SEBI’s paper on appointment of rejected Whole-time Directors / Managing Directors (WTD/MD)

SEBI has recently come out with a consultation paper to introduce new provisions in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 relating to appointment/ re-appointment of persons who fail to get elected as a Whole-time Director (WTD)/ Managing Director (MD) at the general meeting of a listed entity. The paper proposes that such appointment/ re-appointment can be brought to the shareholders again, provided the Company gives detailed justification from the Nomination and Remuneration Committee (NRC), which in turn should have the Board’s approval, regarding why the shareholders should consider the candidature of the said person again. The paper provides that if the shareholders reject the candidature of the person again, he/she cannot be considered for appointment as WTD/ MD for two years in the listed entity. The paper also states that the reasons given by the NRC have to be disclosed to the Stock Exchanges.

The proposal aims to reiterate shareholder supremacy in matters such as the appointment of WTD/ MD. It also makes the Board explain why, in its opinion, a person is fit to be a WTD/ MD.

Some companies consider appointment of MD/ WTD days after the Annual General Meeting (AGM), and take advantage of the provisions of the Companies Act, 2013, whereby such a person can continue being on that position till the next AGM, wherein the shareholders would vote for the appointment, or otherwise, of the person. This can give him/her a term of almost a year before his/her appointment is approved by the shareholders. Pre-empting this, the paper has proposed that this approval has to be accorded within three months of such appointment or the next AGM, whichever is earlier.

SEBI’s move comes in the wake of some instances wherein shareholders have rejected the resolutions proposed at AGMs relating to the appointment of WTD/ MD. The recent examples include rejection of proposals for appointment of MDs of Dhanlaxmi Bank and Lakshmi Vilas Bank.

In coming up with this proposal, SEBI has rightly placed the shareholders at the centre of decision-making. With the condition of providing justification before re-appointing any Director, whose appointment was not approved, SEBI gives an opportunity to the Company to be heard one more time by the shareholders. As can be seen in some cases, shareholders have sometimes rejected the appointment of a Director owing to lack of proper information. When companies have approached shareholders with better quality information, in the form of explanatory statements, the same resolutions have often been approved by the shareholders.

While it is said that shareholder engagement is an important parameter to determine good Corporate Governance, it cannot be ruled out that sometimes, some shareholders act in their own best interest, rather than in the Company’s interests. An illustrative case occurred in 2004 in UK, where three Manchester United Directors were shown the red card at the club’s AGM. American sports tycoon, Malcolm Glazer, who owned 28.1% of the club’s shares, took his revenge on those coming up for re-election, after he was refused access to information which the Company claimed was confidential.

Shareholders majorly rely on the explanatory statements that are given along with the Notice for AGMs. Some additional information is also available in the Annual Reports. Therefore, it would be a good idea if the Company gives detailed justification in the explanatory statement on why the Company feels that the WTD/ MD is, and will be, an asset to the Company, and also highlights their major contributions. The quality of disclosures made in the explanatory statement therefore will also play a very important role.

In coming out with this consultative paper, which seeks to checkmate the dubious designs of some corporates, SEBI has struck a blow for shareholder democracy.

Anita Malashetti