JSA advised and successfully defended one of the former directors of Karvy Stock Broking Ltd. (“KSBL”) in proceedings initiated by the Securities and Exchange Board of India (“SEBI”) in respect of stock broking activities of KSBL.
SEBI issued a Show Cause Notice (“SCN”) to KSBL and various individuals who were directors of KSBL and two wholly owned subsidiaries of KSBL at the relevant point. The SCN alleged that KSBL and other noticees were liable for the defaults/ violations/ non-compliance by KSBL of various provisions of the Securities Contracts (Regulations) Act, 1956, SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003, SEBI (Stock Brokers) Regulations, 1992 and certain SEBI circulars. Vide its common order dated April 28, 2023, SEBI has exonerated the former director on the ground that there is no evidence/ material available on record to show that he was involved in the active management or day to day affairs of the stock broking activities of KSBL or had any knowledge about unlawful practice of raising of funds through pledging of clients’ securities.
While defending the charge, various provisions of the SEBI Act, 1992, Companies Act, 2013, circulars issued by the Ministry of Corporate Affairs and various judgments were relied upon to submit that the former director could not be held liable merely on account of his directorship without producing any evidence to suggest his involvement in the alleged violations.
SEBI accepted the submissions made on behalf of the former director and concluded the proceedings against him without any adverse observations. SEBI’s order dated April 28, 2023 is an acknowledgment of the well settled principle that directors of a company cannot be held vicariously liable for the acts of a company unless their involvement in the affairs of the company/ alleged violations can be established through board processes/ other documentary evidence. Notably, other parties to the proceedings were penalized; barred from accessing capital markets; and/ or restrained from holding the post of director or any other key managerial position in any listed company or a public company which intends to raised money from the public.
Our Dispute Team Partner – Vikram Raghani, Partner – Pulkit Sukhramani, Senior Associate – Vidhi Jhawar, Junior Associate – Deepank Anand.
Pulkit Sukhramani specializes in Securities Litigation and Advisory.