SYMBIOSIS INTERNATIONAL DEEMED UNIVERSITY

COMPANY LAW II
RESEARCH PAPER

‘ANALYSIS OF N NARAYANAN v. ADJUDICATING

OFFICER SEBI CASE’

---------------------------------------------------
Submitted by
Niharika Khanna
Division- ‘D’
PRN – 18010324093
Year – 3rd year
---------------------------------------------------
In
April, 2021
Under the guidance of
Ms. Anita Sable
INTRODUCTION
The term ‘market abuse’ refers to the condition where the trader of an organization who
might also be an investor has an undue advantage over the other participants of the market. It
involves two main aspects, namely, insider trading and manipulation of the market. The case,
N Narayanan v. Adjudicating officer SEBI 1 is one of the landmark cases of Company law
that has provided a concrete judgement and has taken a step towards curbing the manipulative
practices taking place in the securities market. The case deals with various aspects of the
subject. It intended to promote orderly and healthy growth of the market dealing in securities.
The case aimed at warning all those organizations who practice fraud and carry activities that
mislead the investors and creditors of the market. The judgement primarily focused on the
aspect of ‘market abuse’ & ‘Insider Trading’. Various other aspects such as duty of the
directors towards the organization as well as the investors, importance of corporate
governance, duty to keep proper books of accounts & to prevent the investments of the
investors have also been discussed. The orders passed were more for the organizations and
companies in general, rather than being case specific. Judgements on all these aspects have
been passed in the present case and orders relating to measures to protect the same have been
passed.
The case was an appeal which was made before the supreme court against the orders passed
by SEBI. The appellant, i.e. N Narayanan was a whole-time director of M/s Pyramid Saimira
Theatre Limited. This company was involved in the business of television and theatre and
was registered under the Companies Act, 1956. The company had listed themselves under
both the stock exchanges. The director of this company was accused of carrying out
fraudulent practices inside the organization. Additionally, the appellant was accused of
failing to disclose correct and proper books of accounts and losing the confidence of the
investors by abusing the securities market for their individual gains. all these acquisitions
were made by SEBI who is appointed for ensuring a healthy competition in the market. The
adjudicating officer accused the appellant of these charges and also imposed a penalty of Rs
50 lacs for the same. The judgement that was passed by the Supreme court was delivered in
favor of the Adjudicating officer of SEBI in addition to imposition of charges on the
appellant.
Thus, the above case is one of the landmark cases wherein regulations related to prevention
of market investors and promoting transparency and healthy competition in the securities

1
N Narayanan v. Adjudicating officer SEBI, (2013 12 SCC 152)
market have been laid down. The Facts, Issues, Rule of Law, and Analysis of the case will be
discussed in detail in the present paper. Additionally, all the aspects of company law
discussed in the present case will also be dealt in detail in the research paper.

SCOPE AND EXTENT OF THE STUDY

The present study aims to discuss in detail the facts, issues, rule of law discussed and
presented in the case of N Narayanan v. SEBI. Additionally, the scope of the paper extends
towards discussing in detail and analyzing all the aspects and provisions of company law
discussed in the given case. This includes market abuse, insider trading, market manipulation,
duties of a director, section 209 of the Companies Act, 1956, corporate governance, and
importance of promoting healthy growth of the securities market.
Lastly, the study will focus on the importance of disclosure and transparency in
organizations.

SIGNIFICANCE OF STUDY
All the outcomes and the findings by the researcher of this present study will contribute
towards the betterment of the society, taking into consideration that company law plays an
essential role in the field of law today. Since the present study involves protecting the
interests of the investors and shareholders by trying to curb the practices of market abuse and
manipulation, it will promote the orderly growth of the securities market and will help in the
overall growth of the economy. As the demand and importance of company law among the
law students is increasing, the present study upholds the need for providing data with
different approaches of the topic. The present paper will also turn out to useful for the law
students pursing their degree as well as for the lawyers who are dealing with the cases of
company law in their profession. The present study will also enable the researcher to unfold
all the crucial and key areas of the topic that is unexplored.

RESEARCH OBJECTIVES
The objectives of the research paper are as follows: -
 The primary objective of the paper is to have a detailed study on the facts, issues, and rule
of law involved in the case of N Narayanan v. SEBI.
 The paper also aims to analyze the aspect of ‘market abuse’ as discussed principally in
the given case.
 To study in detail the concept of ‘insider trading’ in relation to the assigned case
 To discuss the duties of the director, importance of corporate governance, and the duty of
every organization to keep proper books of accounts.
 To discuss the importance of disclosure as well as transparency in companies &
promoting orderly growth in securities market.

RESEARCH QUESTIONS
The present paper aims to address the following research questions: -
1. What are the detailed facts, issues and rules of law involved in the case of N Narayanan v.
SEBI?
2. What is the concept of ‘market abuse’ & how has it been expanded in the securities
market?
3. What is the concept of insider trading as mentioned in the given case?
4. What are the duties of a director, the duty of every organization to keep proper books of
accounts & what is the importance of corporate governance in company law?
5. How is disclosure and transparency important in an organization and why is it important
to promote orderly growth in securities market?

RESEARCH METHODOLOGY
The research methodology that will be undertaken for this project is the doctrinal form of
research. This study will include analysing the given case law, and will also discuss legal
statutes, provisions and sources. No primary source of collection of data will be taken up in
the present paper the researcher will focus the research on secondary sources of data. The
sources which have already been presented and published by various authors will be used in
the paper. The style of citation that the researcher will use throughout the project will be
‘Blue Book Law Review’. Other secondary sources of data such as journals, articles,
newspapers, magazines, etc will be referred. Additionally, opinions of the experts, research
papers, authorised websites, dictionary as well as book reviews will be looked upon to carry
out research to complete the paper.
ANALYSIS
1. What are the detailed facts, issues, rules of law, arguments advanced and order
passed in the case of N Narayanan v. SEBI?
 FACTS OF THE CASE
 Mr. N Narayanan i.e. the appellant of the case was the whole time director and
promoter of a company named M/s Pyramid Saimira Theatre Ltd (PSTL, whose
primary business was that of theatre, film and television, advertising, etc. The
company was registered under the Companies Act, 1956, and had shares listed in
various stock exchanges of the country.
 Post an investigation conducted by SEBI, the company was found guilty of
committing various irregularities in their books of accounts. Additionally, the
financial statements of the company displayed false increased profits as well as
revenues which in turn attracted the public to invest in their stocks. By luring the
public to make investments based upon false statements resulted in the violation of
various provisions of SEBI Regulations2.
 As a result of this manipulation, SEBI issued a show cause notice to Mr. Narayanan
as well as other directors to give valid reasons for their actions. Another notice was
issued asking for appropriate reasons for non-imposition of penalty upon the appellant
even though various provisions of the act were breached by him and the other
directors.
 A reply to the notice issued by SEBI was made by the appellant asserting that he did
not commit any breach and no form of irregularities were committed by him. He
stated that it was the Managing Director of the company who was responsible for the
daily affairs and maintaining the books of accounts of the company. Him being a
whole time director had different responsibilities such as operating the HR department
and thus he could not be held liable personally for the breach of any of the provisions
of SEBI act.
 After submissions were made by the appellant, it was observed by the board that Mr.
N Narayanan had specifically violated various sections of the SEBI Act. All the
2
Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practice Relating to
Securities Market) Regulations, 2003 (for short ‘Regulations 2003’)
 violations committed were under the purview and powers exercised by the whole time
director of a company and it was proved that the appellant conducted specific
breaches such as manipulation of accounts by making false entries, failure to maintain
specific statements of accounts, etc.
 Thus, an order of was passed against the appellant and other directors restraining them
to buy, sell or deal in any kind of securities for a period of 2 years, and restricting
them from accessing the market in direct or indirect manner. Additionally, they were
also restrained from being appointed as a director in any company that is listed under
the act for a period of 3 years.
 An order was also passed by the adjudicating officer declaring violations of specific
provisions of the act and penalizing the appellant as well as the other directors for an
amount of Rs.50 lacs. This decision was challenged in the tribunal wherein the order
of the adjudicating officer was upheld.
 The appellant Mr. N Narayanan further challenged the decision of the Tribunal before
the supreme court in the present case.
 ISSUES RAISED IN THE PRESENT CASE
The following issues were raised in the present case:
 Whether there was a violation of section 12A in chapter VA of SEBI Act additionally
read with chapter II of Regulations 2003 committed by the appellant and other
directors?
 Whether the appellant failed to undertake due diligence in maintaining corporate
governance?
 Whether the appellant failed to exercise his duties as a whole time director through
non-disclosure and abusing the transparency of the company?
 RULES OF LAW INVOKED IN THE PRESENT CASE
Mr. N Narayanan violated various provisions of the SEBI Act as well as failed to exercise its
duties as a whole time director. The rules of law that were invoked in the present case are as
follows:
 Section 12A in Chapter VA of the SEBI Act- This particular section of the act deals
with prohibiting the buying or selling of devices or securities in a deceptive manner
and talks about insider trading as well as acquiring of substantial securities.
  Section 12A read with Chapter II of Regulations 2003- This provision deals with
prohibiting all those practices that are conducted fraudulently in relation to securities
market.
 Sections 15HA read with Chapter VIA of SEBI- This section is mainly concerned
with imposing penalty for all those who violate the provision of section 12A of the
Regulations 2003.
 ARGUMENTS ADVANCED AND ORDER PASSED IN THE PRESENT CASE
Argument advanced by the appellant- The principal argument presented by the appellant in
the present case was that despite being appointed as the promoter and whole time director of
the company, the main responsibility he undertook was leading the Human Resource
Development team and that he has no involvement in looking after the management of the
company. The daily activities that involved maintaining the financial statements and books of
accounts were not under his control and thus it wasn’t justified to hold him accountable for
the actions. Further, he also argued that keeping the books of accounts was the job of an
accountant and the auditors of the company. He being the director had no knowledge and did
not hold any expertise in the same. Thus, it is not justifiable to hold him responsible for the
activities in which he played no part such as buying and selling the securities and maintaining
the financial records.
Arguments advanced by the respondent- The investigating officers contended that they had
proof as to the breach and violations committed by the appellant. The irregularities and
inflated profits reflected in the books of accounts was one of the proofs presented by them.
Also, the financial reports of the company maintained quarterly showed unreasonable
increase in the profits and securities of the company. Further, there was an inflation in the
scrip price of the company which is usually controlled by the promoter of the organization
and thus this could not be done without the supervision of the appellant. Additional breaches
such as sudden increase in the net profits of the company, non-disclosure of financial figures
and documents etc proved that the appellant was guilty of violating various provisions of the
SEBI Act. As mentioned by section 210 of the Companies Act, 1956, it is the responsibility
of the director to review the books of accounts in every annual general meeting, it was proved
that the appellant failed to exercise his duties as mentioned and listed by the companies act.
Order passed by the Supreme Court- In the present case, the supreme court passed an order in
favour of the SEBI adjudicating officer and upholding its decision as well as the orders of the
tribunal, the court held that the appellant along with other directors would be penalized with a
sum of Rs.50 lacks, they would be restricted from buying or selling securities in any manner
for a period of 2 tears and would be restricted from being appointed as a director for 3 years.

2. What is the concept of ‘market abuse’ & how has it been expanded in the securities
market?
‘Market abuse’ as the name suggests refers to abusing or carrying out practices that hinder
the functioning of the market, be it financial market or securities market. Market abuse is
considered to be unlawful in India. There are provisions that prohibit the practice of market
abuse and also penalizes those who practice it. It specifically includes practices such as
‘insider trading’, the practice of ‘disclosing personal information of a company in an
illegal and unlawful manner’ and ‘manipulating the market’3. The practice of market abuse
harms the integrity of the market to a great extent. Securities market was established to
promote a platform where information in relation to the shares and stocks can be accessed by
the general public. The practice of market abuse loses the confidence of the investors who
invest by establishing trust in the market. Presenting and declaring information about a
company which is completely false and misleading directly attack the trust of the investors
who genuinely rely on such information as presented to them. It not only loses their trust, but
also causes a great deal of monetary loss which is in most situations irrecoverable.
People who are involved in market abuse ‘create artificial image’ of the company by falsely
increasing the profits, revenue and other financial instruments of the company. This is done
by inflating the cost of the scrip of the organization. The general public gets attracted towards
the high figures that the company shows and publishes, and rely upon the expanded figures
leading to manipulation and abuse of the securities market. This practice has been on a rise
where companies artificially create their financial figures and the promoter pledges their
stocks to extract money from other financial institutions.
Market abuse takes place through various other practices such as fraudulently controlling the
demand and supply of the investment market, trading their own shares in the market to build
a fake impression among the public in relation to activity taking place in the shares of their
company, purchasing shares in bulk from the market to lure the public and then increasing the
prices of those shares, etc.4 In order to promote healthy and fair practices in the market,
various provisions have been introduced in the SEBI act as well as in the regulations. Section
3
Market Abuse Definition | Legal Glossary | LexisNexis, , https://www.lexisnexis.co.uk/legal/glossary/market-
abuse (last visited Apr 22, 2021).
4
ComplyLog, The 7 Behaviours That Qualify As Market Abuse – Part 1 - InsiderLog,
https://blog.complylog.com/7-behaviours-of-market-abuse (last visited Apr 22, 2021).
12A of the SEBI Act prohibits the activities that lead to market abuse. There are also
provisions that penalizes and punishes the market manipulators and abusers. Preventing
unfair practices and market abuse is very important because it preserves the integrity of the
market which in turn plays a role in upholding the hallmark of Securities and Company law.
Thus, ensuring proper implementation of the provisions laid down and keep a proper and
regular check on the activities of the market can help in the prevention of market abuse.

3. What is the concept of insider trading as mentioned in the given case?

‘Insider trading’ is a practice wherein securities are bought or sold in an illegal manner by
committing a breach & violating a relationship of trust by relying upon a piece of material or
information about the security that is supposed to be undisclosed to the general public. It
mainly includes using some essential piece information of the company which usually
inaccessible by the general public, for the purpose of trading securities and making profits in
an unlawful manner. In the present case of N Narayanan v. SEBI, the appellant committed the
practice of insider trading thus violating section 12A of the SEBI Act. The practice of insider
trading has enormously been increasing among the companies where every third company is
seen to manipulate the securities market by taking advantage of the inaccessible information
of the organization. It has been observed that over a total of 70 cases were being investigated
by SEBI in relation to insider trading in the financial year of 2018-19. 5 Witnessing an
increase in the number of cases, a committee was set up by the SEBI in the year 2018
wherein suggestions were given to introduce amendments in the present regulations and act.
All these recommendations were duly implemented by way of the 2018 Regulations. 6 These
were amended to ensure fairness and greater transparency in the securities market. SEBI not
only prohibits the practice of insider trading but also punishes the insiders. The punishment is
provided under the SEBI act7 which provides that any person who takes undue advantage of
any kind of information that is sensitive to the company will be penalized with a sum not less
than Rs. 10 lakhs. This penalty can also extend to a sum of Rs.10 crores. Although the
punishment for insider trading is huge in terms of money, there is still no strong or severe
punishment provided for the commission of the act. Stricter provisions with severe
punishments must be introduced to curb the practice of insider trading and ensure the
integrity of securities market.

5
Annual SEBI report, Financial year 2018-19
6
(Prohibition of Insider Trading) (Amendment) Regulations, 2018
7
Section 15G of the Securities and Exchange Board of India Act
4. What are the duties of a director, the duty of every organization to keep proper
books of accounts & what is the importance of corporate governance in company
law?
A director of a is said to be the heart and soul of a company as it is the human agency that
runs it. A director plays a very crucial role in an organization and is said to carry onerous
duties as well as responsibilities. No director can get away from his obligations once
appointed, and it becomes their responsibility to ensure that the company runs in a lawful
manner. The Regulations mentioned under the Companies Act read along with the SEBI Act
puts an absolute obligation on the directors to regulate the company’s performance towards
the advantage of the shareholders. Further, it also obligates them to ensure that the financial
books and statements of accounts of the company are maintained in a lawful and legal
manner. This responsibility increases especially if the company is a listed company. A
director is said to be connected in a direct or indirect manner in relation to the buying and
selling of the securities and thus, would be responsible for any fraudulent activity taking
place inside the organization. The SEBI regulations obligates the directors to have control
over the preparation of the reports and financial records to be prepared annually. It also casts
an additional responsibility upon them to sanction the records only after acquiring complete
satisfaction that the accounts provide a ‘true’ & ‘fair’ view of the revenues and profits of the
company. In the case of Official Liquidator v. P.A. Tendolkar 8, the court held that company
being a legal entity is operated by the directors and their connection with the management of
the company is so close that they would be held personally liable for any mismanagement or
unlawful practices that take place in the organization.
Corporate governance is the practice that lays down various principles that govern the
functioning of an organization. It reflects the relationship between the shareholders and
management of the organization.9 It also involves preparing and developing strategies for the
organization that would prove the most beneficial for shareholders of the company. Company
law strives to ensure that the interests of the investors and shareholders of the securities
market are upheld. Through efficient corporate governance the objective of company law can
be achieved and thus, CG plays a vital role in the field of company law.

8
Official Liquidator v. P.A. Tendolkar, (1973) 1 SCC 602
9
Web Unlimited, Corporate Governance: Importance and Role of Corporate Governance, STUDYCAFE,
https://studycafe.in/corporate-governance-44307.html (last visited Apr 22, 2021).
5. How is disclosure and transparency important in an organization and why is it
important to promote orderly growth in securities market?
Disclosure of true and fair information is very important for every organization as this would
play an important role in shaping the decision of the investors in the market in relation to
investing in a particular company. The books and financial records of the company must
always be disclosed and declared in a lawful manner so that the interests of the investors are
not hindered and their confidence in the market isn’t lost. Disclosure is said to be the main
principle upon which the Companies Act is shaped. The phrase “forewarned is
forearmed”10 reflects the importance of transparency in any organization. The investors are
considered to be the heart and soul of the securities market and to ensure that they are not
abused in any manner, the weapon of true and fair disclosure is very necessary. Every
company must understand their responsibility towards promoting a healthy market and thus
must not mislead them to unlawfully earn profits and revenues for themselves. Disclosure and
transparency are thus said to be the 2 most important pillars of the securities market as they
ensure that the market functions with the participation of genuine investors and traders to
improve the overall economic growth of the country.

10
Gower and Davies, Principles of Modern Company Law, 9th Edition (2012), pg. 751
LITERATURE REVIEW
The author has referred to various articles and books for conducting the present research.
The researcher has referred to the article ‘The Indian Stock Market Saga’11 from SCC
OnLine which discusses the aspect of market manipulation and market abuse in relation to
the case of N Narayanan. It further discusses the regulations laid down by the committee for
the judgement passed in the given case. The article also provides general information on the
aspect of Insider trading.
The researcher has referred to another article named ‘Supreme Court on Market
abuse’12which discusses the importance of curbing the practice of market abuse in the
securities market. The article also analyzes the facts and issues of the given case. The
judgement of the court has also been examined in the current article. Both the sides of the
case have been weighed in relation to who is responsible for the commission of the crime.
A journal namely ‘Insider Trading and the value of the Firm’ 13 published by JSTOR has
been referred by the researcher, which discusses the concept of insider trading and
information in detail and in reference to the given case. The actions of the traders of
abnormally inflating the profits of the company leading to the violation of the orderly and
healthy growth of the securities market has been discussed in the present journal.
An international research paper namely, ‘Corporate governance and director’s duties in
India: overview14 has also been referred by the researcher. The paper discusses the current
and raising importance of corporate governance in company law and also lays down in detail
all the duties that are required to be followed by the director of an organization. The liabilities
in consequence to performing the duties have also been discussed in the research paper.
Lastly, the author has referred to a journal namely, ‘The demand and need for
transparency and disclosure in corporate governance’15 for the present paper. The journal
discusses the need and importance of providing correct and reliable information to the
shareholders and investors of the market and how the culture of need for transparency in
organizations has increased.

11
Vini Gupta, The Indian Stock Market Saga
12
Umakanth Varottil, Supreme Court on “Market Abuse”, India Corp Law
13
Robert T. Masson and Ananth Madhavan, Insider Trading and the Value of the Firm, Vol.39, No.4(Jun 1991)
14
Hemang Parekh, Jayesh Kothari and Supallab Chakraborty, DSK Legal, Corporate governance and directors'
duties in India: overview
15
Benjamin Fung, The Demand and Need for Transparency and Disclosure in Corporate Governance, Universal
Journal of Management 2(2): 72-80, 2014
CONCLUSION AND RECOMMENDATIONS
N Narayanan v. SEBI is a judgement where concrete punishment and penalty was provided to
those who manipulated the market in a fraudulent and unlawful manner. Practices such as
market abuse, insider trading, false disclosure of financial figures of a company hinder not
only the growth of the securities market but also degrades the overall growth of the economy
of the country. Preventing such practices is very essential to not only protect the investors
who get attacked as a result of manipulation but also to save thousands of people out there
who could be affected by the downfall of the economy. There have been several other
prominent cases in India that has caused losses to not only the investors of the particular
company but to all the shareholders and other participants as well as traders of the market.
Our country is primarily governed by the notion of the principle of ‘rule of law’ and thus any
practice that indicates manipulation of the market must not be tolerated at any cost. Various
provisions are already present in the Companies and SEBI acts that prohibits such practices
but it lacks imposition of stricter and severe punishments to those who violate the provisions
of the act. A lot of companies commit breach of these provisions with an underlying thought
that even if it gets caught, they will not be harmed or punished severely. Although the
monetary punishments are high in such cases, there must be additional form of punishments
for the same.
It is the duty of every participant of the securities market to ensure that it must be ‘securely
operated’ and only through collective efforts of the traders and investors can the market grow
in a healthy and lawful manner. The regulators must also perform their duties to protect the
integrity of the market and ensure that people’s confidence and trust is not lost.
 REFERENCES
1. Market Abuse Definition | Legal Glossary | LexisNexis, ,
https://www.lexisnexis.co.uk/legal/glossary/market-abuse (last visited Apr 22, 2021).
2. ComplyLog, The 7 Behaviours That Qualify As Market Abuse – Part 1 - InsiderLog,
https://blog.complylog.com/7-behaviours-of-market-abuse (last visited Apr 22, 2021).
3. Web Unlimited, Corporate Governance: Importance and Role of Corporate Governance,
STUDYCAFE, https://studycafe.in/corporate-governance-44307.html (last visited Apr
22, 2021).
4. Vini Gupta, The Indian Stock Market Saga
5. Umakanth Varottil, Supreme Court on “Market Abuse”, India Corp Law
6. Robert T. Masson and Ananth Madhavan, Insider Trading and the Value of the Firm,
Vol.39, No.4(Jun 1991)
7. Hemang Parekh, Jayesh Kothari and Supallab Chakraborty, DSK Legal, Corporate
governance and directors' duties in India: overview
8. Benjamin Fung, The Demand and Need for Transparency and Disclosure in Corporate
Governance, Universal Journal of Management 2(2): 72-80, 2014
9. Gower and Davies, Principles of Modern Company Law, 9th Edition (2012), pg. 751

CASE LAWS
1. N Narayanan v. Adjudicating officer SEBI, (2013 12 SCC 152)
2. Official Liquidator v. P.A. Tendolkar, (1973) 1 SCC 602

SITES
1. SCC Online
2. Hein Online
3. Manupatra