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Relief for Compliance Officers: Securities Appellate Tribunal Ruling

A recent judgment by the Securities Appellate Tribunal (SAT) has provided relief to compliance officers, who are responsible for ensuring regulatory and policy adherence in companies. The tribunal has ruled that compliance officers cannot be held liable for fraud committed by promoters or directors of a listed company. This decision has clarified a previously grey area in the law, according to securities lawyers.

Background

Until now, Sebi rules have considered compliance officers as key managerial personnel, holding them liable as "officer-in-default" under the Companies Act. This meant that they could be held responsible for the actions of the company’s directors. However, the SAT has now clarified that a compliance officer’s role is ministerial, not managerial.

The Case

The case relates to a monetary penalty of ₹10 lakh imposed by Sebi on V Shankar, former company secretary of Deccan Chronicle Holdings, for allegedly misleading investors by signing a buyback announcement based on misstated financials. The regulator claimed that Shankar was liable for misleading investors because the public buyback announcement in 2011, signed by him as compliance officer, had stated that the company had sufficient reserves. However, Sebi’s investigation revealed that the financial statements had understated loan liabilities and the reserves were not sufficient for a buyback of shares.

SAT Ruling

The SAT bench, presided over by Justice PS Dinesh Kumar, held that the audited accounts are certified by a qualified chartered accountant and approved by the board of directors. Therefore, the finding that Shankar ought to have verified whether the audited accounts had contained the assets and liabilities is "wholly untenable and liable to be set aside." The tribunal quashed the Sebi order and set aside the penalty imposed on Shankar.

Implications

The implication of this judgment for compliance officers of listed entities is significant, as it prevents unnecessary regulatory actions against them for simply being signatories to financial statements or other documents. Aditya Joby, associate at Joby Mathew & Associates, noted that this ruling is true even for disclosures under Sebi rules, where compliance officers may submit certain disclosures to the respective exchanges but cannot be held liable for the contents of the disclosure.

Expert Opinion

Advocate Zerick Dastur emphasized that it is essential to clearly define the scope and role of each position held in a listed company. "A burden of responsibility which does not exist in law ought not to be imposed," he said.

Published On: May 15, 2025, at 09:34 AM IST

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