Role of company secretary with disclosures and compliances

As you are aware that a Company Secretary in a company is the Principal Officer and acts as a link between the Board of Directors, the company and government, regulators, judicial agencies, courts, enforcement agencies etc. A Company Secretary is responsible for compliance and disclosures of the activities and results of the company every year under various laws of land. A Company Secretary provides guidance to the Board of Directors of a company for compliance of various applicable laws. He/she is also responsible for conduct of activities of the company. He /she is also included in definition of "Officers in Default" and "Key Managerial Personnel" of the Company. The duties of a Company Secretary increased many fold in case of listed companies and those companies in which public are substantially engaged.

In this article we are going to explore the rights and duties of a Company Secretary on the basis of a decided case of Deccan Chrinicals Holdings Ltd. Vs. SEBI.

Section 205 of the Companies Act, 2013 read with Rule 10 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 deals with the functions of a Company Secretary . Some of the major duties and functions of a Company Secretarycan be inferred as follows:

• To ensure compliance with laws prevalent and applicable on the company and report to the Board of Directors (Board of Directors) about the same.
• To facilitate approval and conduct of Board meetings and general meetings of shareholders.
• To ensure compliance with the applicable secretarial standards.
• To represent the company before various authorities.
• To ensure that the company engages in good corporate governance practices.
• Any other function that the Central Government may prescribe.

Certain companies have been prescribed under Section 204 of the Companies Act, 2013 read with Rule 9 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014

These companies include:

1. Every listed company
2. Every public company having-
   1. paid-up share capital of fifty crore rupees or more or;
   2. turnover of two hundred fifty crore rupees or more or;
   3. outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.

Such companies are required to comply with secretarial audits which shall be conducted by a CS in practice. The report of such an audit is attached with the report of Board of Directors.

LET'S DISCUSS THE CASE

BRIEF OF CASE

Deccan Chronicle Holdings Ltd. (“DCHL" or the “Company") is a publisher of newspapers suchas 'Deccan Chronicle', 'Asian Age', 'Financial Chronicle' and 'Andhra Bhoomi'. In December 2004,the Company had come out with a public issue of Rs. 80,13,100 shares of Rs. 10 each at Rs. 162 pershare and had got its shares listed on BSE and NSE.

DCHL announced the first buy-back in July 2009 for up to 3.50 cr. equity shares of Rs. 2 each(minimum of 1 cr. equity shares) from the open market through stock exchanges at a price not exceeding Rs.100/- per equity share for an aggregate amount not exceeding Rs. 180 crore. The buyback commenced on August 12, 2009 and closed on January 25, 2010 wherein 26.54 lakhequity shares were bought back at an average price of Rs. 97.78 aggregating Rs. 25.95 crore.

DCHL announced another buy-back of its equity shares in May 2011 up to 3.45 cr. equity shares and minimum of 1 cr. equity shares from the open market through stock exchanges.

SEBI'S INVESTIGATION

SEBI conducted an investigation to ascertain:-

• If the promoters, Chairman, Vice Chairman of DCHL, have made any fraudulent pledgingof shares of DCHL and have made wrong, misleading or inadequate disclosures to thestock exchange, as alleged in the media reports.
• Whether there was understatement of loans by DCHL in its financial statements for thefinancial years from 2008- 09 to 2011-12.

THE INVESTIGATION, INTER ALIA, REVEALED THAT

(1) DCHL had understated its outstanding loans to the tune of Rs. 1,339.17 crore, Rs. 2,982.07crore and Rs. 3,347.41 crore for the year 2008-09, 2009-10 and FY 2010-11 respectively.

(2) The Company had understated the interest and financial charges from financial year2005-06 onwards and the cumulative amount of such understated amount stood atapproximately Rs. 753.91 crore up to September 30, 2012.

(3) Without having adequate free reserves DCHL carried out buyback of its shares whichmisled the uninformed investors and shareholders about the perceived valuation, strongfinancials, and adequate free reserves of the company which actually was not true andmight have influenced / induced the decision of investors and shareholders, particularlywhen the price of the share was declining since May 2010.

(4) The Company had manipulated its financials and the announcement for buyback of itssecurities was made even in the absence of adequate reserves.

(5) The Company had carried out the buyback of shares beyond the prescribed limit and alsodid not make any disclosure about change in its shareholding consequent to the buyback.

(6) The promoters and directors of DCHL, while making disclosure to the stock exchangesfor the quarter ending on September 30, 2012 have for the first time disclosed that99.81% of their shareholding in DCHL is encumbered / pledged whereas the promotershad obtained loans from financial institutions, banks, or finance companies either by wayof pledging their shareholding or by way of entering into Non disposal Undertaking orSecurity Net Agreements since March 2011.

DCHL along with its promoters, chairman and vice-chairman who are responsible for the overall management of DCHL have, inter alia, failed to comply with the followingconditions of the listing agreement, namely –

(a) Failed to disclose to the stock exchange material price sensitive information on the dateof entering into agreement with DCM (partnership firm with its promoters anddirectors).

(b) Misleading financial information (i.e. understatement of interest and outstanding loansand thereby overstatement of profits) in its Annual Report for FY 2008-09, FY 2009-10and FY 2010-11 which were not true and fair.

(c) Delay in filing shareholding pattern for quarters ended Sep-12 and Dec-12 to the stockexchange.

(d) Failure to provide updated information on the shareholding pattern from quarter endedMar-13 onwards on its website.

(e) Failure to appoint Company Secretary of the Company.

(f) Failure to disclose related party transactions pertaining to funds advanced to FlyingtonFreightors Ltd., a related entity.

SHOW CAUSE NOTICE TO THE COMPANY SECRETARY

Pursuant to the investigation, a common show cause notice (“SCN") dated May 10, 2016 wasissued to its, Company Secretary of the company for the above mentioned allegations, basedonthe findings in the investigation conducted by SEBI, which further includes that CompanySecretary being the signatories to the public announcement made by the Company on May 6,2011 for buy back of its equity shares without having adequate free reserves which misled the

uninformed investors and shareholders about the perceived valuation, strong financials oradequate free reserves of the company and these actions have wrongfully influenced andinduced the decision of investors and shareholders particularly when the price of the share wasdeclining since May 2010.

REPLY OF THE COMPANY SECRETARY

• He was appointed as a company secretary of DCHL on April 21, 2009 and resigned fromthe services of the Company vide resignation letter dated May 1, 2012. He had stoppedattending the office and discharging his official duties at DCHL from June 1, 2012. TheCompany has filed Form No. 32 showing relieving of Company Secretary on August 31,2012.
• During his employment in DCHL, he was not invited to the meetings of the board ofdirectors of the Company. The promoters/directors used to meet prior to the scheduledtime on the board meeting date (for approval of results, etc.) and would direct him tosend the financial results to the stock exchanges. He is not aware as to what transpiredin those meetings. Based on the requirement for loan/borrowings any resolutions to bepassed were discussed in the meeting.
• With regard to non-disclosure of encumbrance/pledge of shares it has been stated thatneither he was involved in the transactions nor he had knowledge of the same. Further,the responsibility to make disclosure under regulation 31(1) r/w regulation 31(3) of theTakeover Regulations, 2011 is solely on the promoters.
• With regard to alleged mis-statement in books of accounts, it has been stated that at nopoint of time he was entrusted with any duties or responsibilities relating to theaccounting or finance function of the Company by the management and as such he hadno knowledge of the loan, bank correspondences, pledge etc.
• The presumption as to correctness of the Audited Financial statement is establishedimmediately upon signing of the same by the Statutory Auditors and if anyunderstatement of outstanding loans is noticed upon investigation then a person who ismerely a company secretary may not be held liable as he was not involved in preparationand finalisation of annual accounts. He had signed the financial statements of theCompany under the provision of Section 215 of the Companies Act, 1956 with a view onlyto authenticate that the documents were approved by the board of the company.
• He had ascribed his signature on the public announcement for buyback in his capacity asa Company Secretary. It was only in relation to the compliances of procedural formalitiesfor the buy-back of shares and not in respect of financial statements and informationcontained therein.
• The alleged non-compliances with certain clauses of the Listing Agreement by DCHL havetaken place after he had resigned from the Company as Company Secretary. Therefore,he may not be held responsible for the same.As admitted by the Company Secretary, he was appointed as Company Secretary in DCHL onApril 21, 2009. He resigned from the services of the Company vide his resignation letter datedMay 01, 2012. The Company Secretary has further claimed that he had stopped attending theoffice and discharging his official duties at DCHL w.e.f. from June 01, 2012.The Company Secretary has, inter alia, also contended that during the time when he was in theemployment of DCHL, he was not invited to the meetings of board of directors of the Company.

He has claimed that the promoters/directors used to meet prior to the scheduled time on thedates of board meeting (for approval of results, etc.) and would direct him to send the financialresults to the stock exchanges and that he was not aware as to what transpired in thosemeetings.

With regard to the alleged mis-statement in books of accounts, the Company Secretary hasstated that at no point of time he was entrusted with any duties or responsibilities relating tothe accounting or financial transactions of the Company by the management and as such he hadno knowledge of the loan, bank correspondences, pledge, etc.

The presumption as to correctness of the Audited Financial statement is establishedimmediately upon signing of the same by the Statutory Auditors and if any understatement ofoutstanding loans is noticed upon investigation, then a person who is merely a companysecretary may not be held liable as he was not involved in preparation and finalisation of annualaccounts. He had signed the financial statements of the Company only pursuant to the statutoryrequirement under Section 215 of the Companies Act, 1956 which is mandatory and the signingwas only in the nature of attestation to the effect that these financials have been considered andapproved by the directors. He has also contented that as per the provisions of the CompaniesAct, 1956 the responsibility for accounts and financials rests ultimately on the board ofdirectors.

The requirements of section 215 of the Companies Act, 1956 (section 134 of theCompanies Act, 2013) regarding authentication of balance sheet and profit and lossaccount is given hereunder:-

"215. AUTHENTICATION OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT

(1) Save as provided by sub-section (2), every balance sheet and every profit and lossaccount of a company shall be signed on behalf of the Board of directors –

(i) in the case of a banking company, by the persons specified in clause (a) or clause(b), as the case may be, of subsection (2) of section 29 of the Banking CompaniesAct, 1949 (10 of 1949);

(ii) in the case of any other company, by its manager or secretary if any, and by notless than two directors of the company one of whom shall be a managing directorwhere there is one.

(2) In the case of a company not being a banking company, when only one of its directors isfor the time being in India, the balance sheet and the profit and loss account shall besigned by such director; but in such a case there shall be attached to the balance sheetand the profit and loss account a statement signed by him explaining the reason for noncompliancewith the provisions of sub-section (1).

(3) The balance sheet and the profit and loss account shall be approved by the Board ofdirectors before they are signed on behalf of the Board in accordance with the provisionsof this section and before they are submitted to the auditors for their report thereon."

Thus, as per section 215 of the Companies Act, 1956 every Balance Sheet and every Profit andLoss account of the company shall be signed on behalf of the board of directors, in case ofcompanies, (other than banking companies) by its manager or secretary, if any, and by not lessthan two directors of the company one of whom shall be a managing director where there is one.

Further, the Balance sheet and the Profit and Loss account shall be approved by the board of directors before they are signed on behalf of the board in accordance with the provision of this section and before they are submitted to the auditors for their report thereon. It is a trite law ofinterpretation that the heading or title prefixed to a particular section or group of sections in astatute can be referred to for construing the legislative intent of an Act of the Legislature, andso, in this case also, section 215 of the Companies Act, 1956, which deals with “authentication ofaccounts" should be treated as a preamble to the other provisions spelt out in the Act followingthe said title on the subject of authentication of accounts.

There exists a Government clarification on section 215 of the Companies Act, 1956 videcircular no. 7/72, dated May 12, 1972

Whereby it was clarified that the Department (erstwhileDepartment of Company Affairs) is of the view that as the authentication by the Secretary is “onbehalf of the board of directors" and not in his personal capacity, secretary can be heldresponsible regarding errors, as an “officer" of the company within the meaning of section 628of the Companies Act, 1956 and not because of authentication by him under section 215 as such.

Where, however, the secretary is charged with the responsibility of maintaining the accountsand also assisting the auditor at the time of auditing, he cannot conceivably escape theconsequence of any wrong statement in the accounts.

ROLE OF COMPANY SECRETARY AS PRESCRIBED UNDER OTHER CASE LAWS

The Hon'ble SAT has examined the role of company secretary, insofar as the requirement ofmaking timely and absolutely true disclosures under the Securities Laws is concerned in variousappeals filed in the matter of GHC Ltd.

In this regard, SEBI would also like to draw attention to the findings of the Hon'ble Tribunal inthe matter of Mr. Bhuwneshwar Mishra vs. SEBI (Appeal no. 7 of 2014 – Date of decision – July31, 2014) which are as under:

“19. Therefore, the company, the Company Secretary and the Chairman of the company have agreater responsibility on their shoulders to ensure, in a free and fearless manner, that thepromoters make timely and absolutely true disclosures as regards their respective shareholding inthe company in consonance with various regulations prescribed by SEBI and the ListingAgreement. In fact, the companies are required to maintain a register in this respect and if a vastvariation is noted by the company, the Company Secretary and the Chairman, in the shareholdingpattern of the promoters they are duty bound to inform to the stock exchange or even to SEBIaccordingly. Such acts of wrong disclosures are condemned as fraudulent and unfair tradepractices.

23. In this connection, it is pertinent to note that the Company, the Company Secretary and theChairman are not mere conduit to pass-on whatever details they receive from the promoters to theStock Exchanges irrespective of the records maintained by the Company in respect of the shareswhich may be held by a promoter at given point of time. The Appellants should have acted morediligently and responsibly and should not have been guided by mere legal opinions. It is settled lawthat legal opinions are only advisory in nature and not binding on anyone. Therefore, no legalinfirmity can be attributed to the impugned order which holds all the appellants guilty of violatingthe PFUTP Regulations, 2003 and imposes monetary penalties on them."

OBSERVATIONS AND FINDINGS OF SEBI

OBSERVATIONS - 1

Admittedly, the Company Secretary has served as a Company Secretary in DCHL during thefinancial year 2009-10 and 2010-11 which means, he has attested the Balance Sheet and Profit

and Loss accounts of DCHL for two of the three financial years in which the accounts have beenallegedly fraudulently understated.

The provisions of section 215 of the erstwhile Companies Act, 1956 fasten a duty on theCompany Secretary to authenticate the Balance Sheet and Profit and Loss account of thecompany on behalf of the board of directors. Under the circumstances, as a Company Secretary,cannot plead innocence by stating that he has merely fulfilled a statutory duty by signing theaudited accounts which were prepared by the auditors and approved by the board of directorsof the Company. The Company Secretary was performing the job of a secretary to the board ofdirectors and it was his duty to aid and advice and assists the board in ensuring that the accountscontained all the true information before the same were approved. Further, he was not merelysupposed to attest the accounts but was required to authenticate the Balance Sheet and Profitand Loss account of the Company, which cannot be undermined as a mere routine attestationjob but has to be taken up as a serious responsible job of declaring the authenticity of thecontents of the accounts and all the information contained therein.

The Company Secretaryought to have verified if the audited accounts have contained all the assets & liabilities or anyother material facts that needed to be incorporated in the accounts.

FINDINGS - 1

In view of the above, SEBI finds that, Company Secretary has failed to act diligently andresponsibly while acting as the company secretary of DCHL at a time when the Company and itsdirectors understated outstanding loans and interest and finance charges in the annual reportsfor FYs 2008-09, 2009-10 and 2010-11 and thereby overstated the profits of the Company forall the three successive financial years.

OBSERVATIONS - 2

Company Secretary was appointed in DCHL on April 21, 2009. He resigned from the services ofthe Company vide his resignation letter dated May 01, 2012. He has further claimed that he hadascribed his signature on the Public Announcement for buyback in his capacity as a CompanySecretary and that it was only as a matter of compliance of procedural formalities for thebuyback of shares and not in respect of any financial statements or information containedtherein.

Thus, it is not in dispute here that the Noticee was acting as the Company Secretary of DCHL during the FY 2010-11 when buyback offer worth Rs. 270 crore was made by the Company. It is also an admitted fact that the Company Secretary had ascribed his signature on the publicannouncement for buyback in his capacity as a Company Secretary of DCHL.

In this regard, SEBI once again rely upon the findings of the Hon'ble Tribunal in the matter of Mr. Bhuwneshwar Mishra vs SEBI (Supra) and SEBI'S observations recorded at clauses A(12) to(14) of para 16 of this Order about the roles & responsibilities vested in the Company Secretary,towards the Company and its board of directors.

SEBI reiterate that as a statutory official of the Company, the Company Secretary should have exercised utmost due diligence and checked the veracity of the buyback offer document and itslegal compliances before authenticating such a document and signing the aforesaid public announcement which apparently violated the provisions of the Companies Act, 1956.

FINDINGS - 2

In the light of the above, SEBI held that the company secretary of DCHL responsible as for signingthe public announcement made by the Company on May 6, 2011 for buyback of its equity shares,without having adequate free reserves, which misled the uninformed investors/ shareholdersabout the perceived and artificially overstated valuation, strong financials and adequate freereserves of the Company which might have certainly influenced/ induced the decision ofinvestors/shareholders particularly when the price of the share was declining since May 2010.

Considering the foregoing, SEBI held Company Secretary equally liable for violation of theprovisions of sections 68 and 77A of the Companies Act, 1956 and regulation 3(a), (b), (c), (d), 4(1), 4(2)(f), (k) and (r) of the PFUTP Regulations, 2003 read with section 12A(a), (b) and (c) of the SEBI Act, 1992.

RESPONSIBILITIES OF THE COMPANY SECRETARY

The analysis of facts and evidences which have been alluded to by the SCN and the explanationsoffered by the Noticees to unfasten them from the liabilities that have been fastened on to themin the SCN for the violations committed by them, succinctly bring out a case, where one finds theCompany, its directors and management in cahoots with its company secretary and auditor,have manipulated the accounts by understating the liabilities and expenditure over many yearsfrom 2005-06 onwards with an objective to mislead the shareholders and defraud the investorswith an artificially projected strong financial statements which were full of falsehood andmisrepresentations. The attempt to buyback shares of the Company by the directors andpromoters based on the falsely reported reserves amount despite the Company actually lackingthe requisite free reserves was another attempt to hoodwink innocent investors and to sell theCompany's misplaced false story about its strong fiscal position to its shareholder/investors.

The Company Secretary went on generously authenticating and attesting the financialstatements and the buyback offer documents without any application of mind and with an intentto aid and abate the malicious conduct of the Company and its promoters and directors.Such actions of the Company are replete with glaring manipulations, fraudulent intents andexaggeration of accounts to the extent that it went on for a number of years with the connivanceof the Company Secretary and Auditors. Such blatant and egregious misconduct is not conducivefor the integrity of securities market and cannot be spared to be viewed leniently, rather suchmis-conduct of the Company deserve to be dealt with strictly.

THE ORDER OF SEBI

However, keeping in view the foregoing factual findings and observations SEBI in order toprotect the interest of the investors in the securities market hereby issue the directions to the

Company Secretary as follows:

• Company Secretary shall not directly or indirectly provide company secretarial services

for a period of one year to any listed company or offer services pertaining to complianceobligations of listed companies and intermediaries registered with SEBI in terms of therequirements under the SEBI Act, 1992, the SCRA 1956, the Depositories Act, 1996, thoseprovisions of the Companies Act, 2013 which are administered by SEBI under section 24thereof and the Rules, Regulations and Guidelines made under those Acts which areadministered by SEBI.

• For a period of one year, listed companies and intermediaries registered with SEBI shallnot engage the Company Secretary for company secretarial services for issuing anycertificate with respect to compliance of statutory obligations which SEBI is competentto administer and enforce, under various laws.

CONCLUSION

Company Secretary is a vital link between the company and its Board of Directors, shareholders,government and regulatory authorities. Also Section 205 of the Companies Act, 2013 entrustedthe Company Secretary with the duty;

a) to report to the Board about compliance with theprovisions of Companies Act, 2013 Act, the rules made there under and other laws applicable tothe company,

b) to provide to the directors of the company, collectively and individually, suchguidance as they may require, with regard to their duties, responsibilities and powers, to assistthe Board in the conduct of the affairs of the company,

c) to assist and advise the Board inensuring good corporate governance and in complying with the corporate governancerequirements and best practices.

d) Further a listed company appoints a qualified company secretary as the compliance officer whoshall be responsible for ensuring conformity with the regulatory provisions applicable to thelisted entity in letter and spirit.

DISCLAIMER: The case study presented here is only for sharing information and knowledge with the readers. The views are personal, shall not be considered as professional advice. In case of necessity do consult with professionals for more clarity and understanding of subject matter.