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12 Jun 2025
Detailed-Case-Analysis-Limiting-Compliance-Officer-Liability
Detailed Case Analysis: V. Shankar v. SEBI (SAT Judgment, 5 May 2025)
| Particulars | Details |
|---|---|
| Case Title | V. Shankar v. SEBI |
| Court/Tribunal | Securities Appellate Tribunal (SAT) |
| Date of Judgment | 5 May 2025 |
| Background | V. Shankar, former Company Secretary & Compliance Officer of DCHL, signed a public buyback announcement (6 May 2011), allegedly based on manipulated financial data. SEBI held him liable for misleading disclosures in violation of SEBI regulations and imposed a penalty of ?10 lakh. |
| SEBI’s Allegation | - DCHL fraudulently inflated free reserves and financials by offloading liabilities to an associate entity (DCM) at year-end and reinstating them later. - Shankar signed the buyback public announcement without verifying the accuracy of the unaudited/manipulated accounts. |
| Legal Basis for SEBI’s Action | - Section 15HA, SEBI Act (Fraudulent/unfair trade practices) - Sections 12A(a)-(c) of SEBI Act - Regulations 3 & 4 of SEBI (PFUTP) Regulations, 2003 - Sections 68 and 77A of the Companies Act, 1956 - Regulation 19(3) of SEBI (Buyback of Securities) Regulations, 1998 |
| Key Provision in Question | Regulation 19(3) of Buyback Regulations: “The company shall nominate a compliance officer… for compliance with the buy-back regulations and to redress the grievances of investors.” |
| Penalty Imposed | Rs 10 lakh on V. Shankar |
| Supreme Court Intervention | - Initially, SAT quashed the SEBI order. - Supreme Court remanded the case back, criticizing SAT for interpreting the compliance officer's role too narrowly under Regulation 19(3). - Directed SAT to re-examine in light of compliance obligations, not just grievance redressal. |
| SEBI’s Argument | - Compliance officers must ensure compliance, not merely relay information. - Reliance on unaudited/manipulated data without due diligence violates their duty. - Officers are not merely clerical—they act as gatekeepers. |
| V. Shankar’s Argument | - Compliance officers do not verify financial accuracy. - Authentication is procedural and based on board-approved/auditor-certified records. - Directors, not compliance officers, are accountable for disclosures in public announcements. |
| SAT’s Key Observations | - Compliance officer's role is ministerial, not managerial. - Regulation 19(3) does not create a duty to re-audit or question board/auditor decisions. - Section 215 of Companies Act, 1956 mandates authentication, not verification. - Liability cannot be imposed absent statutory basis. |
| Precedents Cited by SAT | - Prakash Kanungo v. SEBI (disclosure of insider trades—officer not liable to verify). - New Delhi Television Ltd. v. SEBI (compliance officers are employees, not directors). - Bhuwneshwar Mishra v. SEBI (differentiated—direct obligation to file disclosures existed in that case). |
| SEBI’s Broader Regulatory Interpretation | - SEBI has been expanding compliance officer’s role through informal guidance (e.g., Kirloskar Chillers, 2017) and past orders (e.g., Satyam case). - LODR (April 1, 2025 amendment): Compliance officer must now be KMP and held at a senior level within the company, reporting to the board. |
| SAT’s Final Ruling | - Set aside the Rs. 10 lakh penalty. - Held that V. Shankar performed a formal, ministerial role. - No legal basis for expecting him to verify or audit financial statements. |
| Jurisprudential Conflict | - SEBI’s View: Compliance officers must proactively ensure regulatory adherence. - SAT’s View: Compliance officers are not responsible for re-auditing board-approved documents unless statute explicitly says so. - SC’s View (tentative): leans more toward SEBI’s expansive interpretation. |
| Implications for Compliance Officers | - SAT ruling offers relief to compliance officers from disproportionate liability. - Sets precedent that formal authentication ? liability for fraud unless intent or knowledge is proven. |
| Future Outlook | Awaited clarity from Supreme Court in future appeals. The jurisprudence on compliance officer liability remains unsettled, especially post-LODR 2025 amendments. |
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