Holding

Directors of a listed company cannot evade liability for market abuse and false disclosures; the appellant is liable under Section 12A and the penalty provisions of Sections 15HA and 15J of the SEBI Act.

Summary

The appellant, N. Narayanan, a whole‑time director and promoter of Mis Pyramid Saimira Theatre Ltd., was found to have participated in a scheme that inflated the company’s revenues, profits, security deposits and receivables, thereby creating artificiality in its financial statements. SEBI’s investigation revealed false corporate announcements, fictitious theatre agreements and manipulation of accounts, which misled investors and facilitated the directors in pledging shares at inflated prices to raise loans. The appellant argued that he was only responsible for human‑resource matters and relied on auditors, claiming no personal liability. The Supreme Court held that directors of listed companies owe an onerous duty to ensure true and fair view of accounts and cannot escape liability by delegating financial oversight. Accordingly, the Court affirmed SEBI’s two‑year prohibition on dealing in securities and the Rs 50 lakh penalty imposed under Sections 15HA and 15J of the SEBI Act, dismissing the appeals.

Issues considered

The applicability of Section 12A of the SEBI Act and Regulations 3 and 4 of the 2003 Regulations to a whole‑time director who claims limited involvement in financial matters.
Whether the appellant can be held liable for market abuse and fraudulent trade practices despite asserting reliance on auditors.
The proper quantum and basis of penalty under Section 15HA of the SEBI Act.
The extent of directors' fiduciary duties under the Companies Act and SEBI regulations in the context of false disclosures.

Legislation cited

Companies Act, 1956s. 209, s. 210, s. 55A
Securities and Exchange Board of India Act, 1992s. 11, s. 11(4), s. 11B, s. 12A, s. 15HA, s. 15J, s. 15Z, s. 19
Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995s. Rule 4(1)
Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003s. Regulation 11, s. Regulation 3(b), s. Regulation 3(c), s. Regulation 3(d), s. Regulation 4(1), s. Regulation 4(2)(a), s. Regulation 4(2)(e), s. Regulation 4(2)(f), s. Regulation 4(2)(k), s. Regulation 4(2)(r)

Subjects

market abuseSEBIdirector dutiesfalse disclosurepenaltysecurities regulationcorporate governancefraudulent trade practice

Judgment

[2013] 6 S.C.R. 391

N. NARAYANAN A
v.
ADJUDICATING OFFICER, SEBI
(Civil Appeal Nos. 4112-4113 of 2013)
APRIL 26, 2013
B
[K.S. RADHAKRISHNAN AND DIPAK MISRA, JJ.]

Securities and Exchange Board of India Act, 1992 - s.12A
& s. 15HA rlw s. 15J - Securities and Exchange Board of India
(Prohibition of Fraudulent and Unfair Trade Practice Relating C
to Securities Market) Regulations, 2003 - Regulation 3(b},
3(c), 3(d}, 4(1), 4(2)(a}, 4(2)(e), 4(2)(f), 4(2)(k), 4(2)(r) -
· Securities Market - Market abuse - Allegations of, against the
appellant, who was promoter as well as whole time Director
of the company in question - Held: Disclosure and · D
transparency are the two pillars on which mafket integrity rests
- Disclosure of information about companies whose securities
are traded on a public market is crucial for accurate pricing
of the companies' securities and also for efficient operation
of the market - On facts, investors' confidence was eroded and E
the market was abused for personal gains and attainments -
Directors of the company in question failed in their duty to
exercise due care and diligence and allowed the company to
fabricate figures and making false disclosures - The Directors
"created artificiality" and manipulated financial results of the F
company resulting in price rise of the scrip of the company
and then pledged their shares at artificially inflated prices to
raise substantial funds from financial institutions - Clear
violation of s. 12A of the SEBI Act rlw Regulations 3 and 4 of
the 2003 Regulations which essentially intends to preserve G
'market integrity' and to prevent 'market abuse' - Conduct of
appellant-Director and other Directors was fraudulent and the
practices they adopted, relating to securities, were unfair,
which attracted the penalty provisions contained in s. 15 HA
391 H
392 SUPREME COURT REPORTS [2013] 6 S.C.R.

A rlw s. 15J of the SEBI Act - SEBI rightly restrained the
appellant-Director for two years from buying, selling or dealing
with any securities, in any manner, or accessing the securities
market, directly or indirectly and from being Director of any
liste<i company - Adjudicating officer rightly imposed penalty
B of Rs.50 lakhs uls.15HA of the SEBI Act - Maxims - acta
exteriora indicant interiora secreta" (meaning external actions
reveals inner secrets).

Company Law - Listed companies - Corporate
Governance and Directors -Obligations of the Directors -
C Held: Obligations of the Directors in listed companies are
particularly onerous - Over-riding obligation of the Directors
to approve the accounts only if they are satisfied that they give
true and fair view of the profits or loss for the relevant period
and the correct financial position of the company.
D
Company Law - Disclosure and Transparency -
Requirement of - Held: The Companies Act casts an
obligation on the company registered under the Companies
Act to keep the Books of accounts to achieve transparency -
E Disclosure of information about the company is crucial for the
accurate pricing of the company's securities and for market
integrity - Records maintained by the company should show
and explain the company's transactions, it should disclose
with reasonable accuracy the financial position, at any time -
F Accounts to give a true and fair view.

Shares & Securities - Market abuse - What is - Effect of
'market abuse' - Discussed.

Shares and Securities - Securities market - SEBI, the
G market regulator - Duty of the SEBI to protect investors-
individual and collective, against opportunistic behavior of
Directors and Insiders of the listed companies so as to
safeguard market's integrity - Duty of Print and Electronic
Media.
H
I
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 393

The appellant was the promoter as well as a whole A
time Director of a company registered under the
Companies Act, 1956. The company had nine Directors,
including the appellant and was involved in the business
of Exhibition (Theatre), Film and Television, Content
Production, Distribution, Hospitality, Food & Beverage, B
Animation and Gaming and Cine Advertising etc. The
shares of the company were listed on Bombay Stock
Exchange Ltd. (BSE) and National Stock Exchange (NSE)
at the relevant time.

The investigation department of SEBI noticed that the C
company had committed serious irregularities in its
books of accounts and showed inflated profits and
revenues in the financial statements and lured the general
public to invest in the shares of the company based on
such false financial statements and thereby violated the D
provisions of Securities and Exchange Board of India
(Prohibition of Fraudulent and Unfair Trade Practice
Relating to Securities Market) Regulations, 2003. Show
cause Notice was issued to the appellant and to the other
Directors stating that they had violated Section 12A of the E
Securities and Exchange Board of India Act, 1992 and
Regulation 3(b), 3(c), 3(d), 4(1), 4(2)(a), 4(2)(e), 4(2)(f);
4(2)(k), 4(2)(r) of 2003 Regulations. Further, a notice under
Rule 4(1) of the SEBI (Procedure for Holding Inquiry and
imposing penalties by Adjudicating Officer) Rules, 1995 F
was issued to the Directors to show cause why penalty
be not imposed under Section 15HA of the SEBI Act for
the alleged contravention of the provisions of the Act.

The appellant stated, though a whole time Director of
the company, he was only handling Human Resource G
Department of the company and was fully engrossed in
the recruitment of personnel, training and team buildup.
Further, it was also stated that he had only relied upon
the auditor's statements in financial matters and hence
H
394 SUPREME COURT REPORTS [2013] 6 S.C.R.

A was not personally liable for the violation of the
provisions of SEBI Act and 2003 Regulations.

The Whole Time Member (WTM) of SEBI, however,
held that the Directors were guilty for violation of Section
12A of the SEBI Act, 1992 and Regulation 3(b), 3(c), 3(d),
8
4(1 ), 4(2)(a), 4(2)(e), 4(2)(f), 4(2)(k), 4(2)(r) of the 2003
Regulations. Order was passed restraining the appellant
for a period of two years from buying, selling or dealing
in securities in any manner whatsoever or accessing the
securities market directly or indirectly and from being
C Director of any listed company; and further, monetary
penalty to the tune of 50 lacs was imposed on the
appellant under Section 15HA of SEBI Act. The order was
affirmed by the Securities Appellate Tribunal, the legality
of which was the subject matter of this appeal under
D Section 15Z of the SEBI Act.
Dismissing the appeals, the Court

HELD: 1. Investors' confidence in the capital market
E can be sustained largely by ensuring investors'
protection. Disclosure and transparency are the two
pillars on which market integrity rests. Facts of the case
disclose how the investors' confidence has been eroded
and how the market has been abused for personal gains
and attainments. "Market abuse" has now become a
F common practice in the India' security market and, if not
properly curbed, the same would result in defeating the
very object and purpose of the Securities and Exchange
Board of India Act, 1992 which is intended to protect the
interests of investors in securities and to promote the
G development of securities market. Disclosure of
information about companies whose securities are traded
on a public market is crucial for the accurate pricing of
the companies' securities and also for the efficient
operation of the market. In the instant case, the Directors
H of the company had clearly violated provisions of Section
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 395

12A of the SEBI Act read with Regulations 3 and 4 of the A
Securities and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practice Relating to
Securities Market) Regulations, 2003. The SEBI rightly
restrained the appellant for a period of two years from the
date of that order from buying, selling or dealing with any B
securities, in any manner, or accessing the securities
market, directly or indirectly and from being Director of
any listed company and the adjudicating officer has
rightly imposed a penalty of Rs.50 lakhs under Sectio!1
15HA of SEBI Act. [Paras 1, 10, 28, 42] [400-A-B; 403-C- c.
D; 413-C-D; 418-F-G]

Palmer's Company Law, 25th Edition (2010), Volume 2
and Gower & Davies - Principles of Modem Company Law,
9th Edition (2012) - referred to.
D
Corporate Governance and Directors

2. The SEBI Act read with Regulations of the
Companies Act would indicate that the obligations of the
Directors in listed companies are particularly onerous E
especially when the Board of Directors makes itself
accountable for the performance of the company to share
holders and also for the production of its accounts and
financial statements especially when the company is a
listed company. [Para 29] [413-E-F]
F
3. Responsibility is cast on the Directors to prepare
the annual records and reports and those accounts
should reflect 'a true and fair view'. The over-riding
obligation of the Directors is to approve the accounts
only if they are satisfied that they give true and fair view G
of the profits or lks for the relevant period and the
correct financial position of the company. The Directors
are expected to exercise their power on behalf of the
company with utmost care, skill and diligence. [Paras 32,
33] [414-C-D] H
396 SUPREME COURT REPORTS [2013] 6 S.C.R.

A Official Liquidator v. P.A. Tendo/kar (1973) 1 SCC 602:
1973 (3) SCR 364 - relied on.
4. The facts in this case clearly reveal that the
Directors of the company in question had failed in their
duty to exercise due care and diligence and allowed the
8
company to fabricate the figures and making false
disclosures. Facts indicate that they have overlooked the
numerous red flags in the revenues, profits, receivables,
deposits etc. which should not have escaped the
C attention of a prudent person. The facts clearly indicated
that the company had made false corporate
announcement stating that it had entered into
agreements with 802 theatres and that false corporate
announcement gave false figures relating to advance,
security deposit and income pertaining to the theatres
D which were not inexistence. The deposits shown turned
out to be not genuine but mere book entries to hide
receivables in the balance sheet. [Paras 31, 34] [413-H;
414-A-B, F-G]
E Securities Market - Market abuse
5. Market abuse refers to the use of manipulative and
deceptive devices, giving out incorrect or misleading
information, so as to encourage investors to jump into
conclusions, on wrong premises, which is known to be
F wrong to the abusers. 'Market abuse' impairs economic
growth and erodes investor's confidence. The object of
the SEBI Act is to protect the interest of investors in
securities and to promote the development and to
regulate the securities market, so as to promote orderly,
G healthy growth of securities market and to promote
investors protection. Section 12A of the SEBI Act read
with Regulations 3 and 4 of the Regulations 2003
essentially intended to preserve 'market integrity' and to
prevent 'Market abuse'. The statutory provisions deal with
H the situations where a person, who deals in securities,
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 397

takes advantage of the impact of an action, may be . A
manipulative, on the antiC'ipated impact on the market
resulting in the "creation of artificiality'. The same can be
achieved by inflating the company's revenue, profits,
security deposits and receivables, resulting in price rice
of scrip of the company. Investors are then lured to make B
their "investment decisions" on those manipulated
inflated results, using the above devices which will
amount to market abuse. [Para 35] [415-E-G]

6. On facts, it is clearly found that the Directors of the
company have "created artificiality" by projecting inflated C
figures of the company's revenue, profits, security
. deposits and receivables and that the manipulation in the
financial results of the company resulted in price rise of
the scrip of the company and the promoters of the
company then pledged their shares to raise substantial D
funds from financial institutions. The conduct of the
appellant and others was, therefore, fraudulent and the
practices they had adopted, relating to securities, were
unfair, which attracted the penalty provisions contained
in Section 15 HA read with 15J of the SEBI Act [Para 36] E
[415-H; 416-A-B]
Disclosure and Transparency:

7. The Companies Act casts an obligation on the
company registered under the Companies Act to keep the F
Books of accounts to achieve transparency. Disclosure
of information about the company is crucial for the
accurate pricing of the company's securities and for
market integrity. Records maintained by the company
should show and explain the company's transactions, it G
should disclose with reasonable accuracy the financial
position, at any time, and to enable the Directors to ensure
that the balance-sheet and profit and loss accounts will
comply with the statutory expectations that accounts give
a true and fair view. [Para 38] [416-F-H; 417-A-B] H
398 SUPREME COURT REPORTS [2013] 6 S.C.R.

A 8. In the instant case, the Directors and the Chief
Financial Officers of the company had caused to publish
forged and misleading results of the company, various
quarterly financial results and the annual results for the
year 2007-08, were reported to the stock-exchanges
B containing inflated figures of the company's revenue,
pro~its, security deposits and receivables and those
financial statements which were relied upon by investors
in making investment decisions, which did not reflect a
true and fair view of the state of affairs of the company.
c The appellant, admittedly, was a whole time Director of
the company, as regards the preparation of the annual
accounts, the balance-sheet and financial statement and
laying of the same before the company at the Annual
General Meeting and filing the same before the Registrar
D of the Companies as well as before SEBI, the Directors
of the company have greater responsibility, especially
when the company is a registered company. Directors of
the companies, especially of the listed companies, have
access to inside knowledge, such as, financial position
E of the company, dividend rates, annual accounts etc. So
far as this case is concerned, the subsequent conduct
of pledging their shares at artificially inflated prices,
based on inflated financial results and raising loan on
them would indicate that they had deliberately and with
full knowledge committed the illegality and hence the
F principle of "acta exteriora indicant interiora secreta"
(meaning external actions reveals inner secrets) applies
with all force. [Paras 39, 40, 41] [417-F-G; 418-A-E]

Sahara India Real Estate Corporation Limited and
G Others v. Securities and Exchange Board of India and
Another (2013) 1 SCC 1 - relied on.

A word of caution:

9.1. SEBI, the market regulator, has to deal sternly
H with companies and their Directors indulging in
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 399

manipulative and deceptive devices, insider trading etc. A
or else they will be failing in their duty to promote orderly
and healthy growth of the Securities market. Economic
offence is a serious crime which, if not properly dealt
with, as it should be, will affect not only country's
economic growth, but also slow the inflow of foreign B
investment by genuine investors and also casts a slur on
India's securities market. Fraud, deceit, artificiality, SEBI
should ensure, have no place in the securities market of
this country and 'market security' is our motto. SEBI has
a duty to protect investors, individual and collective, C
against opportunistic behavior of Directors and Insiders
of the listed companies so as to safeguard market's
integrity. Print and Electronic Media have also.a solemn
duty not to mislead the public, who are present and
prospective investors, in their forecast on the securities
0
market. A media projection on company's position in the
security market with a view to derive a benefit from a
position in the securities would amount to market abuse,
creating artificiality. [Paras 43, 44] [419-A-F]
Case Law Reference: E
(2013) 1 sec 1 relied on Para 25
1973 (3) SCR 364 relied on Para 33
CIVIL APPELLATE JURISDICTION : Civil Appeal No. F
4112-4113 of 2013.

From the Judgment and Order dated 05.10.2012 of the
Securities Appellate Tribunal at Mumbai in Appeal Nos. 28 &
29.
G
Sibo Sankar Mishra, M.K. Pandey for the Appellant.

The Judgment of the Court was delivered by

K.S. RADHAKRISHNAN, J. 1. India's capital market in
H
400 SUPREME COURT REPORTS [2013] 6 S.C.R.

A the recent times has witnessed tremendous growth,
characterized particularly by increasing participation of public.
Investors' confidence in the capital market can be sustained
largely by ensuring investors' protection. Disclosure and
transparency are the two pillars on which market integrity rests.
B Facts of the case disclose how the investors' confidence has
beem eroded and how the market has been abused for personal
gains and attainments.

2. The Appellate Jurisdiction of this Court guaranteed
under Section 15Z of the Securities and Exchange Board of
C lndi'a Act, 1992 (for short 'SEBI Act') has been invoked
challenging a joint order dated 5.10.2012 passed in Appeal
Nos. 28 and 29 of 2012 passed by Securities Appellate
Tribunal, Mumbai (for short 'Tribunal') upholding the order
passed by SEBI dated April 18, 2011 restraining the appellant
D for a period of two years from buying, selling or dealing in
securities and the order passed by the adjudication officer
dated July 28, 2011 imposing a monetary penalty of 50 lacs
under Section 15HA of SEBI Act.

E 3. The appellant was the promoter as well as a whole time
Director of Mis Pyramid Saimira Theatre Limited (PSTL), a
cor;npany registered under the Companies Act, 1956. The
shares of PSTL were listed on Bombay Stock Exchange Ltd.
(B$E) and National Stock Exchange (NSE) at the relevant time.
The company was involved in the business of Exhibition
F (Theatre), Film and Television, Content Production, Distribution,
Hospitality, Food & Beverage, Animation and Gaming and
Cine Advertising etc. The company had nine Directors,
including the appellant herein. The investigation department of
SEBI noticed that the company had committed serious
G irregularities in its books of accounts and showed inflated
profits and revenues in the financial statements and lured the
general public to invest in the shares of the company based
on such false financial statements thereby violated the
provisions of Securities and Exchange Board of India
H
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 401
[K.S. RADHAKRISHNAN, J.]
A
(Prohibition of Fraudulent and Unfair Trade Practice Relating
to Securities Market) Regulations, 2003 (for short 'Regulations
2003'). Consequently, a notice was issued to the appellant and
to the other Directors stating that they had violated Section 12A
of SEBI Act and Regulation 3(b), 3(c), 3(d), 4(1), 4(2)(a),
4(2)(e), 4(2)(f), 4(2)(k), 4(2)(r) of Regulations 2003 and were 8
directed to show cause why appropriate directions as deemed
fit and proper under Sections 11, 11 B and 11 (4) of the SEBI
Act read with Regulation 11 of Regulations 2003 be not issued
against them.
c
4. The appellant replied to the show cause notice vide
letter dated February 3, 2010 stating that there were no
irregularities and the company's Managing Director and the
Principal Officer would send a detailed reply in that regard.
Later, a notice dated April 8, 201 O under Rule 4(1) of the SEBI o·
(Procedure for Holding Inquiry and imposing penalties by
Adjudicating Officer) Rules, 1995 was issued to the Directors
to show cause why penalty be not imposed under Section
15HA of the SEBI Act for the alleged contravention of the
. provision of the Act.
E
5. The appellant submitted a detailed reply stating that it
was the Managing Director and Principal Officer of the
company who was in charge of day-to-day affairs of the
company including the operations, finance and accounts,
secretarial and compliance, legal services and technical F
services. Appellant, it was stated, though was a whole time
Director of the company was only handling Human Resource
Department of the company and was fully engrossed in the
recruitment of personnel, training and team buildup. Further, it
was also stated that he had only relied upon the auditor's G
statements in financial matters and hence was not personally
liable for the violation of the provisions of SEBI Act and
Regulations 2003. Personal hearing was accorded to the
appellant on 30.8.2010. Written Submissions dated 15.9.2010
filed by the appellant was also considered by SEBI. The Board H
402 SUPREME COURT REPORTS [2013] 6 S.C.R.

A noticed following specific violations:-

(a) manipulated accounts by fictitious entries;
(b) made false disclosures to the stock exchange;
(c) did not co-operate with the investigations, and
B
(<II) did not maintain certain books of accounts.

6. On facts, the officer found that all the above-mentioned
violations had been established. Consequently, the Whole Time
c Memb~r (WTM) of SEBI, in exercise of powers conferred under
Section 19 of the SEBI, held that the Directors were found guilty
for the violation of Section 12A of SEBI Act, 1992 and
Regulation 3(b), 3(c), 3(d), 4(1), 4(2)(a), 4(2)(e), 4(2)(f), 4(2)(k),
4(2)(r) of the Regulations 2003. WTM of SEBI then, in exercise
D of the powers conferred on him under Section 19 read with
Sections 11, 11 B and 11 (4) of the SEBI Act and Regulation
11 of Regulations 2003, passed an order restraining the
appellant and other Directors for a period of two years and three
years respectively from buying, selling or dealing in securities
in any manner whatsoever or accessing the securities market
E directly or indirectly and from being Director of any listed
company.

7. The Adjudicating Officer also held that the appellant and
others have violated the provisions of Section 12A of SEBI Act
F and Regulation 3(b), 3(c), ~d), 4(1 ), 4(2)(a), 4(2)(e), 4(2)(f),
4(2)(k), 4(2)(r) of Regulations 2003 and took the view that the
appellant and other Directors are liable for monetary penalty
under Section 15HA of SEBI Act whereby a penalty of 50 lacs
was imposed on the appellant.
G
8. The above order, as already indicated, was affirmed in
an appeal by the Tribunal, the legality of which is the subject
matter !l>f this appeal.

9. We may before examining various legal issues that
H arise for consideration in this appeal wish to indicate that the
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 403
[K.S. RADHAKRISHNAN, J.]
investigation had revealed that the financial results contained A
in the quarterly report filed with the stock exchanges contained
inflated figures of the company's revenue profits, security
deposits and receivables. Further, the manipulation in the
financial results of the company resulted in price rise of the
scrip of the company and the promoters pledged their shares B
to raise substantial funds from financial institutions.

10. We would like to demonstrate on the facts of this case
as well as law on the point that "market abuse" has now
become a common practice in the India' security market and, c
if not properly curbed, the same would result in defeating the
very object and purpose of SEBI Act which is intended to
protect the interests of investors in securities and to promote
the development of securities market. Capital market, as
already stated, has witnessed tremendous growth in recent D
times, characterized particularly by the increasing participation
of the public. Investor's confidence in capital market can be
sustained largely by ensuring investors' protection.

11. Before examining the law on the point, we would like E
to demonstrate how the company and its Directors had inflated
figures of the company's revenue profits, security deposits and
receivables which were relied upon by investors for making
investment decisions. Facts would also indicate that the
Directors had pledged their shares and artificially inflated prices F
of the scrip based on inflated financial results which enabled
them to raise higher quantum of funds that would not have been
possible otherwise.

12. The quarterly unaudited financial results of the G
company for the quarter ended 31st March 2007 to the quarter
ended 31st March 2009 shows the following details:

H
:r: m 0 OJ

Particulars I For the ouarter ended (in Rs. Lakh)
March June 30, Sept. 30, Dec. 31, March June 30, 'Sept. 30, Dec. 31, March
3-l, 2009' 2009' 2009' 31,2668 2008 2008 2008 31, 200'1
2007
Net Sales 6756.89 12271.43 14418.79 23141.87 24556.12 2501.87 25225.72 13794.81 8069.04 en
c
Other 23.24 13.68 231.75 152.90 141.05 12.94 2.08 -0
Income ;;o
m
Total 6780.13 12285.11 14650.54 23294.77 24700.17 25027.81 25225.72 13796.89 8069.04 s::
Income m
Total 6122.60 9936.44 12513.42 19718.54 22366.93 22886.72 23478.48 12997.58 6859.02 0
Exnencliture 0
Net profit/ 583.47 1600.77 1511.31 2986.50 -311.22 1349.72 870.42 -7474.35 -8527.25
c
loss ~
l&luitv 2827.64 2827.65 2827.65 2827.65 2827.65 2827.65 2827.65 2827.65 2827.65 ;;o
Face value 10 10 10 10 10 10 10 10 10 m
-0
of shares ·(in 0
Rs.) ~
en
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 405
[K.S. RADHAKRISHNAN, J.]
13. The above facts and figures would indicate that the net A
· sales for the quarter ended June 30, 2007 double·d as
compared to the previous quarter. In the subsequent quarters,
till the quarter ended September 30, 2008, that upward trend
had continued and in the quarter ended December 31, 2008,
there was a sudden fall in the net sales figures (the net sales
figures for the quarter ended December 31, 2008 were down 8
by around 45% as compared to the previous quarter).
14. The company also showed a loss of Rs.74.74 crore
in the said quarter. For the quarter ended March 31, 2009, the
company again showed a loss of Rs. 85.37 crore. The net profit
figures also surged in sync with the total income upto the C
quarter ended June 30, 2008 except for the quarter ended
March 31, 2008.
15. SEBI, it was pointed out, had verified books of
accounts of the company for the financial year 2007-2008 to
ascertain whether proper books of accounts and supporting D
documents were maintained by the company in respect of the
theatre income, theatre receivables and theatre security
deposits and whether the financial disclosures made by the
company to the stock exchanges as per listing agreement
reflected true and fair view of the state of affairs of the company. E
16. SEBl's investigation revealed that for the financial year
2007-08, total revenue of Rs. 749.30 crore included an income
of Rs. 549.58 crore from theatres which is stated as follows:
(In Rs. Crore)
.
F
Region From PSTL From Non-PSTL Total Revenue
Theatres Theatre from Theatrei
Tamil Nadu 303.46 41.51 344.97
Andhra 74.66 62.04 136.70
G
Pradesh
Karnataka 45.86 7.60 53.45
Kera la 12.95 12.95
Others 0.28 1.23 1.52
Total 437.21 112.18 549.58 H
406 SUPREME COURT REPORTS [2013] 6 S.C.R.

A 17. On theatre income of Rs. 303.46 crore from Tamil Nadu
region included consolidated credit entries of Rs.244 crore with
corresponding consolidated debits 'Theatre Collections
Receivable Account'. The account did not show any income from
April 2008 onwards. The journal vouchers in respect of those
B entries did not carry any such narration such as daily collection
report number, name of theatre etc. The receivables were
adjus~d against cost of content, transferred to advance/security
depo$it account or remained unrealized. As on March 31, 2008,
the total receivables of the company from Tamil Nadu region
c were Rs. 38.58 crore. Out of that, Rs.2.19 crore was outstanding
against 162 theatres and the balance Rs. 36.39 crore
outstanding in one account only which did not contain the theatre
wise break up. Further it was also noticed that the entire amount
of Rs. 75 crore from own theatres in Andhra Pradesh was
accounted by single journal voucher which did not have any other
0
supporting documents in support of those consolidated entries
or journal vouchers, despite assurance to provide the same.
Those facts lead the SEBI to conclude that those revenues
disclosed inflated figures in its annual report for 2007-08 and
thereby misled the investors.
E
18. The company disclosed no stock exchanges on January
30, 2009 that it had entered into agreement with 802 theatres
as on June 30, 2008. Out of 802 agreements, the company could
show <>nly 257 original agreements to SEBI officials which lead
F SEBI to conclude that the balance 545 agreements never
existed. The fictitious revenues had converted to 'theatre
collection receivables' which in tum had been converted to
'security deposits'. It was noticed security deposits were Jlot
genuine but were created to hide receivables in the balance
G sheet since outstanding receivables for a period of six months
had to be compulsorily disclosed in its annual report. The SEBI
therefore concluded the company had made a false corporate
announcement to the effect that it had entered into agreement
with 802 theatres thereby misled the investing public.
H 19. The appellant's main defence was that, though he was
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 407
[K.S. RADHAKRISHNAN, J.)
the Whole Time Director as well as Promoter of the company, A
yet was not involved in the day-to-day management of the
company and that he was looking after the Human Resource
Department of the company. Further, it was also stated that the
financial statements, accounts etc. were prepared and duly
audited by the statutory auditors, verified by the audit B
committees and reviewed by the managing Director and that,
in the company, the role of each Director was confined to his
field of operation and there was no justification for holding a
Director to be in over-all charge and control of the affairs of the
company. Further, it was also pointed out that the auditors were c
well versed in accounts and finance, therefore, there was no
reason for the Directors who have no expertise or knowledge
of the intricacies of the accounts and finance to suspect them
or sit in judgment over their decisions. In such circumstances,
it was contended, that there is no justification in debarring them
0
from buying, selling or dealing in securities or accessing
securities market or to impose penalty since there is no mens
raa on the' part of the appellant in intentionally stating any untrue
statement or preparing false records and that he has no role
as such in preparing the accounts and finance of the company.
E
20. The facts and figures as such are not in dispute and
the defence taken is that the statements were duly audited by
statutory auditors and, consequently, it could not be held that
the appellant had violated the provision of SEBI Act or the
provisions of Regulations 2003. F
21. Let us now examine the scope of the various
provisions stated to have been violated by the appellant and
its consequences. Section 12A falls in Chapter VA of the SEBI
Act which reads as follows:
G
"PROHIBITION OF MANIPULATIVE AND DECEPTIVE
DEVICES, INSIDER TRADING AND SUBSTANTIAL
ACQUISITON OF SECURITIES OR CONTROL
Prohibition of manipulative and deceptive devices, insider H
408 SUPREME COURT REPORTS [2013] 6 S.C.R.

A trading and substantial acquisition of securities or control.

12A. No person shall directly or indirectly -

(<ii) use or employ, in connection with the issue, purchase
or sale of any securities
B
listed or proposed to be listed on a recognised stock
exchange, any manipulative or

deceptive device or contrivance in contravention of the
provisions of this Act or the rules or the regulations made
c thereunder;

(ij) employ any device, scheme or artifice to defraud in
connection with issue or dealing in securities which are
listed or proposed to be listed on a recognised stock
D exchange;

(c) engage in any act, practice, course of business which
operates or would operate as fraud or deceit upon any
person, in connection with the issue, dealing in securities
which are listed or proposed to be listed on a recognised
E stock exchange, in contravention of the provisions of this
Act or the rules or the regulations made thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or
F non-public information or communicate such material or
non-public information to any other person, in a manner
wjiich is in contravention of the provisions of this Act or the
r1.1les or the regulations made thereunder;

G (f) acquire control of any company or securities more than
the percentage of equity share capital of a company whose
securities are listed or proposed to be listed on a
recognised stock exchange in contravention of the
regulations made under this Act."
H
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 409
[K.S. RADHAKRISHNAN, J.]
22. Section 12A has to be read along with various A
provisions of Regulations 2003. Chapter II of Regulations 2003
deals with prohibition of fraudulent and unfair trade practices
relating to the securities market and Chapter Ill deals with
investigation. SEBI has also noticed the violation of Regulations
.3 and 4 of 2003 Regulations, which read as follows: B
"PROHIBITION OF FRAUDULENT AND UNFAIR TRADE
PRACTICES RELATING TO THE SECURITEIS MARKET:
3. Prohibition .of certain dealings in securities
No person shall directly or indirectly.
c
(a) buy, sell or otherwise deal in securities in a
·fraudulent manner;
(b) use or employ, in connection with issue, purchase D
or sale of any security listed or proposed to be
listed in a recognized stock exchange, any
manipulative or deceptive devise or contrivance in
contravention of the provisions of the Act or the rules
or the regulations made there under;
E -
(c) employ any device, scheme or artifice to defraud
in connection with dealing in or issue of securities
which are listed or proposed to be listed on a
recognized stock exchange;
(d) engage in any act, practice, course of business F
which operates or would operate as fraud or deceit
upon any person in connection with any dealing in
or issue of securities which are listed or proposed
to be listed on a recognized stock exchange in
contravention of the provisions of the Act or the rules G
and the regulations made there under:
4. Prohibition of manipulative. raudulent and unfair trade
practices
H
410 SUPREME COURT REPORTS [2013] 6 S.C.R.

A (1) Without prejudice to the provisions of regulation 3,
no person shall indulge in a fraudulent or an unfair
trade practice in securities.
Dealing
,, in securities shall be deemed to be a
fraudulent or an unfair trade practice if it involves
B fraud and may include all or any of the following
namely:-
(a) indulging in an act which creates false or
misleading appearance of trading in the securities
c market;
(b)
(d) .....
(e) any act or omission amounting to manipulation of
D the price of a security;
'(f) publishing or causing to publish or reporting or
causing to report by a person dealing in securities
any information which is not true or which he does
E not believe to be true prior to or in the course of
dealing in securities.
(g)

(h)
F (i)
0)
(k) an advertisement that is misleading or that contains
information in a distorted manner and which may
G influence the decision of the investors;
(I)
(p) ...... .

H (q) ...... .
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 411
[K.S. RADHAKRISHNAN, J.]
(r) planting false or misleading news which may induce A
sale or purchase of securities."
23. The object and purpose of the above-mentioned
statutory provisions are to curb "market manipulation". Palmer's
Company Law, 25th Edition (2010), Volume 2 at page 11097
B
states: "Market manipulation is normally regarded as the
"unwarranted" interference in the operation of ordinary market
forces of supply and demand and thus undermines the
"integrity" and efficiency of the market." See also Gower &
Davies - Principles of Modem Company Law, 9th Edition
(2012) at page 1160. C
24. Reference may also be made to the penalty provisions
which is contained in Chapter VI A of the SEBI Act of which
we are mainly concerned with Section 15HA which deals with
· penalty for fraudulent and unfair trade practices and Section 1SJ D
which deals with the factors to be taken into account by the
adjudicating officer while adjudging the quantum of penalty.
Those provisions are given below for easy reference:
"15HA. Penalty for fraudulent and unfair trade practices.-
If any person indulges in fraudulent and unfair trade E
practices relating to securities, he shall be liable to a
penalty of twenty-five crore rupees or three times the
amount of profits made out of such practices, whichever
is higher."
F
"15J. Factors to be taken into account by the adjudicating
officer.-While adjudging quantum of penalty under section
15 I, the adjudicating officer shall have due regard to the
following factors, namely:
{a) the amount of disproportionate gain or unfair G
advantage, wherever quantifiable, made as a result of the
default;
(b) the amount of loss caused to an investor or group of
investors as a result of the default;
H
412 SUPREME COURT REPORTS (2013] 6 S.C.R.

A ~c) the repetitive nature of the default."

25. In Sahara India Real Estate Corporation Limited and
Others v. Securities and Exchange Board of India and
Another (2013) 1 SCC 1, this Court has noticed that though
B the lindian Companies Act, 1956 was modeled on English
C.ompanies Act, 1948, no efforts have been made to
inco~porate universally accepted principles and concepts into
our c;:ompany law. Of late, however, some efforts have been
made by carrying out few amendments to the Companies Act,
1956, so also in the SEBI Act, 1992 and Rules and Regulations
C framed therein to keep pace with the English Companies Act
and related legislations. When we interpret the provisions of the
SEBI Act and the Regulations relating to a company registered
under the Companies Act, the provisions of the Companies Act
have also to be borne in mind. For instance, in SEBI Act, there
D is no provision for keeping proper books of accounts by a
regii;tered company.
26. Section 209 of the Companies Act says that every
company shall keep at the registered office proper books of
E accounts. Books of accounts should be so kept as to give true
and fair view of the state of the company's affairs and explain
transactions. Of course, the auditors of the company must
examine whether the company has maintained proper cost
accounting records as required by the rules. Companies whose
securities are traded on a public market, it is trite law that the
F distlosure of information about the company is crucial for the
correct and accurate pricing of the company's securities and
for the official operation of the market. Section 21 O of the
Companies Act states that at every annual general meeting of
the company, the Board of Directors is required to lay before
G it a balance-sheet as at the end of and a profit and loss account
for the financial year.
27. Clause 41 of Listing Agreement between the SEBI and
the concerned companies requires the companies to furnish to
H stock exchange and to publish unaudited financial result on a
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 413
[K.S. RADHAKRISHNAN, J.]
quarterly basis in the prescribed format. Section 55A of the A
Companies Act deals with the powers of SEBI which says some
of the provisions referred to therein, so far as they relate to issue
and transfer of securities and non-payment of dividends in the
case of listed companies be administered by SEBI. Further, it
is also indicated that how the books of accounts have to be B
kept by the company, so also with regard to audit of account
etc. finds a place in the Companies Act, so also the qualification
and disqualification of the Managing Directors.
28. We notice in this case that the Directors of the
company had clearly violated provisions of Section 12A of C
SEBI Act read with Regulations 3 and 4 of 2003 Regulations.
Companies whose securities are traded on a public market,
disclosure of information about the company is crucial for the
accurate pricing of the companies' securities and also for the
efficient operation of the market. D
Corporate Governance and Directors
29. SEBI Act read with Regulations of the Companies Act
would indicate that the obligations of the Directors in listed
companies are particularly onerous especially when the Board E
of Directors makes itself accountable for the performance of
the company to share holders and also for the production of
its accounts and financial statements especially when the
company is a listed company.
F
30. The Directors of the company or the person in charge
directly or indirectly use or employ, in connection with the issue,
purchase or sale of any securities listed in stock exchange, any
manipulative or deceptive device or contrivance in
contravention of SEBI Act or the Regulations made thereunder G
have necessarily to be dealt with in accordance with the
provisions of the Act and the Regulations which is absolutely
necessary for the investor's protection and to avoid market
abuse.
31: The facts clearly indicated that the company had made H
414 SUPREME COURT REPORTS (2013) 6 S.C.R.

A false corporate announcement stating that it had entered into
agreements with 802 theatres and that false corporate
announcement gave false figures relating to advance, security
depQsit and income pertaining to the theatres which were not
inexistence. The deposits shown were turned out to be not
B gen(Jine but mere book entries to hide receivables in the
balance sheet.
32. Responsibility is cast on the Directors to prepare the
annual records and reports and those accounts should reflect
'a true and fair view'. The over-riding obligation of the Directors
C is to approve the accounts only if they are satisfied that they
give true and fair view of the profits or loss for the relevant period
an<f the correct financial position of the company.
33. Company though a legal entity cannot act by itself, it
D can act only through its Directors. They are expected to
exercise their power on behalf of the company with utmost care,
skill and diligence. This Court while describing what is the duty
of ,a Director of a company held in Official Uquidator v. P.A.
Tendo/kar (1973) 1 SCC 602 that a Director may be shown to
E be placed and to have been so closely and so long associated
personally with the management of the company that he will be
deemed to be not merely cognizant of but liable for fraud in the
conduct of business of the company even though no specific
aat of dishonesty is provide against him personally. He cannot
shut his eyes to what must be obvious to everyone who
F examines the affairs of the company even superficially.
34. The facts in this case clearly reveal that the Directors
of the company in question had failed in their duty to exercise
di.le care and diligence and allowed the company to fabricate
G tl:le figures and making false disclosures. Facts indicate that
they have overlooked the numerous red flags in the revenues,
profits, receivables, deposits etc. which should not have
escaped the attention of a prudent person. For instance, profit
as on quarter ending June 2007 was three times more than the
H preceding quarter, it doubled in the quarter ending December
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 415
[K.S. RADHAKRISHNAN, J.]
2007 over the preceding quarter. Further, there was A
disproportionate increase in the security deposits i.e. Rs. 36.05 ·
crore in September 2007 to Rs. 270.38 crore in December
2007 as compared to increase in the number of theatres during
the same period. They have participated in the board meetings
and were privy to those commissions and omissions. B
Securities Market - Market abuse
35. Prevention of market abuse and preservation of
market integrity is the hallmark of Securities Law. Section 12A
read with Regulations 3 and 4 of the Regulations 2003 C
essentially intended to preserve 'market integrity' and to prevent
'Market abuse'. The object of the SEBI Act is to protect the
interest of investors in securities and to promote the
development and to regulate the securities market, so as to
promote orderly, healthy growth of securities market and to D
promote investors protection. Securities market is based on
free and open access to information, the integrity of the market
is predicated on the quality and the manner on which it is made
available to market. 'Market abuse' impairs economic growth
and erodes investor's confidence. Market abuse refers to the E
use of manipulative and deceptive devices, giving out incorrect
or misleading information, so as to encourage investors to jump
into conclusions, on wrong premises, which is known to be
wrong to the abusers. The statutory provisions mentioned
earlier deal with the situations where a person, who deals in
F
securities, takes advantage of the impact of an action, may be
manipulative, on the anticipated impact on the market resulting
in the "creation of artificiality'. The same can be achieved by
inflating the company's revenue, profits, security deposits and
receivables, resulting in price rice of scrip of the company.
Investors are then lured to make their "investment decisions" G
on those manipulated inflated results, using the above devices
which will amount to market abuse.
36. We have, on facts, clearly found that the Directors of
the company have "created artificiality'' by projecting inflated H
416 SUPREME COURT REPORTS [2013] 6 S.C.R.

A figures of the company's revenue, profits, security deposits and
receivables and that the manipulation in the financial results of
the company resulted in price rise of the scrip of the company
and the promoters of the company then pledged their shares
to raise substantial funds from financial institutions. The conduct
B of the appellant and others was, therefore, fraudulent and the
practices they had adopted, relating to securities, were unfair,
whicllJ attracted the penalty provisions contained in Section 15
HA read with 15J of the SEBI Act.
Disclosure and Transparency:
c
37. Gower and Davies on Principles of Modern Company
Law, 9th Edition (2012) at page 751, reiterated their views on
the scope and rationale of annual reporting required under the
Companies Acts, as follows:
D "On the basis that "forewarned is forearmed" the
fundamental principle underlying the Companies Act has been
that of disclosure. If the public and the members were enabled
to find out all relevant information about the company, this,
thought the founding fathers of our company law, would be a
E sure shield. The shield may not have proved quite so strong
as they had expected and in more recent times, ii has been
supported by offensive weapons."
38. The Companies Act casts an obligation on the
F company registered under the Companies Act to keep the
Books of accounts to achieve transparency. Previously, ii was
thought that the production of the annual accounts and it
praparation is that of the Accounting Professional engaged by
the company where two groups who were vitally interested were
the shareholders and the creditors. But the scenario has
G drl;lstically changed, especially with regard to the company
whose securities are traded in public market. Disclosure of
information about the company is, therefore, crucial for the
accurate pricing of the company's securities and for market
integrity. Records maintained by the company should show and
H explain the company's transactions, it should disclose with
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 417
[K.S. RADHAKRISHNAN, J.]
reasonable accuracy the financial position, at any time, and to A
enable the Directors to ensure that the· balance-sheet and profit
and loss accounts will comply with the statutory expectations
that accounts give a true and fair view. Companies
(Amendment) Act, 2000 has added clause (a)(iii) under which
SEBI has also been given the power of inspection of listed B
companies or companies intending to get listed through such
officers, as may be authorized by it.
39. So far as the company in question is concerned, books
of accounts were maintained in the Tally accounting software
and for the financial year 2007-08 separate books of accounts C
were maintained for each region/unit. Books of accounts were
reportedly maintained by the regions in their respective regional
office and at the end of the year for the preparation of annual
financial statement and for auditing purpose, those books of
accounts were brought to the companies registered office. The D
auditors had informed that those books were audited at the
registered office of the company. As already indicated, after
the declaration· of financial results on January 31, 2008,
containing inflated profits, revenues for the quarter ended on
31.12.2007, the Managing Directors of the company, his wife I,:
and the appellant had together pledged 72,75,455 shares of
the company with various banks and financial institutions and
raised 97.30 crores as loans. We have noticed that the
Directors and the Chief Financial Officers of the company had
caused to publish forged and misleading results of the F
company, various quarterly financial results and the annual
results for the year 2007-08, were reported to the stock-
exchanges containing inflated figures of the company's
revenue, profits, security deposits and receivables and those
financial statements which were relied upon by investors in G
making investment decisions, which did not reflect a true and
fair view of the state of affairs of the company.
40. The appellant has taken the stand, as already stated,
that even though he was a whole time Director he was not
conversant with the accounts and finance and was only dealing H
418 SUPREME COURT REPORTS [2013) 6 S.C.R.

A with the human resource management of the company, hence,
he had no fraudulent intention to deceive the investors. We find
it difficult to accept the contention. The appellant, admittedly,
was a whole time Director of the company, as regards the
preparation of the annual accounts, the balance-sheet and
B financial statement and laying of the same before the company
at the Annual General Meeting and filing the same before the
Registrar of the Companies as well as before SEBI, the
Di~ctors of the company have greater responsibility, especially
when the company is a registered company. Directors of the
c companies, especially of the listed companies, have access
to inside knowledge, such as, financial position of the company,
dividend rates, annual accounts etc. Directors are expected to
exercise the powers for the purposes for which they are
conferred. Sometimes they may misuse their powers for their
D personal gain and makes false representations to the public
for unlawful gain.
41. We have indicated, so far as this case is concerned,
the subsequent conduct of pledging their shares at artificially
inflated prices, based on inflated financial results and raising
E loan on them would indicate that they had deliberately and with
full knowledge committed the illegality and hence the principle
of "acta exteriora indicant interiora secreta" (meaning external
a~ions reveals inner secrets) applies with all force, a principle
Which this Court applied in Sahara's case.
F 42. Above being the factual and legal position, we are of
the view that the SEBI has rightly restrained the appellant for a
period of two years from the date of that order from buying,
selling or dealing with any securities, in any manner, or
accessing the securities market, directly or indirectly and from
G being Director of any listed company and that the adjudicating
officer has rightly imposed a penalty of Rs.50 lakhs under
Section 15HA of SEBI Act. The appeals are, therefore,
dismissed. However, there will be no order as to costs.

H
N. NARAYANAN v. ADJUDICATING OFFICER, SEBI 419
[K.S. RADHAKRISHNAN, J.]
A word of caution: A

43. SEBI, the market regulator, has to deal sternly with
companies and their Directors indulging in manipulative and
deceptive devices, insider trading etc. or else they will be
failing in their duty to promote orderly and healthy growth of the
8
Securities market. Economic offence, people of this country
should know, is a serious crime which, if not properly dealt with,
as it should be, will affect not only country's economic growth,
but also slow the inflow of foreign investment by genuine
investors and also casts a slur on India's securities market.
Message should go that our country will not tolerate "market C
abuse" and that we are governed by the "Rule of Law". Fraud,
deceit, artificiality, SEBI should ensure, have no place in the
securities market of this country and .'market security' is our
motto. People with power and money and in management of
the companies, unfortunately often command more respect in D
our society than the subscribers and investors in their
companies. Companies are thriving with investors' contributions
but they are a divided lot. SEBI has, therefore, a duty to protect
investors, individual and collective, against opportunistic
behavior of Directors and Insiders of the listed companies so E
as to safeguard market's integrity.
44. Print and Electronic Media have also a solemn duty
not to mislead the public, who are present and prospective
investors, in their forecast on the securities market. Of course,
F
genuine and honest opinion on market position of a company
has to be welcomed. But a media projection on company's
position in the security market with a view to derive a benefit
from a position in the securities would amount to market abuse,
creating artificiality. SEBI has the duty and obligation to protect
ordinary genuine investors and the SEBI is empowered to do G
so under the SEBI Act so as to make security market a secure
and safe place to carry on the business in securities.
B.B.B. Appeals dismissed.
H