2025 (1) TMI 1454 - AT - SEBI

Non-Executive Chairman wins appeal against SEBI orders after tribunal finds all allegations baseless

The Securities Appellate Tribunal at Mumbai allowed the appeal of a Non-Executive Chairman against SEBI orders. The Tribunal found all allegations ... SEBI orders against non-executive Chairman and Managing Director & Chief Executive Officer - Appellant as the Non-Executive Chairman failed in his duties by not acceding to the requests of Independent Directors for legal advice and not providing necessary documentation regarding the appointment of Mr. Ratnesh - Non acceding to request for legal advice in relation to appointment of Mr. Ratnesh etc. - HELD THAT:- Appellant was appointed as the Non-Executive Chairman of PFC on November 8, 2021. The allegation is, not acceding to the request made by the independent directors for obtaining external legal advice and not providing information about appointment and joining of Mr. Ratnesh, which was the most contentious issue leading to differences between the Management and the independent directors. The first email from the independent directors to the Noticee No. 1 seeking independent legal advice from a lawyer of their choice is dated December 7, 2021. The appellant had informed the Independent Directors that the management was in the process of submitting a comprehensive report and therefore a separate legal consultation was pre-mature. On December 15, 2021 the independent directors conveyed to Noticee No. 1 that they were going ahead with the appointment of an Advocate and did so. The expenses incurred in that behalf were also informed to Noticee No. 1 on April 5, 2022. With regard to not calling meeting of NRC, it was urged that the Appellant was not a member of NRC and had no role to play. The RoC had addressed this issue and did not hold the Appellant responsible. It was also urged that the Management attempted to reconstitute the NRC through a resolution dated December 31, 2021, however the independent directors did not approve the same. It is relevant to record that firstly the independent directors had made their request to the Noticee No. 1 and not to the Appellant. Secondly, the independent directors went ahead and decided to appoint an Advocate themselves and obtain legal advice. The gap between their initial request and their decision to appoint an Advocate is about 8 days which cannot be considered as undue delay. Thirdly, the appellant had instructed the HR department of PTC to give the information sought by the independent directors. Fourthly, Ms. Renu Narang was withdrawn by NTPC. Fifthly, RoC had addressed the issue with regard to conducting meeting of NRC and not held the appellant responsible. In view of the undisputed facts recorded hereinabove, we find that the above three charges in Issue No.1 made against the Appellant are not substantiated. Providing no information or limited / incomplete information to the Board - Appellant submitted that the WTM has noted in the impugned order that Mr. Ratnesh had rejoined NTPC on December 6, 2021. Therefore, he could not have been invited for the Board meeting scheduled on January 22, 2022. He is right in his contention. Therefore, the allegation of not inviting Mr. Ratnesh and the meeting becoming invalid is untenable It is the duty of the Company Secretary to provide guidance with regard to proper conduct of meetings. Independent Directors while raising certain issues in their emails sent during 2021 never sought for those issues to be discussed in the board meetings. Thus, there is no doubt that there was lack of clear communication between the Independent Directors and the management, however, we may note that the Independent Directors themselves had graded the flow of information between the management and the board as excellent in the meeting held on October 5, 2021. No substance in the allegation contained in Issue No. 2. Reconstitution of Audit Committee prior to submission of FAR 2022 - As noted in the Impugned Order, Section 177 of the Companies Act, 2013 provides that the Audit Committee shall be constituted by the Board. The Board had constituted the Audit Committee. SEBI’s direction was not to change the composition of the Board. Therefore, SEBI contention that SEBI’s instructions also included not making any change in the audit committee also, is without any merit and liable to be rejected. Hence, we hold that the charge in Issue No.3 is also baseless. Functioning of the Audit Committee - It is true that the Chairman of the Audit Committee had flagged the issues in functioning of the Audit Committee with respect to Noticee No. 1. The Respondent’s charge is not that the Appellant was responsible but that he was aware of the shortcomings pointed out and yet, did not take remedial steps. In our view, once the respondent holds that appellant is not responsible, nothing further survives for consideration. Hence charge in issue No.4 is also baseless. On a careful perusal of the allegations leveled against the appellant and the contentions urged on both sides, for reasons recorded hereinabove, we are of the view that all the allegations against the appellant in Issues Nos. 1 to 4 are baseless. Therefore, the directions contained in paragraph No: 253 of the impugned order qua the appellant are unsustainable and liable to be quashed. The appellant, has suffered the order for about 6 months for no fault. Appeal allowed. Orde passed by the WTM, SEBI qua the appellant is quashed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment were:1. Whether the appellant, as the Non-Executive Chairman of PFS, failed in his duties by not acceding to the requests of Independent Directors for legal advice and not providing necessary documentation regarding the appointment of Mr. Ratnesh.2. Whether the appellant failed to provide adequate information to the Board, leading to incomplete or limited information being shared.3. Whether the reconstitution of the Audit Committee prior to the submission of the Forensic Audit Report (FAR) 2022 was in violation of SEBI's directions.4. Whether the appellant impeded the proper functioning of the Audit Committee by allowing meetings to be held at short notice and not ensuring accurate minutes of the meetings.ISSUE-WISE DETAILED ANALYSISIssue No. 1: Failure to Accede to Requests for Legal Advice and DocumentationThe relevant legal framework includes the SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015, and the Companies Act, particularly Section 149 regarding the duties of directors. The appellant argued that the management was preparing a comprehensive report, making separate legal advice premature. The Independent Directors engaged a law firm independently, which the company did not oppose. The Registrar of Companies had previously examined this issue and exonerated the appellant. The appellant was not responsible for the withdrawal of Ms. Renu Narang from the board, which rendered the NRC dysfunctional, as this was a decision by NTPC.The Court found that the appellant was not responsible for the alleged failures. The Independent Directors had proceeded with obtaining legal advice independently, and the appellant had instructed the HR department to provide the necessary information. The Court concluded that the charges in Issue No. 1 were not substantiated.Issue No. 2: Providing Incomplete Information to the BoardThe allegations included not placing information regarding Mr. Ratnesh's appointment and not providing notice of a Board meeting. The Court noted that Mr. Ratnesh had rejoined NTPC, making the allegation of not inviting him to a meeting untenable. The duty to ensure proper conduct of meetings lies with the Company Secretary, and the Independent Directors had previously graded the information flow as excellent. The Court found no substance in the allegations.Issue No. 3: Reconstitution of Audit CommitteeThe appellant contended that SEBI's direction not to change the Board's composition did not apply to the Audit Committee. The Board reconstituted the Audit Committee to finalize financial statements. The Court noted that SEBI's direction was limited to the Board and did not extend to the Audit Committee. Therefore, the charge was deemed baseless.Issue No. 4: Functioning of the Audit CommitteeThe charge was that meetings were held at short notice, and agenda items were added last minute. The appellant argued that the Companies Act permits meetings at short notice. The Court noted that the Chairman of the Audit Committee had raised issues with Noticee No. 1, not the appellant. The Court found that the appellant was not responsible for the alleged impediments in the Audit Committee's functioning.SIGNIFICANT HOLDINGSThe Court held that:1. The appellant was not responsible for any statutory violations or failures in corporate governance as alleged by SEBI.2. The appellant had acted within his role as a Non-Executive Chairman and was not involved in day-to-day management, nor did he impede the functioning of the Board or its committees.3. The charges against the appellant were baseless, and the directions in the impugned order were unsustainable.The appeal was allowed, and the order dated June 12, 2024, by the WTM, SEBI, was quashed with no costs awarded.