When it comes to affixing responsibility for contraventions by companies, certain individuals are held liable under most Indian laws. The Companies Act, 2013, also imposes liability on an “officer who is in default”. In these cases, apart from directors and other employees, such individuals may include companies’ compliance officers.
The responsibility of compliance officers, specifically from the standpoint of securities market laws and regulatory actions initiated by the Securities and Exchange Board of India (SEBI), is examined below.
Under the SEBI Act, 1992, and the Securities Contracts (Regulation) Act, 1956, SEBI has notified rules, regulations and circulars dealing with the manner in which listed companies and securities market intermediaries are required to carry out their activities.
To ensure compliance with the applicable law, SEBI requires listed companies and securities market intermediaries to appoint a compliance officer. In the case of listed entities, the compliance officer must be a qualified company secretary. Apart from monitoring compliance, in certain instances SEBI also requires compliance officers to immediately and independently report to SEBI any non-compliance they observe.
SEBI has wide powers to initiate: (i) adjudication proceedings, where monetary penalties are imposed; (ii) enquiry proceedings, which in the case of intermediaries could lead to a warning/censure or a ban for a specified period from trading in India; or (iii) proceedings under section 11B of the SEBI Act, in terms of which SEBI can impose both directions and monetary penalties.
In case of a contravention, SEBI can proceed against the persons responsible for a particular entity, such as the directors as well as the compliance officer, without prejudice to its ability to proceed against the entity itself. In recent years, SEBI has increasingly taken action against compliance officers and imposed monetary penalties when affixing responsibility on them.
A majority of these cases relate to contraventions or lapses pertaining to prevention of insider trading. Listed companies and market intermediaries are required to frame a code of conduct in line with the principles set out under the applicable insider trading law. Apart from specific obligations under the relevant regulations, the compliance officer must administer the code of conduct.
In many instances, SEBI has held a compliance officer accountable for failure to institute proper mechanisms and implement an effective code of conduct for preventing insider trading, as well as for failure to take specific steps (mainly, closure of the trading window in light of certain unpublished price sensitive information). In a case of failure to close the trading window, SEBI is likely to hold the compliance officer liable irrespective of whether any employee or director has traded in securities of the company taking undue advantage of unpublished price sensitive information.
Apart from the responsibilities set out in SEBI regulations, certain specific obligations have been imposed on compliance officers. For instance, SEBI requires compliance officers of market intermediaries to implement adequate policies, procedures and controls in relation to dealing with unauthenticated market-related news or rumours by employees.
Having said the above, the responsibilities of a compliance officer in no way diminish the responsibilities imposed on the company and its directors or other officers. With respect to the insider trading laws specifically, as recently noted in an informal guidance by SEBI (to Kirloskar Chillers), the actions of the compliance officer may be referred to the board of directors and the audit committee for examination in accordance with the laws and the facts of the case. The anti-money laundering laws also require the appointment of a designated director who is responsible for framing the relevant policies as well as ensuring compliance with the laws.
In relation to market participants, foreign portfolio investors are required to have compliance officers, but where offshore derivative instruments are being issued, SEBI requires a compliance certification to be provided by the chief executive officer or equivalent.
This approach is in line with the view taken by securities market regulators in the UK, US and Hong Kong on augmenting accountability of senior management and simultaneously encouraging compliance officers to take action in case of any misconduct or violation. The laws and actions by SEBI are, accordingly, geared to having compliance officers implement a culture of adherence within their organizations, without detracting from the responsibilities of senior management.
Cyril Amarchand Mangaldas is India’s largest full-service law firm. Shruti Rajan is a partner and Garima Joshi is a principal associate at the firm.
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