The Securities Appellate Tribunal (SAT) has overturned the penalty imposed by the National Stock Exchange of India (NSE) on Nectar Life Sciences Limited for non-compliance with Regulation 17(1A) of the SEBI (LODR) Regulations 2015. The case revolved around the question of whether the prior approval of shareholders, through a special resolution, is required to fill a casual vacancy for an independent director who has attained the age of 75 years. SAT held that Regulation 17(1A) is not applicable for filling casual vacancies and that the requirement of a special resolution is not a qualifying condition for an appointment as a director. The judgment provides relief to companies appointing independent directors to fill casual vacancies, particularly for individuals over the age of 75 years. Detailed Analysis is as follows:-
Question of Law with respect to the applicability of Regulations 17(1A) of SEBI (LODR) Regulations 2015 in case of casual vacancy and requirement of prior approval of shareholders by way of special resolution to fill the casual vacancy if the Independent Director has attained the age of 75 years
Facts of the case:
The casual vacancy arose in the Nectar Life Science Limited (hereinafter as Company) due to the death of erstwhile Independent Director. The casual vacancy was filled by Board of Directors by appointing another person as Additional Independent Director who aged around 75 years and 9 months. However, appointment could not be approved in the General Meeting as Additional Independent Director resigned from his post on health grounds. Hence, National Stock Exchange of India (hereinafter referred as NSE) levied penalty on the Company for non-compliance with Regulation 17(1A) of LODR, Regulations for not taking prior approval of shareholders. Appeal was made to Securities appellate Tribunal (hereinafter referred as SAT) against the order passed by the Committee of NSE.
Judgement
SAT judgement quashed the order of NSE imposing the penalty for non-compliance of Regulations 17(1A) of SEBI (LODR) Regulations 2015. Tribunal held that Regulation 17(1A) is not applicable for the purpose of filling up casual vacancy under section 161(4) of the Companies Act, 2013. Regulation 17(1A) has to be read along with Section 152(5), 161(4) and Rule 4( Appointment and Qualification o a of the Companies Act, 2013. The court emphasised that word “unless” depicted in Regulation 17(A) does not mean prior approval and the requirement of passing of special resolution is not a qualifying condition for an appointment as Director.
Legal Provisions are taken into consideration
Companies Act, 2013
- Section 161(4): If the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by members in the immediate next general meeting.
Provided that any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.
- Section 152(5): A person appointed as a director shall not act as a director unless he gives his consent to hold the office as director and such consent has been filed with the Registrar within thirty days of his appointment in such manner as may be prescribed:
Provided that in the case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfils the conditions specified in this Act for such an appointment.
- Rule 4 of Companies (Appointment and Qualification of Directors)
[(1)] The following class or classes of companies shall have at least two directors as independent directors –
(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:
Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it:
Provided further that any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later:
Provided also that where a company ceases to fulfil any of three conditions laid down in sub-rule (1) for three consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions;
Explanation. – For the purposes of this rule, it is here by clarified that, the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account:
Provided that a company belonging to any class of companies for which a higher number of independent directors has been specified in the law for the time being in force shall comply with the requirements specified in such law.
SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations
Regulation 17(1A): No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of seventy five years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.]
Conclusion
- This judgement provides relief to companies appointing Independent Director to fill casual vacancy occurred in a Company, particularly in those cases where individuals over the age of 75 years by removing burden of obtaining prior approval of shareholders.
- Regulation 17(A) can’t be read in isolation. It has to read with Section 152(5) and 161(4) as there is no specific section in LODR regulation which deals with filling up of casual vacancy of a Director in a Company.
- Clarifies the interpretation of all provisions and sections of LODR and Companies Act related to casual vacancy of Independent Director.
References: LODR Regulations, Companies Act and Securities Appellate Tribunal
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