‘N.Narayanan vs. Adjudicating Officer, SEBI,’ Civil Appeal Nos. 4112-4113 of 2013
(D.No.201 of 2013) (Decided on 26.04.2013)
The
defence raised by the Appellant was that:
(i)
Though he was the Whole Time Director as well as Promoter of the company, yet
was not involved in the day-to-day management of the company and that he was
looking after the Human Resource Department of the company.
(ii)
The financial statements, accounts etc. were prepared and duly audited by the
statutory auditors, verified by the audit committees and reviewed by the
managing Director,
(iii)
In the company, the role of each Director was confined to his field of
operation and there was no justification for holding a Director to be in over-all
charge and control of the affairs of the company.
(iv)
The auditors were well versed in accounts and finance, therefore, there was no
reason for the Directors who have no expertise or knowledge of the intricacies
of the accounts and finance to suspect them or sit in judgment over their
decisions.
(v)
There was no mens rea on the part of the appellant in intentionally stating any
untrue statement or preparing false records and that he has no role as such in
preparing the accounts and finance of the company.
Hence
he was not personally liable for the violation of the provisions of SEBI Act
and Regulations 2003.
The
Hon’ble Supreme Court examined scope of the various provisions stated to have
been violated by the appellant and its consequences including section 12 A of
SEBI Act, Regulation 3 and 4 of Regulation 2003, Section 209 of Companies Act, 1956
The
Court held that:
“Companies whose securities are traded on a
public market, disclosure of information about the company is crucial for the
accurate pricing of the companies’ securities and also for the efficient
operation of the market.“
“We notice in this case that the Directors of
the company had clearly violated provisions of Section 12A of SEBI Act read
with Regulations 3 and 4 of 2003 Regulations.’ [Para 28]
“We find it difficult to accept the
contention. The appellant, admittedly, was a whole time Director of the
company, as regards the preparation of the annual accounts, the balance-sheet
and financial statement and laying of the same before the company at the Annual
General Meeting and filing the same before the Registrar of the Companies as
well as before SEBI, the Directors of the company have greater responsibility,
especially when the company is a registered company. Directors of the
companies, especially of the listed companies, have access to inside knowledge,
such as, financial position of the company, dividend rates, annual accounts
etc. Directors are expected to exercise the powers for the purposes for which
they are conferred. Sometimes they may misuse their powers for their personal
gain and makes false representations to the public for unlawful gain. [Para
40]
“We have indicated, so far as this case is
concerned, the subsequent conduct of pledging their shares at artificially inflated
prices, based on inflated financial results and raising loan on them would
indicate that they had deliberately and with full knowledge committed the
illegality and hence the principle of “acta exteriora indicant interiora secreta” (meaning external
actions reveals inner secrets) applies with all force, a principle which this
Court applied in Sahara’s case”. [Para 41]
On the fact of the case, the
court observed:
The facts in this case clearly reveal that
the Directors of the company in question had failed in their duty to exercise
due care and diligence and allowed the company to fabricate the figures and
making false disclosures. Facts indicate that they have overlooked the numerous
red flags in the revenues, profits, receivables, deposits etc. which should not
have escaped the attention of a prudent person. [Para 34]
"We have, on facts, clearly found that the
Directors of the company have “created artificiality” by projecting inflated
figures of the company’s revenue, profits, security deposits and receivables
and that the manipulation in the financial results of the company resulted in
price rise of the scrip of the company and the promoters of the company then
pledged their shares to raise substantial funds from financial institutions.
The conduct of the appellant and others was, therefore, fraudulent and the
practices they had adopted, relating to securities, were unfair, which
attracted the penalty provisions contained in Section 15 HA read with 15J of
the SEBI Act. [Para 36
(i) The
obligations of the Directors in listed companies are particularly onerous.
[Para 29]
(ii)
Responsibility is cast on the Directors to prepare the annual records and
reports and those accounts should reflect ‘a true and fair view’. The
over-riding obligation of the Directors is to approve the accounts only if they
are satisfied that they give true and fair view of the profits or loss for the
relevant period and the correct financial position of the company. [Para 32]
(iii)
Directors are expected to exercise their power on behalf of the company with
utmost care, skill and diligence. [Para 33]
(iv)
Directors will be deemed to be not merely cognizant of but liable for fraud in
the conduct of business of the company even though no specific act of
dishonesty is provide against him personally. He cannot shut his eyes to what
must be obvious to everyone who examines the affairs of the company even
superficially. [Quoting Official Liquidator v. P.A. Tendolkar (1973) 1 SCC 602]
[Para 33]
The
Court quoted Sahara India Real Estate Corporation Limited and Others v.
Securities and Exchange Board of India and Another (2013) 1 SCC 1, wherein the
Court has noticed that :
“though the Indian Companies Act, 1956 was modeled on English
Companies Act, 1948, no efforts have been made to incorporate universally
accepted principles and concepts into our company law. Of late, however, some
efforts have been made by carrying out few amendments to the Companies Act,
1956, so also in the SEBI Act, 1992 and Rules and Regulations framed therein to
keep pace with the English Companies Act and related legislations. When we
interpret the provisions of the SEBI Act and the Regulations relating to a
company registered under the Companies Act, the provisions of the Companies Act
have also to be borne in mind. For instance, in SEBI Act, there is no provision
for keeping proper books of accounts by a registered company.
On
object of SEBI, the Court observed:
On
Company’s obligation towards disclosure and transparency, the Court
observed:
“The Companies Act casts an obligation on the
company registered under the Companies Act to keep the Books of accounts to
achieve transparency. Previously, it was thought that the production of the
annual accounts and it preparation is that of the Accounting Professional
engaged by the company where two groups who were vitally interested were the
shareholders and the creditors. But the scenario has drastically changed,
especially with regard to the company whose securities are traded in public market.
Disclosure of information about the company is, therefore, crucial for the
accurate pricing of the company’s securities and for market integrity. Records
maintained by the company should show and explain the company’s transactions,
it should disclose with reasonable accuracy the financial position, at any
time, and to enable the Directors to ensure that the balancesheet and profit
and loss accounts will comply with the statutory expectations that accounts
give a true and fair view. Companies (Amendment) Act, 2000 has added clause (a)(iii)
under which SEBI has also been given the power of inspection of listed
companies or companies intending to get listed through such officers, as may be
authorized by it. [Para 38]
On
SEBI’s duties, the Court observed:
“SEBI, the market regulator, has to deal
sternly with companies and their Directors indulging in manipulative and deceptive
devices, insider trading etc. or else they will be failing in their duty to
promote orderly and healthy growth of the Securities market. Economic offence,
people of this country should know, is a serious crime which, if not properly
dealt with, as it should be, will affect not only country’s economic growth,
but also slow the inflow of foreign investment by genuine investors and also
casts a slur on India’s securities market. Message should go that our country
will not tolerate “market abuse” and that we are governed by the “Rule of Law”.
Fraud, deceit, artificiality, SEBI should ensure, have no place in the
securities market of this country and ‘market security’ is our motto. People
with power and money and in management of the companies, unfortunately often command
more respect in our society than the subscribers and investors in their
companies. Companies are thriving with investors’ contributions but they are a
divided lot. SEBI has, therefore, a duty to protect investors, individual and
collective, against opportunistic behavior of Directors and Insiders of the listed
companies so as to safeguard market’s integrity. [Para No. 43]
“SEBI has the duty and obligation to protect
ordinary genuine investors and the SEBI is empowered to do so under the SEBI
Act so as to make security market a secure and safe place to carry on the
business in securities.” [Para 44]
On
duties of Print and Electronic Media, the Court observed:
“Print and Electronic Media have also a
solemn duty not to mislead the public, who are present and prospective
investors, in their forecast on the securities market. Of course, genuine and honest
opinion on market position of a company has to be welcomed. But a media
projection on company’s position in the security market with a view to derive a
benefit from a position in the securities would amount to market abuse,
creating artificiality.” [Para 44]
Full text of judgment:
http://judis.nic.in/supremecourt/imgs1.aspx?filename=40338
Full text of judgment:
http://judis.nic.in/supremecourt/imgs1.aspx?filename=40338