Scope of Corporate Governance through

The Eyes of Judiciary

1. Landmarc Leisure Corporation Ltd. and Others, 2022 SCC OnLine SEBI 6
[Securities and Exchange Board of India, WTM/AB/IVD/ID19/14342/2021-22,
Decided on January 20, 2022] – [Para 9]

Also Referred:

a. ARSS Infrastructure Projects Limited and Others, 2021 SCC OnLine SEBI 576
[Securities and Exchange Board of India, WTM/AB/IVD/ID19/14342/2021-22,
Decided on November 25, 2021] – [Para 5]
b. Iris Mediaworks Limited and Others, 2021 SCC OnLine SEBI 571 [Securities and
Exchange Board of India, WTM/AB/IVD/ID19/14185/2021-22, Decided on
November 17, 2021] – [Para 17]
c. Info-Drive Software Limited and Others, 2021 SCC OnLine SEBI 251 [Securities and
Exchange Board of India, WTM/AB/IVD/ID19/13894/2021-2022, Decided on
October 26, 2021] – [Para 6]
d. Jaisukh Dealers Limited and Others, 2021 SCC OnLine SEBI 187 [Securities and
Exchange Board of India, WTM/AB/IVD-ID19/12937/2021-22, Decided on August
6, 2021] – [Para 9]
e. V.B. Industries Limited and Others, 2021 SCC OnLine SEBI 174 [Securities and
Exchange Board of India, WTM/AB/IVD/ID19/12493/2021-22, Decided on July
8, 2021] – [Para 7]
f. And others.

Procedural History:

1. The above stared case was a product of a Show Cause Notice (SCN) which was issued by
Securities and Exchange Board of India listed (SEBI) on 12/02/2020 to 11 Noticee.

2. The SCN called upon the Noticee to show cause as to why suitable directions should be not
be issued and/or penalty not be imposed u/s 11, 11A and11B r/w S. 11(2), 15A, 15HA and
15HB of SEBI Act, 1992 and S. 12A of Securities Contracts (Regulation) Act, 1956 (SCRA,
1956) r/w S. 23E and 23H of SCRA, 1956 against them.
3. The violation stated was u/s 12A of SEBI Act, 1992 and Regulations 3 and 4 of the SEBI
Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market), Regulations, 2003 (PFUTP Regulations, 2003), Regulations 4 and 17 r/w
Part B of Schedule II, 33 and 48 of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 (LODR Regulations, 2015) and S. 21 of SCRA, 1956.

4. Investigation was carried out by SEBI.

Issues:

1. Misrepresentation including of financials and misuse of funds/books of accounts.

2. Non-furnishing of information to the forensic auditor.

Consideration of Submissions and Findings (Relevant to us):

SEBI Act, 1992

S. 27. (1) Where an offence has been committed by a company, every person who at the time
the offence was committed was in charge of, and was responsible to, the company for the
conduct of the business of the company, as well as the company, shall be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any
punishment provided in this Act, if he proves that the offence was committed without his
knowledge or that he had exercised all due diligence to prevent the commission of such
offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act
has been committed by a company and it is proved that the offence has been committed with
the consent or connivance of, or is attributable to any neglect on the part of, any director,
manager, secretary or other officer of the company, such director, manager, secretary or
other officer shall also be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly.

Explanation: For the purposes of this section,- (a) “company” means any body corporate
and includes a firm or other association of individuals; and (b) “director”, in relation to a
firm, means a partner in the firm……………….”

LODR Regulations, 2015

“Principles governing disclosures and obligations.

4. (1) The listed entity which has listed securities shall make disclosures and abide by its
obligations under these regulations, in accordance with the following principles:

(a) Information shall be prepared and disclosed in accordance with applicable standards of
accounting and financial disclosure.

(b) The listed entity shall implement the prescribed accounting standards in letter and spirit
in the preparation of financial statements taking into consideration the interest of all
stakeholders and shall also ensure that the annual audit is conducted by an independent,
competent and qualified auditor

……………………………

(e) The listed entity shall ensure that disseminations made under provisions of these
regulations and circulars made thereunder, are adequate, accurate, explicit, timely and
presented in a simple language.

………………………………

(2) The listed entity which has listed its specified securities shall comply with the corporate
governance provisions as specified in chapter IV which shall be implemented in a manner so
as to achieve the objectives of the principles as mentioned below.

……

(f) Responsibilities of the board of directors: The board of directors of the listed entity shall
have the following responsibilities:

…….

(ii) Key functions of the board of directors—

………………………………

(6) Monitoring and managing potential conflicts of interest of management, members of the
board of directors and shareholders, including misuse of corporate assets and abuse in
related party transactions.

(7) Ensuring the integrity of the listed entity's accounting and financial reporting systems,
including the independent audit, and that appropriate systems of control are in place, in
particular, systems for risk management, financial and operational control, and compliance
with the law and relevant standards.

(iii) Other responsibilities:

….

(3) Members of the board of directors shall act on a fully informed basis, in good faith, with
due diligence and care, and in the best interest of the listed entity and the shareholders.

…………………………………………………

(6) The board of directors shall maintain high ethical standards and shall take into account
the interests of stakeholders.

…..

(12) Members of the board of directors shall be able to commit themselves effectively to their
responsibilities.

……………………………………………….

2. Majestic Auto Limited, 2021 SCC OnLine SEBI 136 [Securities and Exchange
Board of India, WTM/SM/CFD-CMD2/33/2021-22, Decided on June 11, 2022] –
[Para 24]

To put the above discussions in perspective, it is necessary to discuss in brief the necessity
and importance of ID and also the scheme of SEBI Act and LODR Regulations in respect of
appointment as well as the significance of an ID in a listed company. In this regard, it is
noted that the concept of ID has evolved from the need to have a certain number of directors
on the Board of a company who would think and act independently to bring about a healthy
balance between the interests of the promoters and other stakeholders including minority and
small shareholders. The IDs are an important component in the overall framework
of corporate governance. The IDs are often seen as the vanguards of shareholders, especially
minority shareholders in the corporate boardroom. They hold a fiduciary position which is
critical to corporate governance. The role and duties of IDs has also been well emphasized in
schedule-IV of the Companies Act and the same has also been adopted under regulation
17(5)(b) of the LODR Regulations.
 3. Schedule-IV of the Companies Act

The role of ID is to:

a. Ensure that the ID exercises his/her objective independent judgement in the

paramount interest of the company as a whole, while concurring in or dissenting
from the collective judgement of the Board in its decision making.
b. Assist the company in implementing the best corporate governance practice.
c. Help in bringing an independent judgment to bear on the Board’s deliberations
especially on issues of strategy, performance, risk management, resources, key
appointments and standards of conduct.
d. Scrutinise the performance of management in meeting agreed goals and objectives
and monitor the reporting of performance.
e. Satisfy themselves on the integrity of financial information and those financial
controls and the systems of risk management are robust and defensible.
f. Moderate and arbitrate in the interest of the company as a whole, in situations of
conflict between management and shareholder’s interest.
g. Undertake appropriate induction and regularly update and refresh their skills,
knowledge and familiarity with the company.
h. Keep themselves well informed about the company and the external environment
in which it operates.
i. Pay sufficient attention and ensure that adequate deliberations are held before
approving related party transactions and assure themselves that the same are in the
interest of the company.
j. Ascertain and ensure that the company has an adequate and functional vigil
mechanism and to ensure that the interests of a person who uses such mechanism
are not prejudicially affected on account of such use.
k. Report concerns about unethical behaviour, actual or suspected fraud or violation
of the company’s code of conduct or ethics policy.
l. Act within his authority, assist in protecting the legitimate interests of the
company, shareholders and its employees.
 4. Narendra Kumar Malik Versus Space Age Engineering and Chemical P. Ltd.
And Others, 2015 SCC OnLine CLB 342 [Company Law Board, Company
Petition No. 101 of 2013, Decided on March 26, 2015] – [Para 50]

“……… It is true that the director of the company acts in fiduciary capacity, within which the
directors have to act the duty cast upon them on behalf of the company with utmost good
faith, care, skill, due diligence and in the interest of the company. ………”

Comments: In 2015 the principle of Corporate Governance was still evolving and the use of
word director can now as per the IRDAI Corporate Governance Guidelines, 2016 can be
extended upto Management.

5. Ms. Roopa G. Versus Sterlite Industries and Anr., 2015 SCC OnLine CLB 62
[Company Law Board, C.P. No. 1051/2010, Decided on March 23, 2015] – [Para
2]

“………  In case of companies such as theirs, it is essential to adhere to the highest standards
of corporate governance in keeping with global benchmarks. ………”

6. TATA Consultancy Services Limited Versus Cyrus Investments Private Limited

and Others, (2021) 9 SCC 449 : 2021 SCC OnLine SC 272 [Supreme Court of
India, Civil Appeals Nos. 440-41 of 2020 with Nos. 263-64 of 2020, 13-14, 19-20,
442-45, 448-49 and 1802 of 2020, decided on March 26, 2021] – [Para 208]

“208. It is true that the 2013 Act brought a lot of drastic changes. Some of the salient
features of the 2013 Act are:

(i) Every company is required to have at least one Director who has stayed in India for a
total period of not less than 182 days in the previous calendar year.

(ii) Every listed public company is required to have at least one-third of the total number of
Directors as independent Directors.

(iii) Some public companies are required to have at least two independent Directors.

(iv) Every independent Director should give a declaration at the first Board meeting that he
meets the criteria of independence.

(v) Certain types of public companies are required to appoint at least one woman Director.
(vi) Every listed company may appoint a small shareholders' Director, to be elected by the
small shareholders.

(vii) The report of the Board of Directors should include a Director's Responsibility
Statement, covering certain aspects relating to accounting standards, accounting policies and
maintenance of accounting records. (viii) Directors of a company are obliged to perform
certain duties, such as duty to act in good faith, duty to exercise reasonable care, skill
diligence and independent judgment, etc.

(viii) Directors of a company are obliged to perform certain duties, such as duty to act in
good faith, duty to exercise reasonable care, skill diligence and independent judgment, etc.

(ix) A detailed code of conduct for independent Directors is stipulated in Schedule IV. This
includes guidelines for professional conduct, roles and functions and duties.

(x) The resignation or removal of independent Directors should be in accordance with the
procedure prescribed.

(xi) Independent Directors are required to hold at least one meeting in a year without the
attendance of non-independent Directors and members of management and they are entitled
in this meeting to review the performance of non-independent Directors and the Board as a
whole. They can even review the performance of the Chairperson of the Company and assess
the quality, quantity and timeliness of flow of information between the management and the
Board.

(xii) The Board of Directors of certain companies are required to have certain committees
such as: (1) Audit Committee; (2) Nomination and Remuneration Committee, and (3)
Stakeholders Relationship Committee.

(xiii) A separate section on Corporate Governance is to be included in the Annual Reports of

certain companies, with a detailed compliance report on corporate governance.

(xiv) After the advent of the Companies Act, 2013, SEBI Regulations were also amended,
inserting Clause 49 in the Listing Agreement, to enforce compliance with corporate
governance standards.”