SEBI Order in the matter of Religare Enterprises Ltd.

JSA advised and successfully defended one of the former directors of Religare Finvest Limited (“RFL”) in proceedings initiated by the Securities and Exchange Board of India (“SEBI”) in the matter of diversion of funds from Religare Enterprises Ltd. (“REL”), a listed company, through its subsidiary RFL.

SEBI issued a Show Cause Notice (“SCN”) to 63 individuals/ entities including certain former directors of RFL. In respect of these former directors, the SCN alleged that the fraudulent scheme of diversion of funds was indirectly aided by them, and they have failed to exercise due diligence and care in violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”).

Vide its common order dated October 31, 2022, SEBI has observed that a director can only be held liable in respect of acts of omission or commission by a company which have occurred with their knowledge, attributable through board processes, etc. and with their consent or connivance or where the director has not acted diligently.

While exonerating the former directors of the alleged violation of provisions of the PFUTP Regulations, SEBI concluded that since these former directors were not part of any of the loan processes or any of the committees which approved loans/investments which led to diversion of funds, a benefit of doubt has to be given to these individuals in respect of the allegation of violation provisions of the PFUTP Regulations. In respect of other former directors of RFL whose involvement in the loan approval process of RFL could be established through board processes/ other documentary evidence, a monetary penalty has been imposed by SEBI.

SEBI’s order acknowledges the well settled principle that directors of a company cannot be held vicariously liable for the acts of a company unless their involvement can be established through board processes/ other documentary evidence and not without any documentary evidence to show their involvement/ culpability, even in matters of such a large-scale fraud involving serious allegations of violations of PFUTP Regulations.

JSA Disputes Team Comprised Partner – Vikram Raghani, Principal Associate – Pulkit Sukhramani, and Senior Associate – Vidhi Jhawar.