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Directors’ Criminal Exposure: Immediate Compliance and Defence Planning
Selective Internal Disclosure Under SEBI and Company Law: Directors’ Responsibilities and Liabilities
Selective internal disclosure occurs when certain directors or officers within a company are provided with material information about potential regulatory violations, financial irregularities, or other significant corporate developments, while other board members, particularly independent directors are deliberately kept uninformed. This practice fundamentally undermines corporate governance principles and creates significant legal liabilities under both SEBI regulations and the Companies Act, 2013.
The practice has gained regulatory scrutiny following several high-profile cases where independent directors claimed ignorance of financial mismanagement while executive directors possessed complete knowledge of ongoing violations. This selective information sharing creates a dual-tier governance structure that contradicts the fundamental principles of board oversight and fiduciary responsibility.
Legal Framework Governing Disclosure Obligations
SEBI Regulatory Framework
Under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), companies are required to ensure uniform and timely disclosure of material information to all stakeholders. Regulation 30 mandates comprehensive disclosure of material events, while Regulation 46 requires transparency in corporate governance practices.
The SEBI (Prohibition of Insider Trading) Regulations, 2015 establish strict controls over Unpublished Price Sensitive Information (UPSI), requiring companies to maintain structured digital databases.
Companies Act, 2013: Directors’ Statutory Duties
Section 166: General Duties of Directors
Section 166 of the Companies Act, 2013 establishes comprehensive statutory duties for all directors:
Fiduciary Duty – Directors must act in good faith to promote the company’s objectives for the benefit of members, employees, shareholders, community, and environment
Duty of Care and Diligence – Directors must exercise due and reasonable care, skill, and diligence with independent judgment
Conflict Avoidance – Directors must avoid situations involving direct or indirect conflicts of interest
Prohibition of Undue Gain – Directors cannot achieve undue gains or advantages for themselves or associates.
Section 184: Disclosure of Interest
Section 184 requires directors to disclose their concern or interest in any contract, arrangement, or transaction involving the company. This provision ensures transparency and prevents conflicts of interest from remaining hidden.
Key disclosure requirements include:
Mandatory disclosure at first board meeting after becoming aware of interest
Annual disclosure at the first board meeting of each financial year
Comprehensive details about nature and extent of interest
Written disclosure to be recorded in board minutes
Independent Directors: Enhanced Liability Framework
Section 149(12): Limited Liability Protection
Section 149(12) provides that independent directors and non-executive directors (not being promoters or KMPs) shall be held liable only for acts of omission or commission that occurred:
With their knowledge (attributable through Board processes), and
With their consent or connivance, OR
Where they had not acted diligently
This provision creates two distinct liability tests connected by “or,” meaning independent directors can be held liable under either the knowledge test or the diligence test.
Recent Case Law Analysis
Manpasand Beverages Limited (April 2024)
Facts: SEBI found significant financial mismanagement including overstated sales, dubious transactions, and manipulated financial statements for FY 2018-19 and 2019-20.
Key Holdings:
Independent directors were held liable for failure to exercise due diligence despite claiming lack of access to documents
SEBI noted that independent directors failed to provide evidence of attempting to obtain necessary information
The diligence test was applied, emphasizing active oversight responsibilities
Penalties:
Former independent directors Milind Babar and Chirag Doshi: Rs. 2 lakhs each
Current independent directors Nishish Mobar and Bharti Naik: Rs. 1 lakh each
LEEL Electricals Limited (April 2024)
Facts: SEBI investigation revealed fund diversion including Rs. 40.53 crores GST input tax credit fraud and fictitious inventory recognition of Rs. 320.60 crores.
Key Holdings:
Independent directors penalized Rs. 10 lakhs each for failing to fulfill statutory duties as Audit Committee members
SEBI emphasized that lack of expertise does not excuse negligence in oversight responsibilities
Directors were held liable despite not being involved in day-to-day operations
Significance: This case demonstrates SEBI’s stringent stance on independent directors’ accountability, particularly for those serving on specialized committees.[25][2]
Suseela Padmavathy Amma v. Bharti Airtel Limited (March 2024)
Supreme Court Holdings:
Mere directorship does not create automatic liability under Section 141 of Negotiable Instruments Act.
Person must be “in charge of and responsible for” company’s business conduct at material time
No universal rule that directors are in charge of everyday affairs
Managing directors have different liability due to their operational involvement
Impact: This decision provides crucial protection for directors not involved in day-to-day operations while maintaining accountability for those with operational control.
Criminal Liability Framework
Section 447: Punishment for Fraud
Section 447 of the Companies Act, 2013 establishes severe penalties for fraud:
Punishment Structure:
Imprisonment: 6 months to 10 years (minimum 3 years for public interest cases)
Fine: Minimum equal to fraud amount, maximum three times the fraud amount
Fraud: Any act, omission, concealment, or abuse of position committed with intent to:
Deceive the company or stakeholders
Gain undue advantage from the company
Injure interests of company, shareholders, creditors, or others[31][33]
Best Practices for Compliance
Information Governance Framework
Board-Level Controls:
Comprehensive information sharing protocols ensuring all directors receive material information simultaneously
Regular executive sessions for independent directors without management present
Direct access to external auditors and compliance officers
Documented escalation procedures for governance concerns
Director Training and Awareness
Mandatory Training Components:
Legal obligation awareness including fiduciary duties and disclosure requirements
Industry-specific regulatory training relevant to company operations
Financial literacy programs for audit committee members
Case study analysis of governance failures and regulatory enforcement
Technology and Documentation
Digital Infrastructure:
Secure board portals with comprehensive document access and audit trails
Automated compliance monitoring systems with real-time alerts
Structured databases for tracking UPSI sharing and board communications
Regular compliance dashboards showing regulatory adherence status
Conclusion
Selective internal disclosure represents a fundamental breach of corporate governance that exposes directors to significant legal, regulatory, and reputational risks. Recent SEBI enforcement actions demonstrate an evolving regulatory approach that emphasizes substance over form in assessing directors’ responsibilities.
Key takeaways for directors:
Independent directors cannot rely on ignorance as a defense against liability – they must exercise active diligence in seeking information necessary for informed decision-making
All directors have fiduciary obligations under Section 166 to act in good faith and exercise due care, regardless of their operational involvement
Disclosure obligations under Section 184 require transparency about conflicts of interest and must be strictly observed
Criminal liability under Section 447 can attach to directors who participate in or fail to prevent fraudulent activities
SEBI enforcement is increasingly focused on functional independence rather than mere formal compliance with independence criteria
Companies must establish robust governance frameworks that ensure equal access to information, comprehensive training programs, and clear accountability mechanisms to prevent selective disclosure practices and protect both the organisation and its directors from regulatory exposure.
Astrea Legal Associates LLP
Note: This publication is provided for general information and does not constitute any legal opinion.This publication is protected by copyright. © 2025,Astrea Legal Associates LLP
