This decision overturned an earlier order by the Adjudicating Officer (AO) of the Securities and Exchange Board of India (SEBI), who had determined that the appellant misled investors by signing the buyback announcement.

We now examine the background of the case and the significance of the Tribunal’s ruling.

Brief Background

In this case, the appellant served as the company secretary during FY 2009-10 and 2010-11, two of the three FYs in which the company’s accounts, which he attested, were later found to be fraudulently understated.  He also attested the company’s public announcement in May 2011 regarding a buyback of equity shares, despite inadequate free reserves, which misled investors and shareholders about the company’s valuation and free reserves.

In its March 2022 order, the AO made certain specific allegations against the appellant, imposing a penalty of Rs. 10 Lakhs. Firstly, under Section 215 of the Companies Act, 1956, the company secretary was not merely required to attest the accounts but was required to verify if the audited accounts had contained all the assets and liabilities or other facts needed to be incorporated in the accounts. Secondly, as a statutory official of the company, he should have exercised utmost due diligence, checked the veracity of the buyback offer document and its legal compliances before authenticating and signing.

SEBI argued that because there was non-compliance with Section 77A of the Companies Act, 1956, and provisions of the SEBI (Buy Back of Securities) Regulations, 1998 (Buyback Regulations), the compliance officer was an ‘officer in default’ and liable for penal action.[2]

SAT’s Initial Order and the Subsequent Remand

SAT initially set aside SEBI’s order, saying that the appellant was not required to enquire into the veracity of the buyback offer documents.[3] It pointed to Regulation 19(3) of the Buyback Regulations and held that the compliance officer’s role was limited to redressing the grievances of the investors. According to the Tribunal, the obligation to comply rested with the Board of Directors, not the compliance officer.

This prompted SEBI to approach the Supreme Court. The Court observed that under Regulation 19(3), companies are mandated to nominate a compliance officer and an investors’ service centre to (a) ensure compliance with the Buyback Regulations, and (b) redress the grievances of investors. The Apex Court ruled that there was a ‘patent error’ on the part of the Tribunal in interpreting that the role of the compliance officer was limited to redressing the grievances of investors. It said that the Tribunal missed the crucial point that the compliance officer is also required to ensure compliance with the Buyback Regulations, as expressly stipulated under Regulation 19(3). With this, the Court set aside the Tribunal’s decision and remanded the matter for fresh consideration.[4]

SAT’s Final Decision After Reconsideration

After taking a fresh look, SAT once again set aside the penalty. This time, it explained why in more detail. It noted that the public buyback announcement itself clearly said that the Board of Directors was responsible for the information it contained. The Tribunal also pointed out that the audited accounts had already been certified by a qualified chartered accountant and approved by the Board of Directors.

It found fault with the AO’s finding that the appellant ought to have verified whether those accounts contained all the assets and liabilities. The Tribunal said this isn’t the duty of either the company secretary or the compliance officer.

SAT acknowledged the Supreme Court’s point that compliance officers are responsible for ensuring compliance. But it also said SEBI did not point out any specific charge or violation. Merely stating that he signed the public announcement and thereby misled investors was not enough to show a specific violation.

Wrapping Up

The SAT’s ruling is a valuable reminder about the scope of a compliance officer’s role. Yes, they have to ensure compliance with the regulations. But they do not have to sit in judgment or appeal over audited accounts or take on the role of auditors. The decision also underscores the need for clarity when bringing charges against the officers of the Company. Regulators must identify specific violations and clearly outline the basis for any penalties, especially given the serious consequences involved. For both regulators and companies, this case reinforces the importance of assigning responsibility in a fair and well-defined manner, aligned with each role’s actual scope and function.