A Rocket Science Or Is the Law Inconvenient?
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Interpretation of Law - A rocket science or Is the law inconvenient? Corporate Governance Research Private and confidential Proxy Advisory Services For limited circulation only Corporate Governance Scores Stakeholders’ Education Stakeholders Empowerment Services 2012 – 2013 | All Rights Reserved Interpretation of Law - A rocket science or Is the law inconvenient? 2019 SUMMARY • For few companies, it appears that regardless of its size, interpretation of even simple law is akin to ‘Rocket Science’ if the law is inconvenient to implement. And companies will advance all sorts of theories and interpretations to present its case, as this Report presents a fact check of progress in law related to appointment and continuance of persons over 75 years of age as Non-Executive Director in a listed company. • SEBI LODR requires that every listed company appointing or having any Non-Executive Director (NED) on its Board who is 75 years or above, must obtain approval of shareholders by way of special resolution for continuing or appointing such directors on the Board. Such approval is required to be taken either before the concerned director turns75-years- old or by 31st March 2019, whichever is later. • SES in this Report, has analyzed status of compliance of the above Regulations by NSE 500 companies as on 31st March 2019 reckoned as ‘Sample Companies’. SES observed that 228 companies (out of 500) had 431 Non-Executive directors on their Boards, who attained age of 75 years or above or would do so by the end of their existing term, therefore, requiring special resolution by shareholders. Out of top 500 companies in NSE, 272 companies had no NED on board who was above 75 years of age. • Of these 431 directors, companies have taken shareholders’ approval for 266 directors who were already 75+ years of age and 16 NEDs who had yet to attain 75 years of age. The analysis was limited to 415 directors who were already 75+ years of age. Additionally, 102 such directors had resigned on or before 31st March 2019. Out of 228 companies, 28 companies having 47 directors above 75 years have not obtained shareholders’ approval in terms of the above SEBI amendment till 31st March 2019, therefore these companies and 47 directors are non-compliant with SEBI Regulation. SES had sent an email to each of the concerned companies (28) which had not obtained requisite approval for continuation of 47 such NEDs. While SES received communication from 17 such companies, however, 11 companies having 20 such NEDs did not respond (Annexure-I). The responding companies had provided their own reasons for not taking approval. SES is not aware of reasons for not obtaining shareholders’ approval in case of 11 Companies which did not respond. For those companies which responded, analysis reveals that the failure to obtain approval was primarily on account of incorrect interpretation of Regulations. This itself is baffling especially keeping in mind that SES has considered Sample of Top NSE 500 Companies which are presumed to be having professionals to advise the Board besides having qualified professionals on the board itself. The law came into effect after thorough deliberations in Kotak Committee, public comments on recommendations of Committee and has been there for almost a year. The Committee had representations from FICCI and CII, two prominent trade bodies. If such a straight forward provision cannot be interpreted by certain Top 500 companies, then, SES is forced to wonder what would be the position in bottom companies, which do not have resources to seek best legal brains. Such cases of non-compliance would be subject to regulatory action by SEBI or NSE/BSE as the case may be. There could be monetary fine as well, besides reputational loss. What is surprising is that, it is not a case that these non-compliant companies were operating in isolation and were quarantined from the world. More so all those companies which obtained approval for continuation of directors above 75 years, had issued Notices on stock exchanges, presented resolutions for shareholders vote in AGMs, EGMs or PBs and had put out voting results in public domain. If 266 such communications which were in public domain were not enough to trigger an internal debate in defaulting companies to initiate steps to comply or seek clarification from stock exchanges or SEBI or from any Company Law Practitioner, then one can only say that job of regulating such companies is monumental. Although, any excuse of not understanding the law would not carry any weight. 2 Page © 2012 - 2013 STAKEHOLDERS EMPOWERMENT SERVICES | All Rights Reserved Interpretation of Law - A rocket science or Is the law inconvenient? 2019 Background: Securities and Exchange Board of India (SEBI) introduced amendment to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2018 (SEBI LODR) on 9th May, 2018. The amendment (effective from 1st April, 2019) inter alia included addition of Regulation 1A to Regulation 17 of SEBI LODR, which provided that: “(1A) 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.” According to SES, the objective of the amendments was to inter-alia: (i) Empower shareholders of listed companies to consider and if thought fit to approve appointment or continuation of Non-Executive Directors (NEDs) who have attained the age of 75 years, through special resolution and (ii) Provide a higher degree of transparency as to reason why a company feels that a certain director regardless of his advanced age is still superior to others and was necessary for continued success of the company. (iii) This was most relevant in cases of non-executive non-independent non-retiring directors, who once appointed never required further shareholders’ approval for decades and in some cases, even for half a century. SES ANALYSIS SES has done analysis of NSE top 500 listed entities. These 500 companies cover almost 90% of total market capitalization, therefore can be said to be a representative sample of prominent Indian Listed Companies. Out of 431 NEDs, 415 NEDs had already attained the age of 75 years or above while the remaining 16 directors were yet to attain 75 years of age. While, going strictly by the law, special resolution by shareholders is not required for these 16 directors, as technically such NEDs have not attained 75 years. Non-Compliance? Out of total 415 positions where approval was required to be obtained, approval for only 266 NEDs were obtained. As many as 102 NEDs ceased to be NEDs on the respective Boards on account of resignation or not opting for reappointment. Leaving 47 NEDs whose continuation was required to be approved by shareholders vide special resolutions with proper explanation justifying their continuation on the Board despite advanced age. These 47 NEDs were directors in 28 Companies, thereby indicating that such 28 Companies did not obtain shareholders’ approval for continuation of NED above 75 years on their Board. These 47 NEDs included 41 Independent Directors. Table-1 Category ID NED Total Approval Taken 214 52 266 Resigned 87 15 102 Approval Pending 41 6 47 Total Directors 342 73 415 It may be noted that out of the 415 positions, 380 are within the Companies promoted by Indian Entrepreneurs (referred to as ‘Indian Corporates’) and 30 Positions belong to Foreign MNCs (referred to as ‘MNCs’) and only 5 positions are in Public Sector Undertaking (referred to as ‘PSUs’) in the Report. Chart-1 indicates that out of 380 positions in Indian corporates (having 309 IDs and 71 NEDs), approval for 241 Non-Executive directors’ positions have been taken from the shareholders for continuation as per the SEBI amendment, while approval for 44 NED positions are still pending. Further, 95 NEDsresigned just before enforcement date i.e. 1 April 2019 which included 81 IDs and 14 NEDs. 3 Page © 2012 - 2013 STAKEHOLDERS EMPOWERMENT SERVICES | All Rights Reserved Interpretation of Law - A rocket science or Is the law inconvenient? 2019 In the Foreign MNC category, out of 30 positions (28 IDs and 2 NEDs),22 Non-Executive directors’ positions had obtained prior approval, however, 1 position in a Company (Berger Paints Ltd) and 2 positions in (Colgate Palmolive (India) Ltd) did not seek approval from shareholder. Remaining 5 NED ceased as directors in such Companies. The only 4 companies in PSUs having 5 positions which all are IDs in which 3 Non-Executive directors has already obtained the approval of the shareholders and remaining 2 were resigned Chart-1 450 415 400 380 342 350 309 300 266 241 250 200 150 95 102 100 71 73 44 47 30 28 22 50 5 5 0 2 2 5 0 3 3 0 Approval No. of Positions ID NED Resigned Approval Taken Pending PSU 5 5 0 2 0 3 MNC 30 28 2 5 3 22 Indian Corporate 380 309 71 95 44 241 Total Numbers 415 342 73 102 47 266 PSU MNC Indian Corporate Total Numbers Proactive Approach There were 16 NEDs in 11 Companies, who were yet to attain age of 75 years during the pendency of their existing terms. These 11 companies have proactively sought approvals for their NEDs. A list of such NEDs with their Companies is provided below: Table-2 No. Company Director Age ID/NID 1 Asian Paints Ltd Deepak Madhav Satwalekar 70 Independent 2 Asian Paints Ltd Mahendrakumar Sharma 71 Independent 3 Asian Paints Ltd Swaminathan Sivram 72 Independent 4 Glenmark Pharma Ltd Brian William Tempest 71 Independent 5 GMR Infrastructure Ltd Nangavaram C Sarabeswaran 74 Independent 6 Godfrey Phillips India Ltd Bina Modi 74 Non-Independent 7 Himadri Spe.