RELATED PARTY TRANSACTIONS WITHOUT TAKING PRIOR APPROVAL OF THE AUDIT COMMITTEE AND THE BOARD AS REQUIRED UNDER THE ‘LODR REGULATIONS’

[Mr. M. GOVINDARAJAN]

In SECUREKLOUD TECHNOLOGIES LIMITED, GURUMURTHI JAYARAMAN, PADMINI RAVICHANDRAN, G. SRI VIGNESH VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA - 2023 (9) TMI 575 - SECURITIES APPELLATE TRIBUNAL, MUMBAI , the practicing Company Secretary, while conducting the Secretarial audit of the Securekloud Technologies Limited (‘appellant’ for reference) observed  that the Company had entered into certain related party transactions without taking prior approval of the Audit Committee and Board as required under the Listing Obligations and Disclosure Requirements (‘LODR’ for short) Regulations and that two Independent Directors continued to remain as Independent Directors in spite of appointment of their relatives in the Company/ overseas subsidiary which was also violative of the LODR Regulations.

Based on the above said observations in the Annual Report of the appellant company Securities and Exchange Board of India (‘SEBI’ for short) conducted an investigation and issued a show cause notice to the appellant proposing penalty for non compliance various obligations under LODR as noted below-

• Not following due process of approval of related party transactions.
•  Independence of Independent Directors.
• Non-disclosure of the forensic audit being initiated against the Company which is a material event under Regulation 30 of the LODR Regulations requiring disclosure which the Company and Company Secretary failed to do so.

The Adjudicating Officer considered the reply filed by the appellant to the show cause notice.  The Adjudicating Officer found that the appellant was guilty on the above said charges.  The Adjudicating Officer imposed penalty under Section 23E of the Securities and Contracts (Regulation) Act, 1956 (‘SCRA’ for short) as detailed below-

• Rs.25 lakhs on the company;
• Rs.10 lakhs on the independent directors; and
• Rs. 4 lakhs on the Company Secretary.

Against the order of Adjudicating Officer the company, the independent directors and the Company Secretary filed appeal before the Securities Appellate Tribunal (‘SAT’ for short).  The SAT passed an interim order directing the appellants to deposit Rs.10 lakhs.

The SAT considered the submissions of both the parties.  SAT analyzed the provisions of Regulation 23(2) of LODR.  The SAT observed that according to Regulation 23(2) related party transactions requires prior approval of the audit committee.  The SAT observed that in the present case there is a specific finding that certain related party transactions were not placed before the audit committee.  The Company, in its reply, accepted that it had inadvertently missed to take prior approval of certain related party transactions from the audit committee and subsequently rectified the same.  Therefore SAT held that there is a violation of the LODR.  The contention that these transactions were subsequently ratified cannot justify the initial violation which was committed at that point of time.

The SAT analyzed the Regulations 16(1)(b)(vi) and Regulation 4(2)(f) which prescribes the duties and responsibilities of the Board of Directors.  The SAT observed that Regulation 16 places a bar on appointment of a relative of an independent director in the Company.   The SAT observed that during their tenure as independent directors one son of one independent director and husband of another independent director were appointed in the subsidiary of the Company.  Such appointment of an immediate relative of the independent director was violative of Regulation 16(1)(b)(vi) and there was also a conflict of interest.  Any person whose relative is an employee of a listed entity or its holding, subsidiary or associate company will be disqualified under these Regulations.  As per these Regulations, the SAT observed that each independent director, for continuing as an independent director, shall ensure his independent by filing yearly declaration of his independent nature.  The SAT observed that in the present case after the lapse of 4 years the independent directors were re-designated as non executive directors.   The SAT found that these independent directors were re-designated after 4 years from the date of the event and therefore the directors violated the provisions. 

The SAT further observed that the Company Secretary failed to disclose the appointment of forensic auditor appointed by the Company.  The Company Secretary, being a Compliance Officer of the Company is responsible for ensuring conformity with the regulatory provisions applicable to a listed company.  The SAT held that the Company Secretary violated the provisions of LODR.

The SAT observed that even though the appellants had committed violations of various provisions of the LODR Regulations these contraventions are not serious warranting imposition of high penalties.  The SAT further observed that Section 23E of the SCRA is not the charging provision for imposition of penalty for violation of the Listing Agreement and that the correct provision is Section 23A(a) of the SCRA.  The penalty that can be imposed under Section 23A is from a minimum of Rs. 1 lakh to a maximum of Rs. 1 crore and under Section 23E of the SCRA a penalty is up to a maximum of Rs. 25 crores.

Therefore the SAT reduced the penalties imposed on the appellants as detailed below-

• Company - The SAT considered the imposition of penalty of Rs. 25 lakhs on the company is excessive and arbitrary in the facts and circumstances of the given case.   The company deposited Rs.10 lakhs as per the interim order of SAT.  The SAT reduced the penalty on the company to Rs.10 lakhs.
• Independent directors - The penalty of Rs.10 lakhs each imposed on the two independent directors in the given circumstances is high and excessive.  Further he relatives of the independent directors were not appointed in the Company but in an overseas subsidiary Company.  The Company re-designated the independent directors as non-independent directors though at a belated stage.  Considering the aforesaid, in the given circumstances the penalty is reduced to Rs. 5 lakhs each by SAT.
• Company Secretary - The Company Secretary was imposed a penalty of Rs. 4 lakhs for violation of Regulation 6(2)(a) i.e. for not disclosing the appointment of the forensic auditor. Considering the facts and circumstances that the Company and its directors have been penalized the imposition of penalty against the Company Secretary should be the minimum penalty. SAT, therefore reduced the penalty of Rs. 4 lakhs to Rs. 1 lakh.

SAT allowed the appeal partly.