[Gaurav Pingle is a practising Company Secretary in Pune and can be reached at [email protected]]
On June 2 2017, the Securities and Exchange Board of India (‘SEBI’) constituted a committee under the chairmanship of Mr. Uday Kotak for improving the standards of corporate governance of listed companies in India. On October 5, 2017, Kotak Committee submitted its report to SEBI. The SEBI Board (in its meeting held on March 28, 2018) accepted several recommendations of the Committee without any modifications, whereas certain recommendations were accepted with modifications. The SEBI Board decided to refer certain recommendations to various agencies (i.e. the Government, other regulators, professional bodies, etc.). On May 9, 2018, SEBI amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’).
Several provisions relating to independent directors have been amended, namely age-limits of non-executive directors, presence of independent directors in board meetings, remuneration to non-executive directors, eligibility criteria for appointment of a person as an independent director, alternate director of independent director, declaration of independence by the director, directors and officer Policy (D&O Policy), evaluation of independent directors and independent director on the board of directors of unlisted material subsidiary (whether in India or abroad).
The post briefly analyses the interpretational issues in the provisions relating to age-limit criteria introduced for non-executive directors (‘NEDs’).
Background – Uday Kotak Committee’s Recommendation on Age-limit
The Kotak Committee noted that pursuant to provisions of the Companies Act, 2013, a person may be appointed or may continue as managing director (‘MD’), whole-time director (‘WTD’) or manager on attaining the age of 70 years by passing a special resolution. However, no such provision existed for NEDs. The Kotak Committee recognized that while age itself may not be a determinant of efficiency or capability of a person or the basis for disqualification of a director, a higher level of shareholder endorsement may be required for directors to continue in their position beyond a certain age. The Committee further noted that non-executive roles on a board also require significant commitment of time. The Committee opined that checks and balances should be considered in connection with the age of NEDs similar to the provisions of the Companies Act for executive directors. Accordingly, the Committee recommended that provision requiring special resolution on a similar basis should be inserted for listed entities for the appointment or continuation of NEDs upon attaining the age of 75 years for the relevant term, wherein all shareholders should be permitted to vote on such a resolution.
Amendment to SEBI’s Listing Regulations
SEBI amended the clause relating to ‘board of directors’ in the Listing Regulations and inserted regulation 17(1A) as:
No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of seventy five years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.
Analysis of the Amendment
(i) Age-Limit: The basic difference in the provisions of Companies Act, 2013 and Listing Regulations is the age-limit itself. Under Companies Act, 2013, the shareholders’ approval by special resolution is required when director is 70 years old. Under the amended SEBI Listing Regulations, the shareholders’ approval by special resolution is required when NED is 75 years old.
(ii) Whether amendment is applicable prospectively or retrospectively?: While interpreting section 196(3)(a) of Companies Act, 2013, the Division Bench of Bombay High Court, in Sridhar Sundararajan v. Ultramarine & Pigments Ltd. & Rangaswamy Sampath, ruled that “The language of section 196(3)(a) of the Act is plain, simple and unambiguous and it applies to all the Managing Directors who have attained the age of 70 years and the Section does not make any distinction between the Managing Directors who have been appointed before 01/04/2014 and those after 01/04/2014. The moment Managing Director attains the age of 70 years, disqualification mentioned in Section 196(3)(a) of the Act would operate immediately”. The Bombay High Court further observed that since a new clause was added as further disqualification for appointment or continuation as MD of the company, it would operate not only at the stage of appointment but also would operate in the case of a person who has already been appointed and attained the age of 70 years and such a person, therefore, by virtue of disqualification, had no right to be continued as MD, unless a special resolution was passed by the company. Applying the said principle to the amended provisions of SEBI Listing Regulations, the age criteria for NEDs of listed company would operate not only at the stage of appointment but it would also operate in the case of a person who has already been appointed and attained the age of 75 years.
(iii) Whether prior approval of shareholders by Special Resolution is mandatory?: On the age-limit of NEDs, the Kotak Committee recommended that the provisions in SEBI Listing Regulations relating to age of NEDs shall be similar to the provisions of Companies Act for executive directors. However, the pursuant to the amendment to SEBI Listing Regulations, the listed entity shall not appoint a person or continue the directorship of any person as NEDs who has attained the age of 75 years unless a special resolution is passed to that effect. The expression included in the amendment ‘unless a special resolution is passed’. According to the amendment, it means that the appointment of NEDs at a particular age would require prior approval of the shareholders.
Presently, the question before listed entities is how to comply with the provisions of age-limit of NEDs who are already appointed by the company. Whether approval of the shareholders would be required from the commencement of the amended provisions i.e. April 1, 2019? If such prior approval is contemplated by the amendment, then how does one obtain it in respect of NEDs who are already occupying office? In my view, SEBI needs to clarify the provisions with respect to the NEDs already appointed prior to the said amendment. Considering the anomalies, the amendment to the SEBI Listing Regulations is not in alignment with the Kotak Committee recommendation.
– Gaurav Pingle