Duty of Company Secretary to Ensure Compliance with SEBI Buyback Regulations and Redress Grievances of Investors: Supreme Court

Duty of Company Secretary to Ensure Compliance with SEBI Buyback Regulations and Redress Grievances of Investors: Supreme Court

The Supreme Court while hearing an appeal filed by the market regulator Securities Exchange Board of India (SEBI) challenging an order passed by the Securities Appellate Tribunal (SAT) observed that, a Company Secretary, while acting as a compliance officer in terms with the SEBI (Buyback of Securities) Regulations 1998, must ensure that there is compliance of the company with the regulations relating to buyback of shares.

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

On 3 August 2017, a notice to show cause was issued by the Whole Time Member (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 Rs. 270 crore was made by the company in violation of regulatory provisions.

The SEBI found that the respondent had ascribed his signatures on the public announcement for buyback in his capacity as a Company Secretary. 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, board stated.

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 SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) together with cognate provisions of the SEBI Act.

In appeal, the order of the WTM had been set aside by the SAT on 1 November 2022. The SAT 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".

According to the SAT, the respondent was not required to enquire into the veracity of the buyback offer documents. In concluding that the obligation to comply was essentially placed on the Board of Directors and not on the respondent as Company Secretary, the SAT relied on the provisions of Regulation 19(3) of the SEBI (Buyback of Securities) Regulations 1998.

The three judges' bench of Chief Justice of India DY Chandrachud, Justices PS Narasimha and J B Pardiwala after examining the facts and submissions remarked 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.

The Apex Court opined, "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. Regulation 19(3) of the Regulations 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), we 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 bench noted.

In view of the aforesaid grounds, the Apex Court set aside the SAT's decision and remitted the proceedings back to the Tribunal for consideration of the facts afresh in the light of the Top Court's interpretation of Regulation 19(3).

However, the Top Court kept the rights and contentions of the parties including the prior decisions which have been relied upon in the present appeal open to be urged before the Tribunal on remand for fresh consideration. Matter is to be considered in 6 months.