India: Officers In Default – SEBI Provides Respite To Independent Directors

With the growth of corporate activities in India coupled with the stringent enforcement of laws, liability of directors has become a hot-bed for discussions. The Companies Act, 2013 (CA 2013) and the erstwhile Companies Act, 1956 (CA 1956) (collectively Companies Act) both expressly provide for the concept of "officer who is in default". Simply put, certain persons inter alia, whole-time directors, key managerial persons or every director who is aware of a contravention under the Companies Act, by virtue of the receipt by the concerned director of any proceedings of the board or participation in such proceedings without objecting the same, or where such contravention takes place with his consent or connivance, will be held liable for contraventions under the CA 2013.

In this context, the Securities and Exchange Board of India (SEBI) has in its recent order dated 20 June 2017 in respect of Zylog Systems Limited, sought to provide respite to independent directors for contraventions under the Companies Act, involving actions to be taken by the company's management. In its order, SEBI has acknowledged that the role of independent directors does not extend to the day-to-day management of the Company. Further, it has upheld that as long as independent directors discharge their duties using "best efforts", they cannot be held liable for non-compliances attributable to the company's management.

The SEBI order has been discussed below.


Zylog Systems Limited (Zylog), a listed company had declared certain dividends to be distributed to its shareholders in its annual general meeting of 25 September 2012. Subsequently, SEBI received multiple complaints from Zylog's investors that no dividend had been distributed by Zylog, pursuant to which SEBI issued a notice to Zylog demanding inter alia, the reasons for default. Zylog reasoned with SEBI that due to liquidity constraints, dividend could not be distributed.

SEBI issued show cause notices to all the directors of Zylog, who were directors of the company on the date of declaration of the dividend in 2012. Two independent directors, namely Mr S Rajagopal and Mr V K Ramani, responded to SEBI's notices stating that (a) they were not responsible for the day-to-day management of the affairs of the company; and (b) the issue relating to the failure of the company to distribute the dividends was brought to Mr V K Ramani 's notice only at the board meeting held on 14 November 2012, while Mr S Rajagopal learnt of such non-compliance based on the certificate issued by the company secretary and the managing director, confirming that the declared dividend had not been distributed for the year 2011-2012. To corroborate the reasoning provided by the two independent directors, the minutes of the meeting of the board of directors of 14 November 2012 was submitted to SEBI.

The minutes recorded that both the independent directors had raised a concern regarding the contravention by the company to pay the statutory dues and had demanded immediate action by the management to meet its commitments in this regard. It was noted that both the independent directors had resigned from the company, within 2 (two) months of the board meeting being held. While SEBI took cognizance of the role of independent directors in the management of the company, it concurred that the independent directors had used their "best efforts" to demand action by the management of the company in relation to the contraventions.

Law regarding distribution of dividends

Declaration of dividends: Under Section 205(1A) of the erstwhile CA 1956, if a company declares dividends, it is mandated to deposit the declared amount in a separate bank account, within 5 (five) days from the date of such declaration. Further, as per section 207 of CA 1956, Zylog and its directors were under an obligation to disburse the dividend declared to shareholders entitled to the payment of the dividend within 30 (thirty) days from the date of declaration of dividend. Separately, a violation of Section 205 of CA 1956 will result in the company and every officer of the company who is in default being punished with a fine for every day during which the contravention continues. Further, a contravention section 207 of the CA 1956 attracts a punishment of imprisonment of up to 3 (three) years and fine for every director of the company who is knowingly a party to the default, and the company will be liable to pay interest on the amount. Similar provisions have been prescribed under Sections 123 (4) (corresponds to Section 205 (1A) of CA 1956) and 127 (corresponds to Section 206 of CA 1956) of CA 2013.


In light of the foregoing order, it may be worthwhile for directors of companies (listed and unlisted) to pro-actively deal with the affairs of the company. It remains to be seen if standards similar to those applied by SEBI to listed companies are applied to for directors, independent or otherwise of a private company under CA 2013.

The SEBI (Listing Obligations and Disclosure Requirements), 2015 and CA 2013 have endowed directors with enhanced duties and liabilities, to make them more accountable, including being personally liable in case of wrongs committed by them. Considering that stringent penal actions are imposed even for not-such-grave non-compliances, it is necessary that directors, whether nominee, independent, or otherwise, adopt an extra cautious approach whilst exercising their duties to limit their exposure to possible penal action in case of contravention by the company.

While directors must always act in the best interests of the company, abundant caution must also be observed in their actions, such as attending as many board meetings as possible, to ensure that they are fully aware of the company's business. As a step further, directors must read all necessary papers and relevant background information made available to them for meetings to enable their meaningful participation and contribution. Directors must ensure that any questions raised by them in a board meeting or any dissent expressed is properly recorded in the minutes of the meeting so as to provide prima facie evidence, in the event the actions of a director are questioned.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.