Director not associated with everyday affairs isn't liable of misrepresentation in issue of GDRs by Company: SAT

  • Corporate Law
  • GDR

In the issuance of GDR by the company 'M', a bank account was opened with Lisbon Bank, Banco, for purpose of receiving subscription money in respect of GDR and bank was authorized to use subscription money as security in connection with loans, if any. 

Thereafter, pursuant to a credit agreement, a loan was availed by Clifford from Banco which was used to subscribe to the GDR issue of the company.  

A show cause notice was issued to various notices including the appellant who was non-executive independent director in company 'M' alleging that Clifford was sole subscriber to GDR issued by company and that subscription amount was paid by obtaining a loan under a credit agreement. 

It was alleged that the company did not inform BSE about execution of credit agreement and alleged that GDR proceeds were diverted to an extent of US $ 8.90 million and this act of concealing and suppressing material facts violated section 12A of SEBI Act, 1992 and Regulations 3 and 4 of PFUTP Regulations. 

Thereafter, the SEBI issued an order instructing the company to take steps to recover money from Banco and also banned the appellant with other directors from accessing the securities market for 5 years. However, there was no finding of SEBI that the appellant was aware of the arrangement of giving a loan to Clifford and, therefore, liability and/or culpability could not be fastened upon appellant.  

Furthermore, the appellant was not involved in day-to-day business of running the company and was a practicing-chartered accountant who was a non-executive independent director and was only involved in policy decisions. Thus, the disputed order to the extent that it related to appellant could not be sustained and was to be quashed.