[Gaurav Pingle is a practising company secretary and can be reached at [email protected]]
Considering the importance of independent directors on the boards of listed entities, the Securities and Exchange Board of India (“SEBI”) has been amending the provisions relating to their appointment, re-appointment, appointment process, remuneration, and the like under the SEBI (Listing Obligations and Disclosure Requirements) 2015 (“SEBI Listing Regulations”). In April 2023, the Securities Appellate Tribunal (“SAT”) in Nectar Life Sciences Ltd v. SEBIinterpreted one such amendment under the SEBI Listing Regulations in relation to the appointment of independent director above the age of 75 years. This post is an analysis of the said SAT order.
Background of the Amendment to the SEBI Listing Regulations
On June 2 2017, SEBI had constituted a committee under the chairmanship of Mr. Uday Kotak (“Kotak Committee”) 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 Kotak Committee without any modifications, whereas certain recommendations were accepted with modifications. The Kotak Committee had recommended that certain checks and balances should be considered in connection with the age of non-executive directors similar to the provisions of the Companies Act for executive directors in terms of section 196(3)(a) of the Companies Act, 2013. Pursuant thereto, on May 9, 2018, SEBI amended the SEBI Listing Regulations accepting the Committee’s recommendations in this regard, as mentioned below.
Amendment to the SEBI Listing Regulations
Regulation 17 of the Listing Regulations (relating to ‘board of directors’) was amended and clause (1A) was inserted as follows:
“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.”
It is important to note here that the said provision is applicable to non-executive directors and not just independent directors. The said provision is also applicable to non-executive directors from the promoters group.
Recent SAT Order in Nectar Life Sciences Ltd. v. SEBI
In this case, regulation 17(1A) of the SEBI Listing Regulations was interpreted by the SAT. Due to the death of a non-executive independent director, a casual vacancy was created and was subsequently filled up by an appointment of another independent director under the provisions of the Companies Act, 2013 and the SEBI Listing Regulations. The age of such newly-appointed independent director was 75 years and 9 months. The appointment was approved by the board of directors based on the recommendation of Nomination and Remuneration Committee. However, before the approval of the shareholders of the listed entity could be obtained, the appointed independent director resigned. Observing that the shareholders’ approval was not obtained by the listed entity, the National Stock Exchange (“NSE”) issued a notice regarding the non-compliance with regulation 17(1A) of the Listing Regulations and accordingly imposed a fine. The listed entity made an application for waiver of the fine, which was rejected by the NSE. The NSE had observed that prior approval of the shareholders was required under regulation 17(1A) of the Listing Regulations and passing of special resolution by the shareholders of the company was a “qualificatory condition”, and therefore an essential condition for appointment of director under regulation 17(1A) of SEBI Listing Regulations.
For the purpose of appointing a director or filling up the casual vacancy of director, the SAT has referred to sections 149, 152(2), 161(4) of the Companies Act, 2013 and regulations 17(1A), 17(1C), 25 of the SEBI Listing Regulations and has observed as follows:
- There is no provision in SEBI Listing Regulations for filling up a casual vacancy of a director in a company and the casual vacancy can only be filled up under the provisions of the Companies Act, 2013 and the rules made thereunder;
- Regulation 17(1A) of the SEBI Listing Regulations is not applicable for purpose of filling up a casual vacancy under the Companies Act, 2013;
- According to Regulation 17(1C) of the SEBI Listing Regulations, the appointment of a director made by the board of directors is required to be approved by the shareholders/members of the company in the next general meeting or within three months from the date of appointment, whichever is earlier;
- Regulation 17(1A) of the SEBI Listing Regulations shall be read with section 152(5) of the Companies Act and not in isolation;
- By applying the principles of interpretation of statutes, the SAT observed that “Section 17(1A) should be read harmoniously with the provisions of Sections 152, 161(4) of the Companies Act read with Rule 4 of the Rules and Regulation 17(1C) of the LODR Regulations which makes it clear that even if a person above the age of 75 years is appointed by the Board of Directors to fill up a casual vacancy, such appointment is required to be approved subsequently within the prescribed period by a special resolution in the next general meeting by the members of the Company.”
- On further explaining regulation 17(1A) of the Listing Regulations which states that “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…”, the SAT observed that “The word ‘unless’ depicted in Regulation 17(1A) does not mean “prior approval” nor the requirement of passing a special resolution is a qualificatory condition for appointment of a person as a Director.”
Analysis of SAT Order
The issue framed by the SAT – “whether prior approval is required to be taken from the shareholders of the Company through a special resolution before a person who has attained the age of 75 years can be appointed to fill up a casual vacancy” – has no reference to either non-executive directors or independent directors or regulation 17(1A) of the SEBI Listing Regulations. It seems that the SAT has considered regulation 17(1A) of the SEBI Listing Regulations for appointment of any director of the company and not for only non-executive directors of the company. The SAT has placed greater emphasis on ‘filling up of a casual vacancy’ than on the procedure for appointment of non-executive director under regulation 17(1A) of the SEBI Listing Regulations.
Further, the SAT’s reference to section 161 of the Companies Act, 2013 which relates to the ‘Appointment of Additional Director, Alternate Director and Nominee Director’ also seems misplaced as the section talks about the modes of appointment of directors by the board of directors of the company along with a requirement of articles of association of the company. Section 161 of the Act states that subject to the provisions in the articles of association, the board of directors of the company can make appointments of additional director, alternate director, nominee director and director by casual vacancy, which appointments can be made for an executive director or non-executive director (independent director or not).
There is no reference made to section 196(3)(a) of the Companies Act, 2013 in the SAT order, which provides that – “No company shall appoint or continue the employment of any person as managing director, whole-time director or manager who — (a) is below the age of twenty-one years or has attained the age of seventy years:
Provided that appointment of a person who has attained the age of seventy years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person;
Provided further that …….”
The aforesaid provision is applicable to all companies. The wordings of section 196(3)(a) of the Act are similar to that of regulation 17(1A) of the SEBI Listing Regulations, except for the points that section 196(3)(a) of the Act talks about the upper age limit of managing director, whole time directors as 70 years while regulation 17(1A) of the Listing Regulations refers to the upper age limit of 75 years for non-executive directors in listed companies.
The Division Bench of Bombay High Court, in Sridhar Sundararajan v. Ultramarine & Pigments Ltd. & Rangaswamy Sampath, while interpreting the section 196(3)(a) of Companies Act, 2013, ruled: “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 such disqualification 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 managing director, unless a special resolution was passed by the company.
Applying the said principle to regulation 17(1A) of the SEBI Listing Regulations, the age criteria for non-executive directors of listed company would operate not only at the stage of appointment but it would also operate when the non-executive director who has already been appointed has attained the age of 75 years.
Application of Harmonious Rule of Interpretation vis-à-vis Literal Rule of Interpretation
The classic book on the subject of statutory interpretation (Maxwell on Interpretation of Statutes, 12th Edition, p. 28) states that the primary rule of interpretation (also called as ‘literal construction rule’ or ‘plain meaning rule’) is the golden rule of interpretation where the words of a statute must prima facie be given their ordinary meaning. It further states that according to the literal construction rule, ordinary words must be given their ordinary meanings and technical words their technical meanings, unless absurdity would result. Words that are reasonably capable of only one meaning must be given that meaning whatever may be the result. It is only when the words of a statute are unclear or unambiguous that other aids to interpretation are to be resorted to. Further, it is a settled principle of interpretation that where there appears to be inconsistency in two provisions of the same statute, the principle of harmonious construction should be followed. The essence of harmonious construction is to give effect to both the provisions.
In the present case, the SAT applied the principle of harmonious construction for interpreting regulation 17(1A) and the provisions of the Companies Act, 2013. However, it is interesting to note that there was no conflict in the two laws. In fact, the Act provides for filling up of casual vacancy by the board of directors of a company; however, there is no such provision under the SEBI Listing Regulations. Golden rule of interpretation for interpreting regulation 17(1A) of the SEBI Listing Regulations would have been more appropriate in this case, which would have also been in line with observations of the Division Bench of Bombay High Court in Sridhar Sundararajan.
The SAT observed that the word ‘unless’ in regulation 17(1A) did not mean ‘prior approval’ and dismissed NSE’s observations that the requirement of passing a special resolution was a qualificatory condition for appointment of a person as a director. By applying the golden rule of interpretation to regulation 17(1A) under the extant case, prior approval of shareholders for appointment or re-appointment of any person as non-executive directors who have attained the age of 75 years would be a mandatory requirement, making it in consonance with the provisions of the Act.
Taking into consideration the above analysis, the observations of the SAT deviate from the observations of the Division Bench of Bombay High Court on a similar set of provisions under the SEBI Listing Regulations and the Companies Act, respectively. It would be interesting to see whether the SEBI amends the SEBI Listing Regulations or prefers an appeal before the Supreme Court in this regard.
– Gaurav Pingle