Mr. N Narayanan, was the promoter as well as a whole time Director of M/s Pyramid Saimira Theatre Limited (PSTL), a company registered under the Companies Act, 1956. The shares of PSTL were listed on Bombay Stock Exchange Ltd. (BSE) and National Stock Exchange (NSE) at the relevant time. The company was involved in the business of Exhibition (Theatre), Film and Television, Content Production, Distribution, Hospitality, Food & Beverage, Animation and Gaming and Cine Advertising etc. The company had nine Directors, including Mr. Narayana. The investigation department of SEBI noticed that the 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 thereby violated the provisions of Securities and Exchange Board of India (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 various Regulation of Rules 2003 and were directed to show cause why appropriate directions as deemed fit and proper under Sections 11, 11B and 11(4) of the SEBI Act read with Regulation 11 of Regulations 2003 be not issued against them. A legal notice was issued to the company which was replied by Mr. Narayanan, in detail.

Personal hearing was accorded to the appellant followed by a written Submissions by the appellant was also considered by SEBI. The Board 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

d) did not maintain certain books of accounts.

On facts, the officer established above-mentioned violations had. Consequently, the Whole Time Member (WTM) of SEBI, in exercise of powers conferred under Section 19 of the SEBI, held that the Directors were found guilty under various stated sections of SEBI Act. He 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 directly or indirectly and from being Director of any listed company.It was held that the appellant and other Directors were liable for monetary penalty under Section 15HA of SEBI Act whereby a penalty of 50 lacs was imposed on the appellant.

Mr. Narayanan, contended that, though he was the Whole Time Director as well as Promoter of the company, 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 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 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 was no justification in debarring them from buying, selling or dealing in securities or accessing securities market or to impose penalty since there is no mens rea on the part of the appellant in intentionally stating any untrue statement or preparing false records and that he had no role as such in preparing the accounts and finance of the company.

Questions

1. Under the aforementioned circumstances, could the Director be held personally liable for preparing false records and presenting an untrue picture of financial position of the company?

(5 Marks)

2. Since company is a separate legal entity, the directors acting on behalf of the company as its agent be held responsible for company's act? (5 Marks)