SEBI’s proposals on ‘rejected directors’ are welcome

KS Badri Narayanan Chennai | Updated on February 12, 2021

Recommendations will empower shareholders and boost corporate governance

To uphold shareholder rights, the Securities and Exchange Board of India came out with a consultation paper in January on the appointment/re-appointment of persons whom shareholders fail to elect as whole-time directors/managing directors.

It has been common practice for companies to appoint managing directors and whole-time directors after seeking the approval of shareholders through two different resolutions — one for appointment as a director (under Section 152) and other as MD or WTD, along with the terms and conditions for their appointment, SEBI has observed.

When two different resolutions are proposed, there is a possibility of the ordinary resolution for appointment as director being approved and the special one for designating such appointed directors as WTD/MD, along with terms and conditions, including remuneration, getting rejected by shareholders, the market regulator added.

There have been a few instances of such rejection recently. Shareholders of Lakshmi Vilas Bank, which was later acquired by DBS Bank, had rejected resolutions to appoint seven directors, including the Managing Director and CEO to its board as well as statutory auditors, at its Annual General Meeting in September 2020.

Similarly, shareholders of Dhanlaxmi Bank too voted against the appointment of managing director and chief executive Sunil Gurbaxani.

Manpasand ignores rejection

In the case of Manpasand Beverages, the shareholders had rejected the re-appointment of MD, WTD and independent director. But within three days of the rejection, the company had reappointed them for a period of five years. As the company did not conduct any shareholders’ meeting for the re-appointment, SEBI came out with an order directing the company to conduct a meeting to get their approval.

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 certain positions even after rejection by shareholders in certain cases.

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

Need for clarity

These proposals are in right direction and will tone up corporate governance as, going forward, there could be more such assertive voting from shareholders due to proxy advisory firms and media coverage.

However, there should be clarity on whether a rejected person can occupy the same post in other companies, as currently the Companies Act allows a person to be appointed as a director in 10 companies. SEBI should also plug loopholes so that rejected persons cannot, indiectly, call the shots in the company.

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Published on February 12, 2021
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