JURISPRUDENCE OF SEBI (LODR) REGULATIONS 2015 IN FILING UP CASUAL VACANCY IN THE OFFICE OF INDEPENDENT DIRECTOR

1. Brief background of the case:

NSE levied penalty on Nectar Lifesciences Limited for non - compliance of Reg. 17(1A) by not taking prior approval of Shareholders while filing up the Casual Vacancy in the office of the Independent Director. The casual vacancy arose due to the death of the erstwhile Independent Director.

2. Casual Vacancy:

When the office of the Director becomes vacant before the expiry of the term; such a situation is called as Casual Vacancy. It may be due to resignation, removal, death, incapacity, or any other reason.

3. Need to fill Casual Vacancy:

There are legal reasons to fill the casual vacancy can be to maintain the required composition of the Board viz. Companies Act, LODR specifically requires that such vacancy must be filed within 3 months and operational reasons viz. the decision making, apt team, expertise, etc.

4. Legal Provisions to deal with Casual Vacancy:

4.1 Section 161(4) of the Companies Act, 2013 read with Rule 4(1) of Companies (Appointment and Qualification of Directors) Rules, 2014: provides 3 months’ time to the BOD to fill the casual vacancy which subsequently is to be approved by the members in the immediate next general meeting.

4.2 Regulation 25(6) of the SEBI (LODR) Regulations 2015 :- Deals only with casual vacancy arising due to resignation and removal.

4.3 Regulations 17(1A) of the SEBI (LODR) Regulations 2015 :- Requires Special Resolution to be passed by the Shareholders when any director is appointed or continues who has attained the age of 75 years where the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.

5. CORE ISSUE:

5.1 The casual vacancy in Nectar arose due to the death of the ID. 

5.2 The BOD appointed another ID (Dr. Dhillon) whose age was 75 years and 9 months. 

5.3 Before the GM of the company could have been held, Dr. Dhillon resigned on health grounds. 

Hence, NSE levied penalty on Nectar for non - compliance with Reg. 17(1A) of LODR for not taking prior shareholder approval by way of Special Resolution with the contention that the word "UNLESS" used in the regulations means "PRIOR APPROVAL".

 6. QUESTION OF LAW: Whether Regulation 17(1A) is applicable to fill the Casual Vacancy and is prior approval of shareholders required to fill the Casual Vacancy if such director has attained the age of 75 years? 

6.1 LODR Regulations cover casual vacancies in the office of ID due to resignation and removal only. 

6.2 Kotak Committee recommended that Reg. 25(6) must be amended with the phrase "Any Casual Vacancy. . . . . " and not just resignation or removal. 

6.3 SEBI's response to Kotak Committee was that such an amendment may not be carried out as it is squarely covered in the provisions of the Companies Act 2013 via the Companies Amendment Act 2017 when "the casual vacancy in the office of Independent Director shall be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by members in the immediate next general meeting"

6.4 INSERTION OF Regulation 17(1C) which requires the appointment of a director made by the Board of Directors is required to be approved by the shareholders/members of the Company in the next general meeting or within three months from the date of appointment whichever is earlier.

CONCLUSION

Regulation 17(1A) is not applicable for the purpose of filling up a casual vacancy under Section 161(4) of the Companies Act. Regulation 17(1A) cannot be read in isolation. It has to be read along with Section 152(5) of the Companies Act which states “Provided that in the case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he/she fulfills the conditions specified in this Act for such an appointment.” 

Hence, the word “unless” depicted in Regulation 17(1A) does not mean “prior approval” nor the requirement of passing a special resolution is a qualificatory condition for the appointment of a person as a director.

LINK TO SAT ORDER - https://sat.gov.in/english/pdf/E2023_JO2023185_88.PDF