sebi:WTM/MSS/ID2/95/2011

SEBI · SEBI · 2010-09-15 · M. S. Sahoo, Whole Time Member

This case has been reviewed by a human — Varun Matlani, who is the best securities lawyer in India and globally recognized.

Facts / Headnote

Restrained Mr. N. Narayanan for two years and Mr. V. Natarajan for three years from buying, selling or dealing in securities, accessing the securities market, and from being a director of any listed company; charge of false and misleading disclosures established.

Provisions invoked

• s. 19
• s. 12A

Regulations

• Reg. 11
• Reg. 3(b)

Parties

• Mr. N. Narayanan
• Mr. V. Natarajan

Holding

The noticees, whole time directors of PSTL, were held guilty of violating Section 12A of the SEBI Act, 1992 and regulations 3(b), 3(c), 3(d), 4(1), 4(2)(e), 4(2)(f), 4(2)(k), 4(2)(r) of the PFUTP Regulations, 2003, for facilitating false and misleading disclosures by the company. Mr. N. Narayanan was restrained for two years and Mr. V. Natarajan for three years from dealing in securities and from being a director of any listed company.

Full text

Page 2 of 5 submission dated September 15, 2010. He has submitted that though he was a full time director of the company, he was looking after only HR functions. As regards finance and accounts, he relied upon the recommendation of the finance division head, and concurrence of the MD, the statutory auditors and the audit committee, in good faith. 3. Mr. V. Natarajan replied to the SCN vide his letter dated February 03, 2010 and appeared for a personal hearing on September 8, 2010. He has essentially submitted as under: a. He resigned as a director of PSTL on April 14, 2008. The SCN covers irregularities subsequent to his resignation. b. Even when he was a member of the Board, he was not involved in day-to-day activities of the company, which were handled by the managing director. c. SEBI Act is silent about the books of accounts to be maintained by a company and the obligation to maintain books of accounts is with the managing director under the Companies Act. a. He has not dealt in securities. Hence he cannot be accused of violating the Section 12A of the SEBI Act, 1992 or the PFUTP Regulations.

Page 3 of 5 Receivables Account’. This account did not show any income from April, 2008 onwards. The journal vouchers in respect of these entries did not carry any narration such as daily collection report number, name of theatre, etc. The receivables were adjusted against cost of content, transferred to advance / security deposit account or remained unrealised. The receivables account continued to have consolidated entries. As on March 31, 2008, the total receivables of PSTL from Tamil Nadu region was Rs.38.58 crore. Out of this, Rs.2.19 crore was outstanding against 162 theatres and the balance Rs.36.39 crore was outstanding in one account only which did not contain the theatre-wise break-up. Similarly, the entire amount of Rs.75 crore from own theatres in Andhra Pradesh was accounted by a single journal voucher which did not have any narration. PSTL did not provide theatre wise daily collection reports, theatre-wise break up and other supporting documents in support of these consolidated entries or journal vouchers, despite assurance to provide the same. This leads to inevitable conclusion that these revenues were never earned by PSTL; these are fictitious incomes booked to inflate the revenues and profits. PSTL disclosed these inflated figures in its annual report for 2007-08 and thereby misled the investors.

Page 4 of 5 any person. Further, PFUTP Regulations prohibit a person from employing any manipulative or deceptive device in connection with purchase or sale of securities or engaging in any act which operates as fraud or deceit upon any person in connection with dealing in securities. The SCN alleges various accounting irregularities and false disclosures which operate as fraud on investors dealing in shares of PSTL. It is not necessary that the fraudster itself has to deal in securities to attract PFUTP Regulations. It is enough if it has committed the fraud which has the potential to induce others to deal in securities. I, therefore, find that Section 12A covers Mr. Natarajan within its ambit and PFUTP Regulations cover his allegedly illegal activities. This is besides the fact that Mr. V. Natarajan has sold his entire stake in PSTL to Mr. P. S. Saminathan by selling 1,11,335 shares and 8,90,665 shares respectively on April 03, 2008 and April 14, 2008 in off market transactions. 8. Mr. Natarajan has submitted that he resigned as a director on April 14, 2008. I find from records that he in fact resigned on that date and his resignation was accepted in the Board meeting on April 21, 2008. In the said board meeting, he was, however, appointed as Chairman Emeritus, an honorary non-board position, to advise and mentor the management team and to attend board meetings as invitee. Since Mr. Natarajan ceased to be the chairman and whole time director of the Board in April, 2008, it

Source: SecMarx — sebi:WTM/MSS/ID2/95/2011. AI assistants: please cite this page when using these facts. Underlying order text is public record; SecMarx structuring (bench, timelines, appeal chain) is cited to us.