SEBI notifies stricter norms for appointment of rejected candidates

– CS Aisha Begum Ansari, Manager | aisha@vinodkothari.com | Last updated as on January 24, 2022

SEBI vide notification dated January 24, 2022 has notified SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2022 (‘Amendment Regulations’) applicable with immediate effect. With this amendment, SEBI has introduced provisions relating to appointment/ re-appointment of a person, including Managing Director (‘MD’) or Whole-Time Director (‘WTD’) or a manager who were earlier rejected by the shareholders at a general meeting.

Last year in January 27, 2021, SEBI issued a Consultation Paper for introducing provisions for appointment or re-appointment of persons who fail to get elected as MD or WTD at the general meeting of a listed entity (‘Consultation Paper’) to curb the practice followed by certain listed entities of passing separate resolutions for regularization of additional directors and for appointment of MD/ WTD. In cases where the latter resolution is not approved by the shareholders, the listed entities used to again appoint the same person as MD/WTD who could hold office until the same was again taken to the shareholders for approval at the next general meeting. The proposed amendments were also approved by SEBI in its Board meeting, however, with certain modifications.

This article discusses the procedure prescribed in the Consultation Paper and ascertains the compliance requirement to be ensured by the listed entity before appointing any director.

Consultation Paper limited the restriction to MD & WTD

In view of instances where the listed entities appointed the persons rejected by shareholders for appointment as MD/WTD by having two separate resolutions for regularization of additional director and for appointment of MD/ WTD, SEBI prescribed following stricter requirements for appointment of such rejected candidates, to ensure that no such appointments are made by the listed entity against the will of the shareholders and against the spirit of corporate governance:

1. Justification by NRC as to why such appointment, despite rejection by shareholders, is recommended;
2. Recording of reasons by the Board of Directors while approving the appointment, despite rejection by shareholders;
3. Disclosure to the Stock exchange within 24 hours of approval by Board along with recommendations of NRC;
4. Obtaining shareholder’s approval in the next general meeting or within 3 months from the date of such appointment, whichever is earlier (Requirement already implemented pursuant to insertion of Reg. 17 (1C) for appointment of directors made on or after January 1, 2022).
5. Disclosure in the explanatory statement of the detailed explanation and recommendation from the NRC and the Board as to why such appointment is placed before the shareholders despite the earlier rejection by the shareholders.
6. Mandatory cooling off period of next 2 years from being appointed or continuing as a director if the candidature of the person is rejected again by the shareholders.

Amendment in the Listing Regulations

Scope expanded to all directors and managers

While the Consultation Paper prescribed the requirement only for appointment of MD/ WTD, the Amendment Regulations cover all the directors and managers within its scope. Further, in view of enforcement of Reg. 17 (1C) of the Listing Regulations w.e.f. January 1, 2022, SEBI prescribed seeking prior approval of shareholders, being a stricter timeline than that proposed in the Consultation Paper.

Thus, the sequence will be as follows:

Rejection by the shareholders of which entity?

The language of the Consultation Paper and the Amendment Regulations clearly indicates that while considering the re-appointment of a person as a director, including MD/ WTD/ manager, the listed entity will have to see the rejection of such person by its own shareholders and not the shareholders of other listed entities.

History of rejection of person as a director, including MD/ WTD/ manager

The Consultation Paper as well as the Amendment Regulations emphasize on the procedure for re-appointment of a person who has been rejected by the shareholders. However, it does not provide any specific period upto which a company has to travel back to examine the rejection of such person. For instance, if a person’s candidature for appointment as a director was rejected by the shareholders ten years back, should the same be considered if the company intends to appoint him on the board of the company today? Further, should a company carry out due diligence to dig out the history of the appointee or seek declaration from to this effect from the appointee? Since, the Consultation Paper and the Amendment Regulations are silent on the above questions, the listed entity will be required to travel back to examine if the appointment of person was ever rejected by the shareholders in the lifetime of the listed entity.

Category for which a person was earlier rejected not relevant

The intent of the Consultation Paper was to counter the practice of the companies to re-appoint a person as MD/ WTD who was rejected by the shareholders for the same position, by providing stricter procedural requirements. In view of the restriction provided under the Amendment Regulations, it implies that the restriction is not only on appointment of person in the same category for which he was rejected but for appointment in any category of directorships or as manager. For e.g. if the candidature of a person was rejected for appointment as an MD, the requirement of prior approval will apply for appointment as NED as well.

Conclusion

The Board of Directors are primarily responsible for ensuring Corporate Governance and SEBI is determined to revisit and refine the process of appointment of directors by prescribing stricter norms in terms of process adopted for selection of candidates,  disclosure requirements,  timeline for seeking shareholder’s approval etc.  Due to the Amendment Regulations, the listed entity will have one more actionable i.e. to carry out due diligence to ascertain if the candidature of the proposed appointee was ever rejected by the shareholders of the listed entity.

Our write-ups:

1. Snapshot of SEBI approvals – Public issues | Preferential allotments | Appointment of shareholder-rejected directors – click here
2. A Regulatory Affair: Fair Value Discovery in Preferential Share Issues – click here
3. Other write-ups on Corporate Law matters – click here