Limiting Compliance Officers’ Liability: V. Shankar v. Securities Exchange Board Of India
INTRODUCTION
On 05 May 2025, the Securities Appellate Tribunal (“SAT”) in the case of V. Shankar v. Securities Exchange Board of India,1 ruled on whether compliance officers or company secretaries under Section 215 of the Companies Act, 1956 and Regulation 19(3) of the SEBI (Buyback of Securities) Regulations, 1998 (“Erstwhile Regulations”) are required to reverify the documents which they are signing, especially when the documents have been certified by a qualified Chartered Accountant and subsequently approved by the Board of Directors of a company.
In the said case, V. Shankar (“Appellant”), serving as a company secretary of Deccan Chronicle Holdings Limited (“DCHL”) was held not to bear responsibility for the information contained in DCHL’s annual reports or the information disclosed in DCHL’s public announcement regarding buyback of equity shares. This finding is significant because, although a Company Secretary is generally expected to remain apprised of the company’s assets, liabilities, and Board resolutions, the SAT clarified that such general responsibilities do not extend to independently verifying or re‑auditing financial statements that have already been certified by statutory auditors and approved by the Board of Directors.
BRIEF FACTS
On 03 August 2017, the SEBI issued a show cause notice to DCHL, contending that the Appellant had signed certain documents of DHCL that were under scrutiny. The documents included the annual reports for the financial year 2008-2009, 2009-2010 and 2010-2011, wherein SEBI noted that DHCL had understated its outstanding loans and interest in finance charges, and the public announcement made by the Company on 06 May 2011 for the buyback of its equity shares were more than 25% of its paid-up share capital without having the adequate free reserves, which is a contravention of Section 68 (2) (c) read with Section 77A (2) (c) of Companies Act, 1956. The Company understated its loans and finance charges by transferring them from DCHL to another entity i.e. Deccan Chronicle Marketers on the last day of the financial year, only to bring them back to DCHL at the beginning of the following year.
The adjudicating officer (“AO”) by its order dated 22 March 2022 penalised DHCL, its directors, promoter and the Appellant. The order of AO was subsequently challenged before the SAT.
Thereafter, SAT, set aside the AO’s order by relying on Section 215 of the Companies Act, 1956 and stated that the Board of Directors had a fiduciary responsibility to verify the balance sheet before approving it, while the Company Secretary’s role in signing the balance sheet after such approval was merely procedural in nature. The NCLT further noted that the AO’s order lacked any specific finding of liability against the Company Secretary under Section 77A of the Companies Act, 1956, and instead made clear that responsibility for the understatement and misleading statements rested with the directors. Additionally, relying on Regulation 19(3) of the Erstwhile Regulations, the SAT observed that the Appellant’s functions were confined to addressing investor grievances. However, on appeal, the Supreme Court set aside the SAT’s decision.
The Supreme Court ruled that SAT had made a patent error while interpreting Regulation 19(3) of Erstwhile Regulations which stated that the purpose of appointment of a compliance officer by a company planning to buy-back its shares was to “ensure compliance with the buyback Regulations”. Hence, the proceedings were remanded back to the SAT for fresh consideration of the facts.
FINDINGS OF SAT
The AO had taken a view based on Section 215 of the Companies Act, 1956 that a company secretary cannot plead innocence by stating that he has merely fulfilled a statutory duty by signing the audited accounts which were prepared by the auditors and approved by the Board of Directors. The AO ruled that the Appellant was required to aid, advise and assist the Board in ensuring that the accounts contained true information before the same were approved by checking if the audited accounts contained all the assets and liabilities.
However, SAT overruled this view. It held that the Appellant was not required to verify whether the audited accounts, which were certified by a qualified Chartered Accountant and subsequently approved by the Board of Directors, contained all the assets and liabilities, as this is not mandated by any legal provision. The SAT held that the AO had wrongly presumed that the compliance officer or Company Secretary ought to re-examine the veracity of certified accounts. Therefore, the Appellant cannot be presumed to be an “officer in default”.
The SAT further observed that it was DHCL and its directors who had manipulated the accounts and disseminated incorrect information to the public through the announcement. Thus, the Appellant was not responsible for the information contained in the public announcement for the buyback of shares in absence of any specific duty under Regulation 19(3) of the Erstwhile Regulations.
OUR THOUGHTS
The ruling underscores that a compliance officer or Company Secretary is not legally obliged to reverify the accuracy of documents already certified by auditors and approved by the Board. In this case, relief was granted to the Appellant because he acted bona fide, and the manipulation was attributable solely to DCHL and its directors. Significantly, the decision must be read in its factual context and cannot be construed as blanket protection, particularly where a Company Secretary is complicit in or negligent toward regulatory violations.
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- Appeal No. 283 of 2022 ↩︎
