In one of the recent rulings of the Securities Appellant Tribunal (’Tribunal’), Mumbai, the interim order passed by SEBI in the matter of Neesa Technologies Limited(‘Company’) has been quashed qua one of the directors i.e. Mr. Nimain Charan Biswal who had joined and resigned from the directorship of the Company before the issuance of Non-convertible Debentures (NCDs),the subject matter of the case.This write up contains a brief analysis of the aforesaid ruling of the Tribunal.
Facts of the caseplaced before SEBI
Mr. Nimain Biswal (the “Appellant”) was appointed as a director of Neesa Technologies Limited on November 7, 2013 and he had resigned from the directorship w.e.f. March 6, 2014. The Company had made an issue (public issue as alleged by SEBI in its order) of NCDs during the Financial Year 2013-14 from the period starting from April 8, 2013 to August 22, 2013.
SEBI via an interim order cum show cause notice dated June, 2, 2016 (‘Order’), made an allegation that the issue of NCDs made by the Company was in the nature of a ‘public issue’ as against the claim of the Company of the issue to be a private placement without complying with the norms that regulate such public issues, viz., Sections 56, 60, 73 and 117C of the Companies Act, 1956(“Act, 1956”) and the SEBI(Issue and Listing of Debt Securities)) Regulations (‘ILDS regulations’).
In terms of the Order,the Company and directors (collectively referred to as ‘noticees’) was directed to show cause as to why suitable directions/prohibitions under Sections 11(1), 11(4), 11A and 11B of the SEBI Act including the following, should not be taken/imposed against them:
A. Direction for refund of money collected through the offer of NCD salong with interest, if any, promised to investors therein;
B. Direction for not issuing any prospectus or any offer document or issue advertisement for soliciting money from the public for the issue of securities, in any manner whatsoever, either directly or indirectly, for an appropriate period;
C. Direction for refraining from accessing the securities market and prohibiting them from buying, selling or otherwise dealing in securities for an appropriate period.
SEBI noted that the Company had defaulted in payment of interest in respect of the aforesaid NCDs during the directorship of Mr. Biswal and accordingly, by virtue of the aforesaid order,Mr. Biswal was
A. prohibited from issuing prospectus or any offer document or issue advertisement for soliciting money from the public for the issue of securities, in any manner whatsoever, either directly or indirectly, till further orders;
B. directed to restrain from accessing the securities market and further prohibited from buying, selling or otherwise dealing in the securities market, either directly or indirectly, till further directions;
C. directed to provide a full inventory of all their assets and properties.
Being aggrieved by the aforesaid Order of SEBI, the Appellant had filed an appeal (Appeal No. 204/2016) before the Tribunal.The aforesaid order was quashed qua Mr. Biswal by the Tribunal vide its order dated July 14, 2016 on the following grounds and opinion-
A. The decision of the Whole-Time Member of SEBI goes beyond the interim order and the show cause notice and therefore, the interim order should be to set aside and fresh order on merits and in accordance with the law should be passed by SEBI.
B. Mr. Biswal was a director of the Company only for a period of approximately 4 months i.e. from November 7, 2013 to March 6, 2014 and the allotment of NCDs by the Company was completed on August 22, 2013 i.e. before Mr. Biswal joined NTL as a director. In view thereof, it was held that Mr. Biswal became a director after the offer, issue and allotment of NCDs was complete and therefore, he cannot be held responsible for violations of the Company regarding offer, issue and allotment of NCDs.
C. The documents of the Company do not show contrary to the claim made by Mr. Biswal of not attending or non receiving any notice of any Board Meeting during his tenure and of not involving in any decision making process related to the NCDs.
D. Even though Mr. Biswal was appointed in executive capacity but the records of the Company does not suggest the extent of his involvement in the affairs of the Company.
E. As alleged in the interim order of SEBI of default in payment of interest in respect of NCDs during the directorship of Mr. Biswal, however, the corresponding provisions of law violated by the Company on account of such default in payment of interest have not been alleged in the interim order. Further, the details / particulars regarding such default in payment of interest on NCDs have also not been brought out in the interim order. Thus, the charge against Mr. Biswal in the interim order is vague.
As discussed above, the decision of the Tribunal is primarily based on the fact that Mr. Biswal was not associated with the Company during the period in which the issuance of the NCDs had happened. Further, he was not involved in the affairs of the Company even after his appointment since he did not attend any of the Board meetings of the Company till his resignation and therefore was not involved in the decision making process of the Company. Therefore, it can be inferred that a director can only be held liable for the acts which takes place during his tenure of directorship or with his knowledge or connivance. Further, a director cannot be held responsible for merely holding an executive capacity unless he has an involvement in the affairs of the Company by taking policy decisions with respect to the Company.
 Source: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1433336089953.pdf
(Author is associated as an Executive with Vinod Kothari & Company)