BRIDGING THE GOVERNANCE GAP: SEBI’S NEW TENURE NORM FOR NON-RETIRING DIRECTORS
Regulation 17 (1D) of the SEBI LODR Regulations, 2015 (inserted by the SEBI LODR (Second Amendment) Regulations, 2023) states that on and from 01.04.2024, the “continuation of a director of a listed entity as on March 31, 2024, without the approval of the shareholders for the last five years or more shall be subject to the approval of shareholders in the first general meeting to be held after March 31, 2024”. The said regulation exempts under its second proviso, the WTD, MD, Manager, Independent Director or a director of the company retiring as per Section 152 (6) of the Companies Act, 2013 (“Act”). This amendment raises the question, for whom is this provision applicable?
Retirement by rotation: This provision in SEBI LODR, is to be seen in the light of the provisions of Section 152 (6) of the Act. The provision provides for the retirement of 2/3rd of the total number of directors of a public company by rotation (unless the articles of a company provides for the retirement of all directors at every annual general meeting (“AGM”)), and 1/3rd of those liable to retire by rotation are to retire at each AGM.
Non-retirement: The corollary to this is, 1/3rd of the directors need not retire by rotation and 2/3rd of the total number of directors are to retire by rotation, of which 1/3rd will retire each year. The 1/3rd of those who need not retire by rotation, once appointed, hold on to the position till they resign.
Companies Act, 2013 and the changes it brought in: The Act introduced fixed tenures for Independent Directors and executive appointments yet allowed one-third of directors to remain without periodic shareholder appointment. It also brought with it, the period of office of a WTD, MD etc., even in private companies to be only for 5 years. However, the concept of 1/3rd of the total directors need not retire by rotation remained in the statute book.
Legislative gap: With every appointee under the Act, be it MD, WTD, Independent Directors, Financial Auditors having a fixed maximum tenure of appointment of 5 years when appointed by the shareholders, letting one set of directors holding office without going back to shareholders, with board performance evaluation being in SEBI LODR, leaves a legislative gap.
SEBI, by this amendment in SEBI LODR, has bridged the legislative gap, requiring even those directors in listed companies, who fall within the 1/3rd of the non-retiring portion to seek shareholder approval every 5 years. Hence, a listed company is required to place before the shareholders the appointment of even a director forming part of the 1/3rd of the non-retiring part under the Companies Act, 2013, once every 5 years, and this is to be a special business in the notice of the AGM.