2013 (4) TMI 652 - SC - Companies Law

Supreme Court affirms SEBI's actions against Director for financial irregularities and emphasizes investor protection

The Supreme Court upheld SEBI's actions against the appellant, a Director of a listed company, for serious financial irregularities, including inflated ... Irregularities in books of accounts - Market abuse - company charged with inflated profits and revenues in the financial statements and lured the general public to invest in the shares of the company based on such false financial statements thereby violated the provisions of SEBI(Prohibition of Fraudulent and Unfair Trade Practice - violation of Section 12A of SEBI Act and Regulation 3(b), 3(c), 3(d), 4(1), 4(2)(a), 4(2)(e), 4(2)(f), 4(2)(k), 4(2)(r) of Regulations 2003 - Held that:- As 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. 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. The facts clearly indicated that the company had made false corporate announcement stating that it had entered into agreements with 802 theatres and that false corporate announcement gave false figures relating to advance, security deposit and income pertaining to the theatres which were not inexistence. The deposits shown were turned out to be not genuine but mere book entries to hide receivables in the balance sheet. Responsibility is cast on the Directors to prepare the annual records and reports and those accounts should reflect ‘a true and fair view’. As decided in Official Liquidator v. P.A. Tendolkar (1973 (1) TMI 53 - SUPREME COURT OF INDIA) a Director as so long associated personally with the management of the company that he 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. 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 by overlooking the numerous red flags in the revenues, profits, receivables, deposits etc. which should not have escaped. Profit as on quarter ending June 2007 was three times more than the preceding quarter, it doubled in the quarter ending December 2007 over the preceding quarter. Further, there was disproportionate increase in the security deposits i.e. ₹ 36.05 crore in September 2007 to ₹ 270.38 crore in December 2007 as compared to increase in the number of theatres during the same period. They have participated in the board meetings and were privy to those commissions and omissions. Thus 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. Books of accounts were maintained in the Tally accounting software and for the financial year 2007-08 separate books of accounts were maintained for each region/unit. As already indicated, after the declaration of financial results on January 31, 2008, containing inflated profits, revenues for the quarter ended on 31.12.2007, MD of the company, his wife and the appellant had together pledged 72,75,455 shares of the company with various banks and financial institutions and raised 97.30 crores as loans. Thus the Directors and the Chief Financial Officers of the company had caused to publish forged and misleading results of the company, various quarterly financial results and the annual results for the year 2007-08, were reported to the stock-exchanges containing inflated figures of the company’s revenue, profits, security deposits and receivables and those financial statements which were relied upon by investors in making investment decisions, which did not reflect a true and fair view of the state of affairs of the company. Thus the SEBI has rightly restrained the appellant for a period of two years from the date of that order from buying, selling or dealing with any securities, in any manner, or accessing the securities market, directly or indirectly and from being Director of any listed company and that the adjudicating officer has rightly imposed a penalty of ₹ 50 lakhs under Section 15HA of SEBI Act. The appeals are, therefore, dismissed. However, there will be no order as to costs. Issues Involved:1. Investor Protection and Market Integrity2. SEBI's Appellate Jurisdiction3. Allegations Against the Appellant and Company4. Appellant's Defense5. SEBI's Findings and Violations6. Legal Provisions and Interpretations7. Corporate Governance and Directors' Responsibilities8. Market Abuse and Investor Confidence9. Disclosure and Transparency10. SEBI's Role and ResponsibilitiesDetailed Analysis:1. Investor Protection and Market Integrity:India's capital market has seen significant growth with increasing public participation. Investor confidence is crucial and relies on disclosure and transparency. The case highlights how investor confidence was eroded and the market abused for personal gains.2. SEBI's Appellate Jurisdiction:The Supreme Court's appellate jurisdiction under Section 15Z of the SEBI Act was invoked to challenge a joint order by the Securities Appellate Tribunal (Tribunal) that upheld SEBI's order restraining the appellant from dealing in securities for two years and imposing a monetary penalty of 50 lakhs.3. Allegations Against the Appellant and Company:The appellant, a promoter and Director of M/s Pyramid Saimira Theatre Limited (PSTL), was involved in serious irregularities, including showing inflated profits and revenues in financial statements to lure public investments. SEBI issued a notice for violations under Section 12A of the SEBI Act and various regulations of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003.4. Appellant's Defense:The appellant claimed no involvement in financial irregularities, stating that he handled only the Human Resource Department and relied on auditors for financial matters. He argued that he was not personally liable for the violations.5. SEBI's Findings and Violations:SEBI found specific violations, including manipulated accounts, false disclosures to the stock exchange, non-cooperation with investigations, and failure to maintain proper books of accounts. The Whole Time Member (WTM) of SEBI found the appellant and other Directors guilty under Section 12A of the SEBI Act and various regulations, restraining them from dealing in securities and being Directors of listed companies.6. Legal Provisions and Interpretations:Section 12A of the SEBI Act prohibits manipulative and deceptive devices, insider trading, and substantial acquisition of securities. Regulations 3 and 4 of the 2003 Regulations prohibit fraudulent and unfair trade practices. The Court emphasized the importance of market integrity and preventing market abuse to protect investors.7. Corporate Governance and Directors' Responsibilities:The Court highlighted the onerous obligations of Directors in listed companies, especially regarding the accuracy of financial statements. Directors must ensure that accounts reflect a true and fair view of the company's financial position. The appellant and other Directors failed to exercise due care and diligence, allowing the company to fabricate figures and make false disclosures.8. Market Abuse and Investor Confidence:Market abuse, including manipulative and deceptive practices, undermines investor confidence and economic growth. The Court found that the company's Directors created artificiality by inflating financial figures, leading to a price rise in the company's scrip and enabling the promoters to raise substantial funds.9. Disclosure and Transparency:The Court reiterated the importance of disclosure and transparency in maintaining market integrity. Companies must keep proper books of accounts to show and explain transactions accurately. The appellant's claim of ignorance regarding financial matters was rejected, emphasizing the Directors' responsibility for accurate financial reporting.10. SEBI's Role and Responsibilities:The Court stressed SEBI's duty to deal sternly with companies and Directors engaging in manipulative practices. SEBI must protect investors and ensure market integrity. The Court upheld SEBI's order restraining the appellant from dealing in securities and imposing a penalty of 50 lakhs.Conclusion:The Supreme Court dismissed the appeal, affirming SEBI's actions against the appellant. The judgment emphasizes the importance of investor protection, market integrity, and the responsibilities of Directors in listed companies. SEBI's role in curbing market abuse and ensuring transparency was underscored.