[The Viewpoint] Securities Law Update | Liability of a Company Secretary for Wrong Disclosure in a Listed Company

The article analyses and gives observations on V Shankar v. SEBI which recently came before the Securities Appellate Tribunal.
Bhushan Shah and Aditya Sarangarajan
Bhushan Shah and Aditya Sarangarajan

Personal liability of a Company Secretary upon non-compliance of obligations towards the listed Company has come under question before the Securities Appellate Tribunal (SAT) in the case of V Shankar v. SEBI wherein it has been observed that the Company Secretary (i.e. Appellant) has no obligation to look into the veracity of the details mentioned in the financial statements and disclosures of the listed company. The judgement can make serious ripples in the securities market and has once again brought forth the debate on the scope and extent of a Company Secretary’s liabilities.

This article endeavours to analyse V Shankar's judgement and the consequences arising from this same. However, before we analyse the same, let us evaluate relevant judgements of SAT with regard to Company Secretaries in the last decade:

  • G Jayaram v SEBI - Guilty (2013): In this judgement of SAT, it was held that a Company Secretary of Satyam Computer Services Limited is liable for not performing his obligations as a Compliance Officer under the Model Code of Conduct under the SEBI (Prohibition of Insider Trading) Regulations, 1992 for not closing the trading window when in possession of unpublished price sensitive information. SAT further clarified that a Compliance Officer would be liable for a penalty if he fails to close the trading window when in possession of unpublished price-sensitive information, even if no employee has traded in shares of that company when in possession of unpublished price-sensitive information. Thus, a stern approach towards the liabilities of a Company Secretary was taken by the SAT in 2013.

  • Pooja Mahna v SEBI - Not Guilty (2016): In the said case, SAT overturned the decision of the AO whereby the Company Secretary was held to be not liable as the offences pertaining to a Board meeting conducted after she had tendered her resignation and was under her notice period. SAT, in this case, found that there existed sufficient evidence to show that the Compliance Officer was not involved in the Board Meeting and thus, the imposition of penalty for non-compliance did not arise. Thus, SAT has emphasised the need to show a nexus between the offence committed and the responsibility of the officer who sought to be penalised.

  • Manoj Agarwal v SEBI - Not Guilty (2017): In stark contrast to G Jayaram Case, SAT, in this case, found the Company Secretary of Bharatiya Real Estate Development Limited (BREDL) was not liable for the alleged violations committed under Section 73(2) of the Companies Act, 1956 (1956 Act). In the said case, the SAT held that there was nothing on record to suggest that the Company Secretary was authorised to comply with the obligations relating to the deemed public issue and hence, the argument that the Company Secretary of BREDL ought to have been made liable cannot be accepted. This necessitates a higher threshold to hold the Company Secretary liable, by requiring some sort of nexus to be present between the offence and the offender.

  • Brooks Laboratories Limited & Ors (BLL) v SEBI - Guilty (2018): In this case, the question before the SAT was whether the Adjudicating Officer of SEBI (AO) was justified in imposing an individual penalty on the Company Secretary of BLL for failing to disclose material information and making false/misleading statements in the Prospectus. Interestingly, SAT found the Company Secretary to be liable for the violations of provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market) Regulations, 2003 and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. SAT, while passing the order, equated the responsibilities of the KMPs and Company Secretary on the same footing under the aforementioned provisions. In this judgement, SAT held a higher level of responsibility to be vested on the Company Secretary.

Analyses of V Shankar v SEBI

In this case, the question before the SAT was whether the AO was right in holding the Company Secretary of Deccan Chronicle Holdings Limited (DCHL) liable for being:

(a) signatory to the annual reports of the Company wherein the outstanding loans, interest and finance charges were understated; and

(b) further for being a signatory to the public announcement made by the company for buyback of its equity shares without having adequate free reserves thereby misleading investors/shareholders and violating the Companies Act?

  • SAT interpreted Section 215 of the 1956 Act to indicate a fiduciary relationship 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 statement are approved by the Board of Directors, then the ministerial task falls upon the company secretary and two of the directors to sign the balance sheet.

  • SAT further stated that “the Company Secretary, is only there 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 the such document.” Such a duty was held as not to be a part of the responsibility of the Company Secretary.

Our Observations

  • It is interesting to observe that this judgement does not engage in any jurisprudential analysis of the roles, responsibilities and liabilities of the Company Secretary.  Further, under 1956 Act or under the Companies Act, 2013 (2013 Act), a Company Secretary is considered as principal officer and the Principal has to be accountable as a signatory to annual reports or other documents; 

  • Section 205 (1)(b) of 2013 Act mandates the Company Secretary to ensure that the company complies with applicable secretarial standards. This includes Indian Accounting Standards 107  dealing with “Financial Instruments: Disclosures”, wherein the appropriate standards for disclosure of financial statements of the company have been prescribed. Such a duty of the Company Secretary is to be carried out in his individual capacity and not on behalf of the Board of Directors. Further, by virtue of Section 2(51) of 2013 Act, a Company Secretary is designated as a KMP thereby making him liable akin to that of the Director/ CEO / CFO of the Company.

  • Accordingly, we believe that the decision in V Shankar case may have future implications. 

Bhushan Shah is a Partner & Aditya Sarangarajan is an Associate at Mansukhlal Hiralal & Company.

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