SEBI moots proposal on appointment of managing director

NEW DELHI: Seeking to put in place stricter norms, Sebi on Wednesday proposed that a person rejected by a listed company's shareholders as a managing director or whole-time director can be appointed or re-appointed to the posts only after the company fulfils various conditions, including providing detailed justifications.

In case, the company's shareholders reject the candidature of the persons again, such persons cannot be considered for appointment as director or continue as a director for two years.

The proposals are part of a discussion paper floated by Sebi.

Under the proposal, if a person whose appointment or re-appointment as a managing director (MD) or whole-time director (WTD) has been rejected by the shareholders of a listed firm should not be appointed again on such post unless certain conditions are satisfied, Sebi said in a consultation paper.

Those conditions are the company's nomination and remuneration committee has recommended such appointment with detailed justification, despite rejection by shareholders and the board has approved the appointment after recording reasons for such appointment.

The proposal is aimed at ensuring shareholder supremacy on the appointment of such positions.

After the appointment of such directors, a listed company should disclose reasons for naming such persons to the board to stock exchanges within 24 hours along with the recommendations of the nomination and remuneration committee.

Besides, a listed entity should obtain shareholders' approval for such appointments in the immediate next general meeting or within three months, whichever is earlier.

In addition, the explanatory statement to the notice to the shareholders for considering the appointment of the director should contain a detailed explanation and recommendation from the nomination and remuneration committee and the board as to why such appointment should be placed before the shareholders despite the rejection of the candidature earlier by the shareholders.

In case, the shareholders reject the candidature of the persons again, such persons cannot be considered for appointment as director, or continue as a director of that particular listed entity, for a period of two years from the date of rejection by the shareholders, Sebi said.

Securities and Exchange Board of India (Sebi) has sought comments from public till February 12 on the proposals.

As per the Companies Act, the board cannot appoint a person who fails to get elected as a director at a general meeting as an additional director.

However, this does not explicitly prohibit the board from re-appointing a person as an MD or WTD, whose appointment to such posts was rejected by the shareholders at the general meeting.

Further, the board of a listed entity can continue to appoint such persons as WTD or MD even after subsequent rejections by the shareholders.

According to Sebi, such appointments by the boards are against the will of the shareholders, who are entrusted by the law to approve the appointment of directors to the boards of companies, and also against the spirit of corporate governance as envisaged under the Listing of Obligations and Disclosure Requirements (LODR) Regulations.

With increased shareholder awareness, rejection of appointment or re-appointment of directors by shareholders at general meetings and the possibility of appointment of such directors by listed entities cannot be ruled out, Sebi noted.

Therefore, a need has been felt for a policy intervention to include specific provisions in the LODR Regulations to deal with such circumstances, it added.