SEBI stripped the 'good faith' shield from SBI's nominee on ARSS Infrastructure

In an order published on 26 November 2021, markets regulator SEBI took the rare step of disallowing the 'acted in good faith' protection for Krishna Chandra Raut, the 75-year-old retired State Bank of India chief general manager whom the bank had nominated to the board of ARSS Infrastructure Projects (AIPL) in May 2013, after the company entered corporate debt restructuring. SEBI barred Raut from the market for six months and fined him ₹1.5 lakh, charging that AIPL misrepresented its books and misused funds; it also acted against the CEO, CFO and other key board members.

SEBI's reasoning was that Raut was not a passive nominee: he sat on AIPL's audit committee, attending two of four meetings in FY2015-16 and all four in FY2016-17. Under the Listing Regulations his role included reviewing the financial statements and auditor's report, including related-party disclosures, and ensuring the statements were correct, sufficient and credible. The regulator found AIPL had presented 'true and fair' financials while executing non-genuine transactions — misrepresentation that was fraudulent and detrimental to investors.

Raut, who joined SBI as a probationary officer in 1970 and retired with what he called an unblemished record, had resigned from the AIPL board in July 2021. He argued nominees of public sector banks cannot be proceeded against absent proof of bad faith. A SEBI lawyer told BusinessLine the order was striking — the regulator had charged a nominee director while taking no action against the company's auditors, and had itself invoked good faith to shield senior exchange officials in other matters.

SEBI rejected the customary good-faith protection for PSU-bank nominees — a precedent the article calls a rare case.

Audit-committee attendance, not day-to-day management, was the basis: two meetings in one year and four in the next were enough.

The order lands on the practice of banks parking retired officials on boards of distressed borrowers after CDR.

The penalty itself is modest, but the precedent shifts liability onto every lender-nominee who signs off on suspect financials.

Accepting a nominee board seat at a distressed borrower is not a ceremonial job: audit-committee attendance alone was enough for the regulator to pierce the good-faith shield.

The order issued on 26 November 2021 was expected to be challenged before the Securities Appellate Tribunal, according to a SEBI lawyer cited by BusinessLine. Raut had already resigned as SBI's nominee in July 2021.