SEBI has released a Consultation Paper on introduction of provisions relating to appointment / re-appointment of persons who fail to get elected as Whole-time directors / Managing Directors at the general meeting of a listed entity. Public comments to the same are invited by 12 February 2021.

The Paper notes that under the extant provisions of the Companies act 2013 (CA 2013), companies appoint persons as Managing Directors / Whole-Time directors, by seeking approval from shareholders through two different resolutions – one for appointment of such persons as a director (under section 152) and the second for appointment of such directors as Managing Director (MD) or Whole-time Director (WTD) along with terms and conditions for their appointment (under sections 196, 197 and 198). In such a situation, there is a possibility of the ordinary resolution for appointment as director being approved by the shareholders and the second resolution, which could be a special resolution, for designating such appointed directors as WTD / MD being rejected by the shareholders.

Although 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, the Act 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. The board of a listed entity can continue to appoint such persons as WTD / MD even after subsequent rejections by the shareholders. This possibility cannot be ruled out.

Such appointments by the boards would be against the will of the shareholders and also against the spirit of Corporate Governance as envisaged under the LODR Regulations. In light of increased shareholder awareness, a need has been felt to amend the LODR Regulations to include specific provisions to deal with such circumstances, as below:

“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:

1. Its Nomination and Remuneration Committee has recommended such appointment with detailed justification as to why such appointment, despite rejection by shareholders, is recommended;
2. 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:

1. 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;
2. 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;
3. 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”.

To refer to the Consultation Paper, click here.