Recently the SEBI has made an important change in the methods of appointment and removal of independent directors in listed companies through an amendment in the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) vide its notification dated 14.11.2022.
The amendment has been made in sub-regulation 2(A) of Regulation 25 of the Listing Regulations. Just before the amendment, this regulation simply required that the appointment, re-appointment, or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution. Now there are two provisions added to it as under:
“Provided that where a special resolution for the appointment of an independent director fails to get the requisite majority of votes but the votes cast in favour of the resolution exceed the votes cast against the resolution and the votes cast by the public shareholders in favour of the resolution exceed the votes cast against the resolution, then the appointment of such an independent director shall be deemed to have been made under sub-regulation (2A).
Provided further that an independent director appointed under the first proviso shall be removed only if the votes cast in favour of the resolution proposing the removal exceed the votes cast against the resolution and the votes cast by the public shareholders in favour of the resolution exceed the votes cast against the resolution.”
Independent Director’s appointment, reappointment, and removal by shareholders: What type of resolution would be required?
Subsequent to the amendment in the Listing Regulations, it may be worthwhile to know how the voting results of a general meeting could impact the appointment/re-appointment/removal of an independent director under the new Regulations and how well are they aligned with the applicable provisions of the Companies Act, 2013 (as amended) and the rules made thereunder.
Let us first discuss the various compliance related issues for appointment and removal of independent directors under SEBI (LODR) Regulations, 2015 and the Companies Act, 2013.
If the Resolution for appointment /re-appointment/removal is put to vote as a special resolution in a general meeting as per Regulation 25 (2A) of the Listing Regulations, and the resolution is passed, then Form MGT-14 shall be filed for as per Companies Act, 2013 and the rules made thereunder, in respect of the resolutions passed for the appointment /re-appointment/removal of the concerned independent director and Form DIR -12 shall be filed for appointment / change in designation/cessation of an independent director.
However, if the special resolution fails, then Form MGT- 14 need not be filed in all cases and Form DIR-12 should be filed for cessation of independent director who could not be re-appointed as per the erstwhile listing regulations as well as the provisions of the Companies Act, 2013.
But, as per the newly amended Regulation 25(2A) of the Listing Regulations, there is still a window open even if a special resolution for the appointment of an independent director fails to get the requisite majority of votes if the votes cast in favour of the resolution exceed the votes cast against the resolution and the votes cast by the public shareholders in favour of the resolution exceed the votes cast against the resolution, in which case the appointment of such an independent director shall be deemed to have been made under proviso 1 of Regulation 25(2A) of the SEBI (LODR) Regulations, 2015 but it may not be permissible under Companies Act, 2013 unless the Resolution was drafted as ordinary resolution in the first place.
Similar is the case when an independent director, who was appointed under Proviso 1 of Regulation 25(2A) of the SEBI (LODR) Regulations, 2015 is proposed to be removed. Here also if the votes cast in favour of the resolution exceed the votes cast against the resolution and the votes cast by the public shareholders in favour of the resolution exceed the votes cast against the resolution, an independent director shall be deemed to have been removed under proviso 2 of Regulation 25(2A) of the SEBI (LODR) Regulations, 2015 but it may not be permissible under Companies Act, 2013 unless the Resolution was drafted as ordinary resolution in the first place.
Let us briefly go through the applicable provisions for appointment /reappointment / removal of an independent director under the Companies Act, 2013.
Procedure for appointment/reappointment of independent Director under the Companies Act, 2013
According to Section 149 (1), every company shall have a Board of Directors consisting of individuals as Directors and shall have
(a) a minimum number of three Directors in the case of a public company, two Directors in the case of a private company, and one director in the case of a One Person Company; and
(b) a maximum of fifteen Directors Provided that a company may appoint more than fifteen Directors after passing a special resolution.
Further, according to Section 149 (10), subject to the provisions of section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.
Procedure for removal of independent Director under the Companies Act, 2013
Under Section 169 of the Companies Act, 2013:
(1) A company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242, before the expiry of the period of his office after giving him a reasonable opportunity of being heard:
Provided that an independent director re-appointed for second term under sub-section (10) of section 149 shall be removed by the company only by passing a special resolution and after giving him a reasonable opportunity of being heard:
(2) A special notice shall be required of any resolution, to remove a director under this section, or to appoint somebody in place of a director so removed, at the meeting at which he is removed.
We observe that, in accordance with Companies Act, 2013, an independent director can be appointed by ordinary resolution in all cases, except when being re-appointed for a second term and in other cases, if his or her appointment is in excess of 15 directors as on date in the existing Board of Directors.
Points of discussion for due compliance of Provisions under Listing Regulations and the Companies Act, 2013
Since as per SEBI (LODR) Regulations, 2015, the appointment, re-appointment or removal of an independent director of a listed entity, was subject to the approval of shareholders by way of a special resolution. [Regulation 25 (2A) prior to the recent amendment; the Listing Regulations set a higher threshold for the appointment of the independent directors, compliance with Companies Act, 2013 was not an issue.
However, if an appointment/ removal is made in pursuance to the amended Regulation 25 (2A) of the Listing Regulations, there may be issues with respect to the filing of DIR -12 as well as MGT -14. For example, if the resolution was drafted as Special Resolution in the Notice of a general meeting, and the Board of the Company has recommended it for passing as special resolution, then how this can be changed post-voting if the resolution fails to get the requisite majority? It is not possible to change the resolution content once the Notice has been posted to the shareholders and uploaded on the website of the stock exchange where the shares of the Company are listed.
Further, in MGT- 14 you may have to answer a question when you select either the Board of Directors or Shareholders as the authority for passing or agreeing to the resolution, as to whether the resolution was meant to be ordinary, special or requisite majority.
The Possible Way out:
While Drafting the Notice, the resolution for appointment up to 15 Directors or for the removal of independent directors so appointed the Board may have to recommend the resolution as a resolution to be passed with “requisite majority” as the appointment in any case can now be made by ordinary resolution (subject to proviso) as per the amended SEBI (LODR) Regulations, 2015 as well as the existing provisions of the Companies Act, 2013. However, the proviso to the regulation 25 (2A) does not cover the case of re-appointment or appointment in excess of 15 Directors on Board in which case special resolution may be needed.
Disclaimer: This article has been published based on the Author’s own understanding of the applicable listing regulations/provisions of the Companies Act, 2013. For compliance purposes, the reader is advised to take expert opinion/informed view.