Is the Compliance Officer Responsible for Regulatory Filing after Tendering Resignation?
The status of key managerial personnel of a company bestows on the company secretary manifold functions and responsibilities under various provisions of law, inter alia, Section 205 of the Companies Act, 2013, Regulation 6 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and other such requirements. However, there has always been a question regarding the extent to which a company secretary is required to go for the purpose of fulfilling her duties towards the organization and those associated with it.
Herein, it is pertinent to note that every responsibility comes with a set of liabilities on the respective person. In certain circumstances, those endless duties and responsibilities may lead the professional to face unjustified repercussions which may considerably impact his professional repute in the industry. Accordingly, one may consider analyzing the boundaries of the role of a compliance officer in an organization, whether the same shall be as a ‘safeguard’ to ensure the adequacy of compliances or as a ‘watchdog’ to detect and be a sentinel for any non-compliance in the company.
Brief Facts of the Matter
1. Share prices of BGIL Films & Technologies Ltd (hereinafter, referred to as “BFTL/Company’) suddenly shot up after the company’s merger announcement. SEBI investigated and found that BFTL did not disclose the price sensitive information to the stock exchange, or its decision to cancel the proposed merger taken during BFTL’s board meeting held on 23 February 2010. The non- disclosure of such information was considered by the compliance officer of BFTL, who was responsible for all the regulatory compliances of BFTL, as a violation of regulation 12(2) of SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter, referred to as “PIT Regulations, 1992”) read with clause 2.1, clause 3.2 and clause 7(ii) of the schedule of the code of corporate disclosure practices for prohibition of insider trading as specified in schedule II of these regulations (https://www.sebi.gov.in/acts/insideregu.pdf
). SEBI issued a show cause notice on 2 February 2017 to the compliance officer.
2. On being heard, the compliance officer stated that it had been almost seven years since she was in the employment of BFTL (period of employment in BTFL being from February 2009 to March 2010) and that she had resigned on 19 February 2010 and was serving the notice period while the said meeting dated 23 February 2010 was conducted and that she did not have any access to the records of that period.
3. The chairman of the company had also issued her a letter dated 15 February 2018 stating and confirming that she was not involved in the said board meeting dated 23 February 2010 and that she was therefore, not responsible for the consequent compliances/non-compliances or disclosure/non-disclosure with respect to the board meeting held on 23 February 2010.
SEBI Order Dated 26 October 2018
On considering the facts of the matter, the adjudicating officer stated that although there was a benefit of doubt in favour of the compliance officer, she was responsible for the failure on her part and liable to pay a penalty of Rs50,000 for not complying with the disclosure requirements under the PIT Regulations, 1992.
Order by SAT reversing the SEBI Order
1. SAT on considering the facts, that despite the admitted position of the compliance officer and ample evidence on record to prove her not being involved in the said board meeting, held that the adjudicating officer, even after observing that a benefit of doubt should be given to the compliance officer, imposed a penalty in a case where she was clearly serving the notice period subsequent to her resignation. Accordingly, the question of imposition of penalty for non-compliance of the regulation does not arise in the case and therefore the impugned order could not be sustained.
2. Also, in view of the fact that the appellant had to undergo the litigation process and face harassment for almost a year and a half, coupled with the substantial costs incurred on the lawsuit, was entitled to a compensation of Rs50,000.
Analysis of the Case
The order passed by SEBI was similar to the order by the Financial Services Authority imposing fines on the company and its CFO respectively, in the matter of Universal Salvage plc and Martin Chrisopher Hynes
for the breach of the market abuse regulations due to delay in announcing the price sensitive information to the market.
On having a conservative approach to the decision of SEBI, it may be understood that notice period of any employee is not excluded while considering a person’s tenure in any organization. The period during which a person holds a designation, automatically holds him liable for the duties and liabilities associated with the said designation while he is in the office. Also, the regulations are clear on defining the responsibility of the official for ensuring that the company complies with continuous disclosure requirements. However, in the present case, the benefit of doubt as upheld by SAT adequately comes to the rescue of the compliance officer, since the chairman of the company himself absolved the compliance officer of the responsibility for compliances, stating that the compliance officer was not given access to the related records after she tendering her resignation, which was in sufficiently in advance of the meeting.
Need of the Hour
Bearing the requirements of the PIT Regulations in mind, one cannot contend that any information which is expected to be price-sensitive should be announced promptly after it becomes known to a director or the senior management and/or is the subject of a decision by the directors or senior management of the company.
However, in case of inadvertence or negligence, there should be due consideration and analysis of the facts and circumstances of the exact instance before holding the compliance officer liable for every violation. It goes without saying that the compliance officer of a company is responsible and authorized to oversee the adequacy of the compliances within the organization. However, it may not be expected of him to go into an investigating mode to dig into or rectify the non- compliances, especially those which may occur without his knowledge or in his absence.
Having said so, it is also pertinent to note that with the increasing number of compliance requirements and the strictness of the regulators in the present scenario, it is of utmost importance for professionals to be proactive in understanding and performing their duties in order to safeguard their companies from the occurrence of any violations and the repercussions that follow. Senior management, which specifically includes the compliance officer, cannot be expected to be oblivious of such activities or circumstances in the organization which might lead to any sort of non-compliance, at least during his tenure the office. In an ideal scenario this shall hold equally good, whether the compliance officer is serving a notice period or is absent for a limited period.
A company secretary or a compliance officer plays a vital role in ensuring that his company complies with the requirements of law both in the letter and spirit. Besides ensuring compliance with the statutory responsibilities, the professionals are expected to be proactive in updating themselves regarding the changing rules and laws. As regards the compliance burden during the notice period, the same should be placed on such compliance officer only to a reasonable extent and as per the terms between the management and such officer. While it may not be practical to list the role of a compliance officer in bulleted points, he may construed as the guardian for ensuring proper compliance of the law and best practices within an organization.
(The writer is manager in the corporate law division at Vinod Kothari & Co.)