SEBI Proposes Tighter Norms For Reappointment Of Rejected Directors 
SEBI building in Mumbai. (Photo: BloombergQuint)

SEBI Proposes Tighter Norms For Reappointment Of Rejected Directors 

The market regulator has proposed tighter norms for appointing managing or whole-time directors who are rejected by shareholders as it looks to improve corporate governance.

This includes recording detailed reasons for seeking appointment, prompt disclosure to exchanges and seeking shareholder approval within three months, according to a discussion paper released by the Securities and Exchange Board of India. Such directors of a listed entity, however, can't continue on being rejected twice by shareholders.

The discussion paper is aimed at promoting better corporate governance in listed entities. Stakeholders can offer comments by Feb. 12. Of late, shareholder activism has resulted in rejection of proposals for appointment of individuals in key positions.

Shareholders of Dhanlaxmi Bank Ltd. rejected the appointment of Sunil Gurbaxani as the bank’s managing director and chief executive officer. Similarly, minority shareholders of Apollo Tyres Ltd. rejected the re-appointment of its promoter Neeraj Kanwar as the managing director in 2018. The last proxy season also saw advisories advising shareholders to vote against such proposals.

The Legal Framework

Appointment of directors in listed companies is governed by the Companies Act, 2013. SEBI’s Listing Regulations provide additional conditions that a listed entity must comply with.

The law allows a company’s board to appoint a person as an additional director at any time during the year. However, it must then be regularised by shareholders at a general meeting; failing which, the appointment ceases. A separate approval is also required for appointing a person as a whole-time or managing director, where information on the terms and conditions along with remuneration details must be disclosed to shareholders.

SEBI has observed that there may be certain instances where shareholders approve a person’s regularisation but vote against his appointment. Pointing to the limitations under the Companies Act, the regulator said the board of a listed company can continue to propose the appointment of persons in such positions even after subsequent rejection by shareholders.

To address this, SEBI has proposed that if an earlier proposal was rejected by shareholders:

  • The nomination and remuneration committee must give a detailed recommendation on such a proposal.
  • Board must consider and approve the proposal after recording reasons for appointment despite shareholders' rejection.
  • The committee’s approval along with reasons for appointment must be sent to the stock exchange within 24 hours after being named.
  • Shareholder approval must be sought within three months or in the immediately next general meeting.
  • In case of a rejection again, a person cannot continue as a director of that company for a period of two years. Similarly, re-appointment cannot be proposed.

Few Instances Of Rejection By Shareholders

Experts said while the intent of the market regulator is good, there are no recent instances to necessitate such a change.

Hetal Dalal, president and chief operating officer at advisory firm IiAS, said only a handful of executive director appointments have been defeated by shareholders in the past six years. Given how seldom this has occurred, SEBI may want to consider making this as a best practice rather than embedding it into the listing regulations, she said.

In our experience, when resolutions are defeated by shareholders, engagement levels increase significantly, and board members usually reach out to investors for understanding their concern. Even so, SEBI’s recommendations will likely make NRCs a little more thoughtful when recommending directors (re)appointments and nudge companies to make better disclosures on executive remuneration
Hetal Dalal, president and chief operating officer, IiAS

SEBI will amend the listing regulations based on the outcome of the consultation process.

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