TMI Blog2012 (10) TMI 1203X X X X Extracts X X X X X X X X Extracts X X X X ..... krishanan - independent director and member of audit committee 4. The appeals arise out of investigation conducted by the Securities and Exchange Board of India (for short the Board) for the financial year 2007-08 and consequential action taken against the appellants by way of directions under section 11B of the Securities and Exchange Board of India Act, 1992 (the Act) and adjudication proceedings initiated under chapter VI A of the Act. Acting under the powers conferred upon him under section 19 read with sections 11 and 11B of the Act, the whole time member restrained Shri N. Narayanan and Shri V. Natarajan for a period of two years and three years respectively from buying, selling or dealing in securities in any manner whatsoever or accessing the securities market directly or indirectly and from being a director of any listed company. In the case of the appellants, Shri K. Natarahjan, Shri K.S. Kashiraman and Shri G. Ramakrishanan, the whole time member passed orders restraining them from being an independent director or member of audit committee of any listed company for a period of two years from the date of the order. All of them were found to be guilty of violating regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ior counsel for the respondent Board. 8. The common thread running through the submissions of the appellants is that they were not personally involved in the day to day management of the company and the financial results as verified and certified by the chief financial officer and auditors was approved by them. They had no role in the verification and authentication of the financial results since they had been already verified and certified by duly appointed and competent professionals. In respect of Shri N. Narayanan, promoter and whole time director, it was contended that his expertise was in human resource management and he was involved only in man management, leadership and team building in the company. He was fully engrossed in recruitment of personnel, training and team buildup. According to the appellant, all business operations, financial matters and verification of accounts were handled by Shri P.S. Saminathan, managing director of the company. It is the case of the appellant Shri N. Narayanan that he, being a human resource expert, totally trusted the financial statements duly audited by statutory auditors, verified by the audit committee and reviewed by the managing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuments were produced for approval and they approved the same in good faith. It is submitted that even though they were members of the audit committee, no irregularity could be pointed out since the professionals working in the company, who have been delegated with the task of preparing, consolidating and verifying the accounts did not raise any alarm bell. As in the case of the whole time director, Shri N. Narayanan, the three other appellants mentioned above also submitted that finance was the portfolio of the managing director and the accounts were accepted by them in board meetings since their veracity and accuracy have been tested by the professionals duly appointed for the job. 10. Shri Shiraz Rustomjee, learned senior counsel for the Board took us through the records of the case, the provisions of the Act, the regulations and the minutes of the board meetings. According to him, the whole time director and other directors had a predominant responsibility of the duty of care and this has been abdicated by the appellants in this case. It is submitted that a director is statutorily expected to show the diligence and care of a prudent person while verifying the documents place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the show cause notice in the case of Shri N. Narayanan. ..more than 63% of the total revenue from the theatres for the financial year 2007-08 (around ₹ 347 crores) was accounted in the books of accounts by passing fictitious entries in order to show inflated revenues. The fictitious revenues shown were either adjusted as security deposit or shown as receivable. Therefore, there was no actual cash inflow for the said revenues shown by the company. The company showed negative cash flow from operating activities for the said financial year. Therefore, in order to meet the liquidity requirements, the company had to raise additional funds. Thus, by taking advantage of the rise in market price of the shares which resulted from the publication of the inflated results, finances were raised by pledging of the shares held by Shri Saminathan along with other two promoters. 12. On a consideration of the facts on record and the submissions made by the parties we have to conclude that the appellants have not acted in compliance with the statutory requirements of the director of a company. The director of a company is expected to exercise due care and diligence in the approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted financial powers. The chairman, managing director and Shri N. Narayanan are specially assigned powers of drawal of cheque without any limit. It cannot be accepted that a whole time director of the status of Shri N. Narayanan would be signing cheques in a casual manner or in total ignorance of the implications of the same. This is only one of the instances. He has been made member of almost every committee other than the audit committee. The fact that Shri N. Narayanan was the whole time director and he was actively involved in the functioning of the various committees, which control the day to day management of the company, shows that his duty and responsibility were expected to be of a high order. In this background, the plea taken by him in the appeal that all matters concerning finances were exclusively handled by the managing director and he believed him and the documents presented in the board meeting without any verification cannot be accepted. 14. It is on record that the appellants Shri K. Natarahjan, Shri K.S. Kashiraman and Shri G. Ramakrishanan were independent directors but were members of the audit committee. Shri K. Natarahjan and Shri K.S. Kashiraman attended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audit findings e. Compliance with listing and other legal requirements relating to financial statements. f. Disclosure of any related party transactions g. Qualifications in the draft audit report. The role of the audit committee is clearly spelt out in the above resolution of the board. The members of the audit committee are expected to exercise due oversight of the company's financial reporting process and to ensure that the financial statement is correct, sufficient and credible. It is also expected to conduct a meaningful review with special emphasis on major accounting entries and significant adjustments made in the accounts before putting up the statements for the approval of the Board. The board of directors of the company has entrusted the audit committee with an onerous duty to see that the financial statements are correct and complete in every respect. In this background, the members of the audit committee cannot take shelter under the verifications made by the internal auditor and other professionals. The details extracted in the show cause notice and the impugned order illustrate that there were several prominent irregularities which should have alerte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LJ in Baker v. Secretary of State for Trade and Industry [2001] BCC 273 at p.285 where the Court of Appeal approved the summary given by Jonathan Parker J at first instance in these terms: '(i) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors. (ii) Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions. (iii) No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director's role in the management of the company. In Tendolkar's case also the legal position has been brought out as under- It is certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellants have employed a device so as to defraud investors in dealing in the securities. They have also perpetrated fraud as defined in regulation 2(c) of the FUTP Regulations. We cannot restrict the above provisions to the narrow confines of 'dealing in securities' as canvassed by the appellants' learned counsel. The provisions of section 12A of the Act and the definition of fraud in regulation 2(c) of the FUTP Regulations are very wide in their scope and the device employed by the appellants squarely fall within the mischief. 19. During the hearing of the appeal, the learned counsel for the parties took us through the various provisions of Companies Act, 1956. We do not consider it necessary to discuss those provisions here because the facts of the case are squarely covered by the provisions of the Act and FUTP Regulations. 20. It is noteworthy that this Tribunal has decided the appeal of Shri V. Natarajan, chairman of the company, during the relevant period [V. Natarajan's case (supra)]. The observations of this Tribunal therein are relevant to the present appeal also. ..we are satisfied that the provisions of Regulations 3 and 4 of the Securities ..... 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