial Public Offering
(IPO). This prospectus generally contains the information about the
business operations of the company, financial statements, and stock holding
information, risks that would potentially arise while investing in the company,
the objectives on which the company operates and so on.
The
accused no. 2-11 are the directors/promoters/manager/key management
personnel/persons in charge of the business of the accused company and are
responsible for the day-to-day affairs of the company. The accused directors
joined the Board after the allotment of the said Non-Convertible Debentures.
The
petitioner in this case did not know anything about the said allotment and did
not even attend the meeting for said allotment. Soon after such an allotment
the directors who were accused resigned and it was revealed that the issue of
securities was not as per the compliances and hence the company was asked to
return the money taken from the investors back to them.
It
was held by the Hon’ble Calcutta High Court that such a director or officer
cannot be made an officer in default when he had no knowledge of the act. Section 27 of SEBI Act and Section 2(60) of the Companies Act, 2013 does not
apply to the Petitioner. As no materials could be placed before this
court that the petitioner was involved in the day to days affairs of the
accused No. 1/Company, the petitioner cannot be held liable.
