On January 27, 2021, SEBI issued a consultation paper (Consultation Paper) with a view to introduce certain provisions in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) regarding the appointment / re-appointment of persons who fail to get elected as Whole time Directors (“WTDs”) or Managing Director (“MD”) of a listed entity at the general meeting of its shareholders.
Section 152 of the Companies Act, 2013 (the “Act”), requires every director to be appointed by a company in its general meeting. Further, as per Section 196 of the Act, an MD / a WTD is to be appointed by the board of directors of the company at a meeting, subject to approval by a resolution passed by its shareholders at the next general meeting.
Therefore, as per the existing framework, the process for appointment of persons as MDs / WTDs to companies is routed through two different resolutions of the shareholders - firstly, for appointment as a director under Section 152 and thereafter, as a MD / WTD under Section 196 of the Act. According to SEBI, this two-tiered approach could lead to a situation where the shareholders of a company may approve the appointment of a person as a director through an ordinary resolution under Section 152, and thereafter reject the appointment of such person as WTD / MD of the company under Section 196 of the Act.
It is relevant to state that the prohibition under Section 161(1) of the Act for re-appointment of persons rejected by the shareholders applies only with respect to the appointment of additional directors. Therefore, in the absence of a specific prohibition on re-appointment of persons as WTDs / MDs post rejection by shareholders under Section 196, SEBI has proposed the following amendments to the LODR Regulations:
- Persons whose appointment or re-appointment as a WTD / MD has been rejected by the shareholders of a listed entity, shall not be re-appointed as WTD/MD unless the following conditions are fulfilled: (a) The nomination and remuneration committee (“NRC”) of the listed entity has recommended such appointment with detailed justification as to why the appointment, despite being rejected by the shareholders, should be recommended, and (b) the board of directors has considered and approved such appointment after recording reasons for such appointment despite rejection by the shareholders.
- If the above conditions are fulfilled and the person concerned is re-appointed as WTD/MD, the listed entity is required to make disclosure of the re-appointment, along with the reasons recorded by the NRC for such appointment, to the stock exchanges within 24 hours.
- Further, the listed entity shall obtain shareholders’ approval to such appointment in the next general meeting or within three months, whichever is earlier. Further, detailed reasons are to be provided to the shareholders in the explanatory statement to the notice by the NRC and the board of directors for consideration of such appointment.
- In the event the appointment of such person as WTD / MD is rejected again by the shareholders, such person cannot be considered for appointment as a director or continue as a director of the listed entity for a period of two years from the date of such rejection.
The above amendments have been proposed with a view to safeguard shareholders’ supremacy in the appointment of WTDs / MDs and to also provide a carve out for shareholders to re-consider proposals for the appointment of persons as MD / WTD whose appointments were otherwise rejected earlier.
