In the matter of Soumen Chatterjee v. Securities and Exchange Board of India dated January 07, 2021, the Securities Appellate Tribunal (SAT) quashed a confirmatory order of SEBI in relation to a prior ex-parte ad-interim order passed against the appellant (Soumen) indefinitely barring him from accessing the securities market and inter alia imposing severe restrictions on his right to dispose of his assets. In the order, SAT opined that while determining the liability of a director with respect to the violations of a company, SEBI should look beyond merely the designation of a board member and delve into his/her actual involvement in/awareness of any violations in the company.
In the present matter, SEBI had initiated an investigation into the activities of Guiness Securities Limited (GSL/Company), a stock broking company in which Soumen was appointed as an executive director (ED) with the designation ‘Director Research’. Though Soumen was designated as an ED, his role was limited to undertaking research-related activities in the Company. Soumen was not engaged in the day to day affairs of GSL and he was unaware of the alleged irregularities of the Company. During the investigation, SEBI found a prima facie case of inter alia misappropriation of client securities and falsification of books in GSL and therefore on December 19, 2018, the regulator issued an ex-parte ad-interim order, against the Company and all its EDs, without analysing the specific roles and functions played by each ED in the organisation (Ex-parte Order). The Ex-parte Order was consequently confirmed by SEBI through a confirmatory order on July 31, 2019 (Impugned Order).
The Ex-parte Order and Impugned Order imposed severe restrictions on Soumen solely on the basis that he was designated as an ED of GSL, which in SEBI’s view created a presumption of knowledge about the daily activities and the alleged financial irregularities/violations of the Company. During the hearing, Soumen had contended that though he was designated as an ED, his work profile was limited to research related activities within the Company. Further, Soumen had no means to ascertain the alleged violations being committed by GSL except through the documents produced during the three board meeting he attended as a board member, which disclosed no irregularity on the face of it.
Concurring with the submissions of Soumen, SAT opined that the Ex-parte Order and the Impugned Order against Soumen could not continue to have effect merely on the basis of Soumen’s designation in GSL and the presumption of knowledge flowing from the said designation. Further, SAT observed that Soumen had relied on the same statutory compliance certificates and internal audit reports perused by the independent and/or non-executive directors of GSL, against whom no directions were issued by SEBI. In view of the same, SAT held that in the absence of any specific adverse findings related to the role or complicity of Soumen in the alleged violations of the Company, the application of a different yardstick for the due-diligence exercised by Soumen vis-à-vis the independent and/or non-executive directors of GSL was misconceived and erroneous. Furthermore, SAT observed that a majority of the alleged misappropriation of securities took place before Soumen was even appointed as a director of GSL and there were no findings in the Ex-parte Order or the Impugned Order about the quantum of securities misappropriated during Soumen’s tenure as an ED in the Company. Additionally, it was noted that 2 years had already elapsed from the issuance of the harsh Ex-parte Order and no show-cause notice had been issued by SEBI till date. For the reasons highlighted above, SAT set aside the Impugned Order qua Soumen.
SAT’s decision in the present matter can be considered a meaningful contribution to the growing jurisprudence surrounding the liability of directors in Indian companies, specifically in terms of looking beyond mere designations and delving into the true role and association of a director with a company while deciding the issue of liability. When violations are committed by companies, the present judgement places an obligation on SEBI to ensure that orders are not passed against EDs of such companies merely on the basis of their designation, when there is no evidence on record to demonstrate their involvement in/awareness of such violations.
