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): [1]- 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): - [2] 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.
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