Business environment in India has undergone a sea-change in the past decade. Increased emphasis on values such as accountability, transparency, risk management has led to integration of compliance management with business processes. Executive board member(s) of companies are now incentivized and encouraged to multiply their efforts towards value protection and management and not just value creation. The paradigm shift in the expected role of managerial personnel(s) can be attributed to the shift in penal measures adopted by regulators from corporate liability to a personal liability regime. This article focuses specifically on the stand taken by Securities Exchange Board of India (“SEBI”) with respect to role, responsibilities and liability of “compliance officers”.
SEBI expects numerous compliances from listed entities and vide SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) establishes a framework for corporate governances applicable to every entity listed with stock exchange(s) in India. One of the primary requirements of the LODR is the appointment of a qualified company secretary in the capacity of a compliance officer, to ensure conformity with SEBI regulations in letter as well as spirit. So much so that, the said compliance officer along with the the chief executive officer is authorized to sign the quarterly compliance report on corporate governance, to be filed with the relevant stock exchange.
The Compliance officer is inter-alia responsible for carrying out numerous core functions including co-ordination with recognised stock exchange(s) and depositories vis-a-vis compliance with rules, regulations and other directives of SEBI; monitoring e-mails received by grievance redressal division of the listed entity; maintenance of appropriate procedures to ensure correctness, authenticity and comprehensiveness in information being filed with SEBI etc.
The SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) propagates a self-regulatory mechanism to enforce prohibitions on insider trading in listed entities and, thereby, piles on more responsibilities on the compliance officer.
As per the PIT Regulations, a compliance officer could be any senior officer who is designated so and is reporting to the board of directors. The compliance officer shall be responsible for compliance of policies, procedures, maintenance of records and monitoring adherence to the provisions of PIT Regulations for preservation of unpublished price sensitive information (UPSI). Every trading plan is required to be reviewed and approved by the compliance officer before it is notified to the stock exchanges on which the securities are listed.
Every company whose securities are listed on stock exchanges and every market intermediary registered with SEBI is mandatorily required to formulate a code of conduct to regulate, monitor and report trading by its employees. The onus of administering the code of conduct is on the compliance officer. The compliance officer shall also advise the board of directors on the designated person proposed to be covered by the said code of conduct.
It is pertinent to note that, compliance officer performs requisite functions/responsibilities under the overall supervision of the board of directors or head of organization of the listed entity. Notwithstanding the above, the compliance officer has the obligation to perform his duties independent of the board of directors. The extent of power and liability of the compliance officer came into question in the infamous matter of Satyam Computer Services Limited[SEBI Adjudication Order No. PG/AO-115/2011 dated November 29, 2011], wherein SEBI was of the opinion, that the compliance officer being one of the key personnel, has an important role to play in the company for monitoring adherence to SEBI regulations, preservation of price sensitive information and implementation of code. Even if the relevant regulations specify that the compliance officer shall execute his responsibilities under the overall supervision of the Board, yet the provision confers key responsibilities on the compliance officer per se, which cannot be overlooked. SEBI, in its order, stated that the compliance officer cannot raise the defence that internal approvals were not available, because if such contention is accepted, it would render the concept of appointment of compliance officer meaningless.
Given the aforesaid background, the adjudicating officer found that the compliance officer failed in its responsibility to close the trading window and adhere to provisions of the code of conduct and applicable SEBI regulations and, therefore, imposed monetary penalty as per Section 15HB of the Securities and Exchange Board of India, 1992. SEBI referred to the Supreme Court judgement in SEBI v. Shri Ram Mutual Fund[(2006) 68SCL 216 (SC)] wherein it was held that “once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant. Once the contravention is established, then the penalty is to follow.” An appeal was preferred with the Securities Appellate Tribunal (SAT)
[Appeal No. 182 of 2012, Securities Appellate Tribunal, Mumbai dated 24.12.2013], which did not result in a different outcome for the appellant. The SAT confirmed penalty of INR 5,00,000 on the compliance officer for violating applicable SEBI regulations.
More recently SEBI provided further insight on the authority of a compliance officer with respect to pre-clearance of security trade in an Interpretative Letter dated February 3, 2017 issued to Kirloskar Chillers Private Limited (KCPL). One of the queries raised by KCPL was whether compliance officer has discretionary power to accept or reject pre-clearances for any reason it deems fit, even if they are extraneous to the provisions of the PIT Regulations or the code of conduct.
SEBI, in its response, stated that Regulation 2(1)(c) read with Schedule B of the PIT Regulations casts certain obligations on the compliance officer, which includes making decisions with respect to a pre-clearance request after necessary assessment as per PIT Regulations and the code of conduct. Since the compliance officer acts under the overall supervision of the board of directors or the audit committee, the acts of the compliance officer can be referred to the board of directors or the audit committee, irrespective of whether such action is extraneous to the provisions of the PIT Regulations or the code of conduct. Therefore, SEBI is of the view that the board of director or the audit committee, as the case maybe, shall merely serve as a review mechanism to examine the decisions made by the compliance officer and does not dilute the compliance officer’s obligations under the PIT regulations or the code of conduct.
It is clear from the judgment and interpretation letter that SEBI holds the compliance officer responsible for general compliance of all SEBI regulations. Given that the board of directors are required to establish controls, especially to prevent disclosure of UPSI, ambiguity continues to exist with respect to attribution of liability and responsibility under PIT regulations.
The role of compliance officer in a listed company for the aforesaid reasons is abound with risks for a professional from a regulatory perspective. Therefore, it is extremely important for the professional to meticulously examine the applicable SEBI regulations while accepting the role of a compliance officer and negotiate on matters such as D&O liability insurance or indemnity protection prior to accepting such a position in a listed entity.
The Compliance officer is inter-alia responsible for carrying out numerous core functions including co-ordination with recognised stock exchange(s) and depositories vis-a-vis compliance with rules, regulations and other directives of SEBI; monitoring e-mails received by grievance redressal division of the listed entity; maintenance of appropriate procedures to ensure correctness, authenticity and comprehensiveness in information being filed with SEBI etc.
The SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) propagates a self-regulatory mechanism to enforce prohibitions on insider trading in listed entities and, thereby, piles on more responsibilities on the compliance officer.
As per the PIT Regulations, a compliance officer could be any senior officer who is designated so and is reporting to the board of directors. The compliance officer shall be responsible for compliance of policies, procedures, maintenance of records and monitoring adherence to the provisions of PIT Regulations for preservation of unpublished price sensitive information (UPSI). Every trading plan is required to be reviewed and approved by the compliance officer before it is notified to the stock exchanges on which the securities are listed.
Every company whose securities are listed on stock exchanges and every market intermediary registered with SEBI is mandatorily required to formulate a code of conduct to regulate, monitor and report trading by its employees. The onus of administering the code of conduct is on the compliance officer. The compliance officer shall also advise the board of directors on the designated person proposed to be covered by the said code of conduct.
It is pertinent to note that, compliance officer performs requisite functions/responsibilities under the overall supervision of the board of directors or head of organization of the listed entity. Notwithstanding the above, the compliance officer has the obligation to perform his duties independent of the board of directors. The extent of power and liability of the compliance officer came into question in the infamous matter of Satyam Computer Services Limited[SEBI Adjudication Order No. PG/AO-115/2011 dated November 29, 2011], wherein SEBI was of the opinion, that the compliance officer being one of the key personnel, has an important role to play in the company for monitoring adherence to SEBI regulations, preservation of price sensitive information and implementation of code. Even if the relevant regulations specify that the compliance officer shall execute his responsibilities under the overall supervision of the Board, yet the provision confers key responsibilities on the compliance officer per se, which cannot be overlooked. SEBI, in its order, stated that the compliance officer cannot raise the defence that internal approvals were not available, because if such contention is accepted, it would render the concept of appointment of compliance officer meaningless.
Given the aforesaid background, the adjudicating officer found that the compliance officer failed in its responsibility to close the trading window and adhere to provisions of the code of conduct and applicable SEBI regulations and, therefore, imposed monetary penalty as per Section 15HB of the Securities and Exchange Board of India, 1992. SEBI referred to the Supreme Court judgement in SEBI v. Shri Ram Mutual Fund[(2006) 68SCL 216 (SC)] wherein it was held that “once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant. Once the contravention is established, then the penalty is to follow.” An appeal was preferred with the Securities Appellate Tribunal (SAT)
[Appeal No. 182 of 2012, Securities Appellate Tribunal, Mumbai dated 24.12.2013], which did not result in a different outcome for the appellant. The SAT confirmed penalty of INR 5,00,000 on the compliance officer for violating applicable SEBI regulations.
More recently SEBI provided further insight on the authority of a compliance officer with respect to pre-clearance of security trade in an Interpretative Letter dated February 3, 2017 issued to Kirloskar Chillers Private Limited (KCPL). One of the queries raised by KCPL was whether compliance officer has discretionary power to accept or reject pre-clearances for any reason it deems fit, even if they are extraneous to the provisions of the PIT Regulations or the code of conduct.
SEBI, in its response, stated that Regulation 2(1)(c) read with Schedule B of the PIT Regulations casts certain obligations on the compliance officer, which includes making decisions with respect to a pre-clearance request after necessary assessment as per PIT Regulations and the code of conduct. Since the compliance officer acts under the overall supervision of the board of directors or the audit committee, the acts of the compliance officer can be referred to the board of directors or the audit committee, irrespective of whether such action is extraneous to the provisions of the PIT Regulations or the code of conduct. Therefore, SEBI is of the view that the board of director or the audit committee, as the case maybe, shall merely serve as a review mechanism to examine the decisions made by the compliance officer and does not dilute the compliance officer’s obligations under the PIT regulations or the code of conduct.
It is clear from the judgment and interpretation letter that SEBI holds the compliance officer responsible for general compliance of all SEBI regulations. Given that the board of directors are required to establish controls, especially to prevent disclosure of UPSI, ambiguity continues to exist with respect to attribution of liability and responsibility under PIT regulations.
The role of compliance officer in a listed company for the aforesaid reasons is abound with risks for a professional from a regulatory perspective. Therefore, it is extremely important for the professional to meticulously examine the applicable SEBI regulations while accepting the role of a compliance officer and negotiate on matters such as D&O liability insurance or indemnity protection prior to accepting such a position in a listed entity.
[The author is Principal Associate in Corporate practice, Lakshmikumaran & Sridharan, Bangalore]
