Consultation Paper on appointment / reappointment of WTD / MD by Listed Entities who fail to get elected at general meeting

Consultation Paper on appointment / reappointment of WTD / MD by Listed Entities who fail to get elected at the general meeting

♦ Overview

Securities and Exchange Board of India (SEBI) vide report dated 27^th January, 2021 has issued and publishes Consultation Paper for public comments on ‘Consultation Paper on introduction of provisions relating to appointment or re-appointment of persons who fail to get elected as Whole-time directors or Managing Directors at the general meeting of a listed entity‘ with an objective To solicit public comments / views on the proposal to introduce provisions in the SEBI (LODR) Regulations, 2015 (hereinafter referred as “LODR Regulations” or “LODR”), relating to appointment / reappointment of persons who fail to get elected as Whole-time Directors/Managing Directors at the general meeting of a listed entity.

The proposal mentioned above was placed before the Primary Market Advisory Committee (PMAC) of SEBI for consideration.

♦ Legal Provisions on appointment and re-appointment of directors of a listed entity

♦ Major proposal for appointment/re-appointment of MD/WTD, once his/ her candidature is rejected by shareholders:

i) Nomination & Remuneration Committee (NRC) to recommendation should be in detail, about reason for appointment after shareholders’ rejection.

ii) Board of Directors considered and approved appointment/re-appointment, after recording reasons for such appointment despite rejection by shareholders earlier.

iii) Stock exchanges intimation – Reasons for appointment and recommendation of NRC to be intimated within 24 hours.

iv) Shareholders approval to be obtained within 3 months from Board approval or next general meeting, whichever is earlier.

v) Explanatory statements should contain a detailed explanation and recommendation of NRC, for such appointments even after rejection from shareholders.

♦ Why this Consultation Paper:

With increased shareholder awareness, rejection of appointment / reappointment of directors by shareholders at general meetings and the possibility of appointment of such directors, as stated above, by listed entities cannot be ruled out. Therefore, a need has been felt for a policy intervention to include specific provisions in the LODR Regulations to deal with such circumstances.

Changes required under the Existing Provisions:

a) As per Section 161(1) of the CA 2013, the board cannot appoint a person who fails to get elected as a director at a general meeting as an additional director. However, the CA 2013 does not explicitly prohibit the board from re-appointing a person as a MD or WTD, whose appointment to such posts was rejected by the shareholders at the general meeting. Further, the board of a listed entity can continue to appoint such persons as WTD / MD even after subsequent rejections by the shareholders

b) Such appointments by the boards are against the will of the shareholders, who are entrusted by law to approve appointment of directors to the boards of companies, and also against the spirit of Corporate Governance as envisaged under the LODR Regulations.

Proposal for public comments:

In order to ensure shareholder supremacy in matters of appointment of directors, amendments to the LODR Regulations on the following lines are proposed:

“A person whose appointment or re-appointment as a Managing Director or Whole-time Director has been rejected by the shareholders of a listed entity shall not be appointed again as Managing Director or Whole-time Director, unless the following conditions are satisfied:

a) Its Nomination and Remuneration Committee has recommended such appointment with detailed justification as to why such appointment, despite rejection by shareholders, is recommended;

b) The board has considered and approved the appointment after recording reasons for such appointment despite rejection by shareholders earlier;

The listed entity shall take the following steps after appointment of such directors to the board:

a) The reasons for such appointments to the board shall be disclosed to Stock Exchanges within 24 hours along with the recommendations of the Nomination and Remuneration Committee;

b) Shareholder approval for such appointments shall be obtained in the immediate next general meeting or within three months from the date of appointment by the board, whichever is earlier;

c) The explanatory statement to the Notice to the shareholders for considering the appointment of the director shall contain a detailed explanation and recommendation from the NRC and the board as to why such appointment is placed before the shareholders despite the rejection of the candidature earlier by the shareholders.

In case the shareholders reject the candidature of the persons again, such persons cannot be considered for appointment as director, or continue as a director of that particular listed entity, for a period of two years from the date of rejection by the shareholders”

♦ How to send Public Comments and by When & Where

Format for public comments

Link:  SEBI Consultation Paper on appointment / reappointment of WTD / MD by Listed Entities who fails to get elected at general meeting

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