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In a rare case, markets regulator SEBI has disallowed protection under the rule of ‘acted in good faith’ to 75-year old Krishna Chandra Raut, a nominee of government-owned State Bank of India (SBI) on the board of ARSS Infrastructure Projects (AIPL). Government employees or its nominees on the board of companies are protected from prosecution or legal proceedings by any authorities unless it has proved that they acted in a ‘bad faith’.

Raut is a retired SBI official who was put as a nominee by the bank on AIPL board in 2013 after the company went into CDR (corporate debt restructuring).

SEBI has barred Raut from the stock markets for six months and imposed a fine of ₹1.5 lakh on the charges that AIPL misrepresented its books of accounts. SEBI has also took action against key board members of AIPL including the CFO and CEO for misrepresenting the financials of the company and misusing the funds. Raut was just a nominee director on AIPL board and not involved in any of the day-to-day activities of the company.

“It is strange that the regulator has gone to the extent of charging a nominee director of SBI for misrepresenting the books of accounts but has yet to take any action against the auditors. The matter could be surely challenged in SAT (Securities and Appellate Tribunal). Also, this order of SEBI is in contrast to its past behaviour where the regulator has not acted against senior stock and commodity exchange officials on grave matters citing the rule of ‘acted in good faith’ despite the fact that forensic audit reports pointed fingers in their direction for wrong doings,” a SEBI lawyer told BusinessLine.

Raut’s resignation

In July, Raut resigned as SBI’s nominee on the AIPL board. Raut told SEBI that he became a director of AIPL on May 11, 2013, and had no role to play in the affairs or day to day management of the company. He submitted further that there was no question of proceeding against any nominee director of a public sector bank in respect of any act done or omitted to be done in discharge of its duties as a director/unless it was established that he had acted in bad faith and was complicit in commission of any such offence.

Raut also told SEBI that he had joined SBI as a probationary officer on December 24, 1970, and retired as Chief General Manager from SBI Kolkata local head office on April 30, 2005 with an unblemished service record.

But SEBI’s reasoning in pressing charges against Raut was that he was not just a director of AIPL but a member of the audit committee and had attended 2 of the 4 audit committee meetings in FY2015-16 and all the 4 meetings during FY2016-17. “Hence, the noticee (Raut) cannot take the plea that he acted in good faith as a director of the board in approving the financials that were provided to him by the audit committee, as the noticee himself was a member of the audit committee whose role under Regulation 18(3) read with Part C of Schedule II of the LODR (Listing Regulations) was inter alia to review the financial statement and auditors report with reference to disclosure of any related party transactions etc. and to ensure that the financial statement is correct, sufficient and credible.”

SEBI has said that AIPL presented true and fair financial statements and had executed transactions which are non-genuine in nature tantamounting to misrepresentation of the accounts/financials statement and misuse of account/funds of the company.

SEBI has said that AIPL had misused funds/misrepresented books of accounts which are detrimental to the interests of genuine investors and are fraudulent in nature. It was also alleged that the directors, CEO and CFO had failed to exercise duty of care, by misrepresenting the financials/misusing the funds. It was alleged that transactions which are non-genuine in nature were executed.