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. 
 
In this article, we shall discuss a recent order dated 28 June 2019 (http://sat.gov.in/english/pdf/E2019_JO2018480.PDF) passed by the Securities Appellate Tribunal (SAT) in the case of Pooja Mahna vs Securities and Exchange Board of India, quashing the SEBI order passed in the matter, on 26 October 2018 (https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/oct-2018/1540568876951.pdf#page=1&zoom=auto,-15,841), to analyze the role of a compliance officer and his need in the present times.
 
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.
 
Conclusion
 
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.)
 
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    SC seeks Unitech home buyers’ suggestions on NBCC proposal
    The Central government on Monday told the Supreme Court that the NBCC is willing to complete pending housing projects of Unitech under a court-appointed monitoring committee, headed by a retired high court judge, which would eventually hand over the possession of the flats to home buyers in a time-bound manner.
     
    Attorney General K.K. Venugopal submitted that they have filed the report along with the NBCC's proposal. "In the report filed before the court, we suggest that a Committee be constituted to oversee be completion of the project," he said.
     
    A bench of Justice D.Y. Chandrachud and Justice M.R. Shah said that the proposal submitted by the NBCC will be vetted by the Committee, suggested by the Attorney General.
     
    The NBCC has sought Rs 50 crore as construction fee and two per cent of the entire project for due diligence, before beginning the process of construction.
     
    M.L. Lahoti, counsel for the home buyers, however, contended that this proposal from NBCC is not similar to its proposal earlier shared in Amrapali. "We strongly disagree with this demand of the NBCC before it takes over pending projects," he said.
     
    During the course of hearing, arguments were made about the capability of the NBCC to carry out the construction work as it is already handling Amrapali's pending projects, and it is likely to take over construction of Jaypee as well.
     
    The Attorney General said that L&T had initially made a proposal but later refused to take over the project.
     
    The court observed that the NBCC will not execute the work but will only oversee the construction. "The work might be sub-contracted, if required. And, the whole project will also be monitored step by step by the Committee suggested by the AG," it said, adding that no stay has been granted related to construction.
     
    At the end of the hearing, the court observed that there should be one counsel for all the home buyers in order to streamline the process of hearing on the matter.
     
    The court also directed the amicus curiae in the matter to upload the NBCC proposal on the website for the home buyers to go through the proposal, and submit their suggestions by August 2. The amicus curiae shall collate the suggestions and put them up on website too.
     
    The court will next hear the matter on August 9.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    IL&FS Securities and Allied Financial Mess Hits Brokers of NSE
    Fund crunch at IL&FS Securities Services Ltd (ISSL) hit its client-brokers on Thursday morning as the National Stock Exchange (NSE) put their terminals in square-off mode due shortfall in settlement payments by ISSL. On Friday too, the terminals continued to remain in square-off mode. However, there is no panic among brokers like yesterday, says a market participant. 
     
    IL&FS Securities is facing financial problems due to about Rs380-crore derivative fraud by Allied Financials Services Pvt Ltd, a depository participant (DP), which is also a brokerage firm. While fund shortage with the IL&FS group company is known to everyone, in the fraud case, Securities and Exchange Board of India (SEBI), needs to come forward and resolve the issue on its own, instead of going to courts, says a brokerage firm who knows the matter. But more about it later. 
     
    According to this broker, who does not want to be named, on Thursday about 150 brokers, who had signed clearing agreements with ISSL were not allowed to put in fresh orders for nearly two hours and their trading terminals were put in square-off mode only. 
     
    He says, “Thursday being the last day for settlements of futures & options (F&O) segment, the situation was chaotic. Today (Friday) these terminal continue to be in square-off mode.”
     
    On Thursday, these terminals were restored two hours after ISSL paid the dues, says a report. "...about 150 brokers who had signed clearing agreements with ISSL were not allowed to put in fresh orders for nearly two hours and their trading terminal was re-activated by noon only after ISSL made the payments," a report from Economic Times says.
     
    Quoting experts, a report from the Hindu Business Line says, "the situation at IL&FS Securities is precarious as brokers and clients are seeking a return of their deposits given as collateral and NSE Clearing Corporation (NCC) is routinely pressing the clearing member to make good payment obligations on existing positions."
     
    As reported by Moneylife in February 2019, Allied Financials had helped itself to the shares and funds worth Rs366 crore kept in safe custody, including shares of Odisha Cement. 
     
    The cement maker has separately informed stock exchanges about the loss of shares, which in its case alone amounts to Rs344 crore and it had also filed a criminal complaint. SEBI also received a complaint from Novjoy Emporium Pvt Ltd alleging unauthorised transfer of its mutual fund units worth Rs21.70 crore by Allied Financial Services. 
     
    Dalmia Bharat had filed case against Allied Financials contending that it did not authorise the trades and ISSL being a clearing members should bear the loss. "ISSL maintains that it is in no financial position to honour the trades and has requested NSE Clearing, the clearing corporation of the NSE, to annul the trade and absorb the loss, as it has the power to do so under law. NSE Clearing has refused to do so," says a report from Moneycontrol.com.
     
    The options bought by Allied Financials expired on 27 June 2019. However, since the collateral used by the broker was obtained fraudulently, the economic offences wing (EOW) of Mumbai police have frozen it. This allegedly led to defaults by Allied Financials and the IL&FS group company, which already is in financial troubles.
     
    In February this year, SEBI had ordered forensic audit of 11 entities including Allied Financials. NSE conducted the audit of Allied Financial, which found the broker had used mutual fund units as collateral for futures & options with ISSL.
     
    SEBI, however, changed its stance later and claimed that is had no jurisdiction over the trade annulments and NCL, being a clearing house should take a decision on this. 
     
    Earlier this month, the market regulator even moved to the Supreme Court against SAT’s order claiming that it should not be asked to investigate the Rs460-crore IL&FS Securities case as it is beyond its jurisdiction to annul trades. 
     
    It further said that the NSE Clearing Corp should be rather asked to look into the matter. Last month, the apex court had halted Rs435 crore payment by IL&FS subsidiary until Securities Appellate Tribunal (SAT) and Bombay High Court passed an order in the alleged fraudulent claims.
     
    The SAT had earlier this month directed SEBI to pass an order in the case of Allied Financial Services, which allegedly had fraudulently used mutual fund units it did not own as margins for derivative trades. Allied Financial Services carried out alleged fraud trades on behalf of its client Dalmia Bharat resulting in a loss of about Rs460 crore.
     
    “There are wide ramification of his case,” the broker we spoke to, says, adding, “Default of one member cannot be passed on to the others and the Exchange has to declare the member as defaulter. However, in this case, everyone, including the Exchange and the market regulator, are protecting their own turf and passing on the responsibility. I feel, SEBI should step forward and resolve the issue.” 
     
    “In addition, the transfer of mutual fund units (from Dalmia Cement to units of Allied Financial) took place a few months back. For every change in the demat account the clients receives an alert via SMS as well as periodic statement. Now after a gap of three-four months, I feel, Dalmia Cement cannot take a stand of ignorance and file claims of losses,” the market participant says.  
     
    As per NSE's February 2019 forensic report, three clients, Money Mishra Financial Services, Awanish Kumar Mishra and Money Mishra Overseas Pvt Ltd, collectively hold 89% of holdings in registrar of securities (ROS). Their holding allegedly includes mutual funds units, transferred in an unauthorised manner from third party and clients. Awanish Kumar Mishra along with Jitender Kumar Tiwari are directors of Money Mishra Financial, Money Mishra Overseas as well as Allied Financial Services. 
     
    "The member has transferred the mutual funds units belonging to unregistered entities or client to its client beneficiary account through its three associated concerns viz. Money Mishra Financial Services, Awanish Kumar Mishra and Money Mishra Overseas Pvt Ltd. It is further observed that these transferred mutual fund units have been used as collateral for futures & options (F&O) margin with its clearing member ISSL towards trade obligations of these three associated concerns," the NSE report says. 
     
    The report also find out non-availability of funds payable to clients in the bank accounts of Allied Financial Services. As on 31 January 2019, the broker was supposed to pay Rs138.78 crore to clients. However, total funds available with it, including deposits of Rs42.42 crore with ISSL, amount of Rs1.1 crore with exchanges, and bank balance of Rs84 lakh, were only Rs44.36 crore. There was a shortfall of Rs94.42 crore.
     
    Besides Allied Financial Services, SEBI had banned Rajeev Kumar Asopa, Lalit Agarwal, Rajendra Prasad Basia, Awanish Kumar Mishra, Jitendra Kumar Tiwari, Money Mishra Financial Services, Money Mishra Overseas Pvt Ltd, Pankaj Garg and Jitender Malhotra from accessing the securities market.
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