Nectar Life Sciences Ltd. vs Sebi

Exchange Plaza, Block G, C 1, Bandra Kurla Complex, Bandra East, Mumbai - 400 051, Maharashtra. ...Respondents

Mr. Anand Kankani, PCS with Ms. Muskan Mubarakali Kadiwar, Advocate for the Appellant.

Mr. Ravishekhar Pandey, Advocate with Mr. Nishit Dhruva, Ms. Shefali Shankar and Ms. Rasika Ghate, Advocates i/b. MDP & Partners for the Respondent No.1. 2

Mr. Gaurav Joshi, Senior Advocate with Mr. Krushi N. Barfiwala, Mr. Shlok Bodas, Advocates i/b. Parinam Law Associates for the Respondent No.2.

CORAM: Justice Tarun Agarwala, Presiding Officer Ms. Meera Swarup, Technical Member

Per: Justice Tarun Agarwala, Presiding Officer

1. The present appeal has been filed against the order

dated 12th July, 2022 passed by the Committee of

National Stock Exchange of India Ltd. (hereinafter

referred to as „NSE‟) rejecting the waiver application

which was filed for waiver of the fine on account of

non-compliance of Regulation 17(1A) of the Securities

and Exchange Board of India (Listing Obligation and

Disclosure Requirements) Regulations, 2015

(hereinafter referred to as „LODR Regulations‟).

2. The facts leading to filing of the present appeal is,

that one Dr. (Maj. Gen.) S.S. Chauhan (Retd.) was a

Non-Executive Independent Director in the Company 3

and unfortunately died on 22nd November, 2020

resulting in a casual vacancy in the Board of Directors.

3. The casual vacancy was required to be filled up by

an appointment of another Independent Director under

the provisions of the Companies Act, 2013 (hereinafter

referred to as the Companies Act) read with the

provisions of the LODR Regulations within three

months.

4. On the recommendation of Nomination and

Remuneration Committee of the Company, the Board

of Directors in the meeting held on 13th February, 2021

resolved and filled the casual vacancy in the office of

Independent Director by appointing Maj. Gen (Retd.)

Dr. Ajit Singh Dhillon as an Additional Independent

Director. At that time the age of Major General was 75

years and 9 months.

5. Under the Companies Act the casual vacancy can be

filled up by the Board of Director but the same is

required to be approved by the shareholders of the 4

Company within a stipulated period. Before such

resolution could be passed by the general body of the

Company, Maj. Gen (Retd.) Dr. Ajit Singh Dhillon

resigned from the post of Additional Director with

effect from 24th June, 2021. Thus, the total tenure of

Maj. Gen (Retd.) Dhillon was 132 days i.e. from 13th

February, 2021 to 24th June, 2021. As a result of the

resignation of Major Gen (Retd.) Dhillon, no resolution

approving his appointment as an Independent Director

could be passed by the shareholders of the Company.

6. NSE issued a notice dated 20th August, 2021

regarding non-compliance of the LODR Regulations

and directed the appellant to pay a fine of Rs.3,11,520/-

for non-compliance of Regulation 17(1A) for the

quarter ended 30th June, 2021.

7. The appellant accordingly made an application dated

25th August, 2021 for waiver of the fine which

application was rejected by the impugned order dated

12th July, 2022.

5

8. The Committee of NSE justified the imposition of

fine on the ground that the provisions of Regulation

17(1A) is mandatory and that no person can be

appointed as a Non-Executive Independent Director

who is more than 75 years of age unless a special

resolution is passed by the shareholders of the

Company. The Committee observed that under

Regulation 17(1A) of the LODR Regulations prior

approval of the shareholder is required. The

Committee observed that the requirement of passing a

special resolution is a qualificatory condition for

appointment of a person as a Director under Regulation

17(1A).

9. We have heard Mr. Anand Kankani, PCS assisted by

Ms. Muskan Mubarakali Kadiwar, Advocate for the

appellant and Mr. Ravishekhar Pandey, Advocate

assisted by Mr. Nishit Dhruva, Ms. Shefali Shankar and

Ms. Rasika Ghate, Advocates for the respondent no.1

and Mr. Gaurav Joshi, Senior Advocate assisted by Mr. 6

Krushi N. Barfiwala and Mr. Shlok Bodas, Advocates

for the respondent no.2.

10. The core issue is whether prior approval is required

to be taken from the shareholders of the Company

through a special resolution before a person who has

attained the age of 75 years can be appointed to fill up a

casual vacancy.

11. Before we deal with this aspect it would be

necessary to refer to a few provisions of the Companies

Act, the Rules and certain provisions of the LODR

Regulations.

12. Section 149 of the Companies Act, 2013 provides

that every Company shall have a Board of Directors

consisting of individuals as Directors. Section 152(2)

of the Companies Act provides that Directors can only

be appointed by the Company in a general meeting.

Section 161(4) provides for filling up of a casual

vacancy by the Board of Director. For facility, Section 7 152(2) and Section 161(4) of the Companies Act, 2013

is extracted hereunder:

Section 152(2)

"(2) Save as otherwise expressly provided in this Act, every director shall be appointed by the company in general meeting."

Section 161(4)

"(4) If the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, 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.

Provided that any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated."

13. A reading of Section 152(2) and Section 161(4)

makes it clear that a Director can only be appointed by

the shareholders of the Company in the general

meeting. However, in case where the office of a

Director is vacated before his term of office expires 8

which results in a casual vacancy then such casual

vacancy can be filled by the Board of Directors which

shall subsequently be approved by the members in the

immediate next general meeting.

14. In exercise of the powers conferred under the

second proviso to sub-section (1) and sub-section (4) of

Section 149, the Central Government made the

following rules, namely, Companies (Appointment and

Qualification of Directors) Rules, 2014. Rule 4(1) of

the Rules relates to appointment of Independent

Directors according to the class/classes of Companies.

The second proviso to Rule 4(1) reads as follows:

Rule 4 (1)

"Number of Independent directors

(1) The following class or classes of companies shall have at least two directors as independent directors -

.............

Provided further that any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate 9

next Board meeting or three months from the date of such vacancy, whichever is later:"

15. A perusal of the aforesaid proviso indicates that any

intermittent vacancy of an Independent Director shall

be filled up by the Board immediately but not later than

three months from the date of the vacancy.

16. Thus, from a reading of Section 161(4) of the

Companies Act read with the proviso to Rule 4(1) of

the Rules it is clear that a casual vacancy which occurs

in the office of the Director is required to be filled up

by the Board of Directors within three months from the

date of such vacancy and such appointment is required

to be approved by the members in the next general

meeting.

17. Regulation 25 of the LODR Regulations, 2015

relates to obligations with respect to Independent

Director. Regulation 25(6) of the LODR

Regulations provides as under:

10

"Obligation with respect to independent directors.

25. (1) ..........

..........

(6) An independent director who resigns or is removed from the board of directors of the listed entity shall be replaced by a new independent director by listed entity at the earliest but not later than the immediate next meeting of the board of directors or three months from the date of such vacancy, whichever is later:

Provided that where the listed entity fulfils the requirement of independent directors in its board of directors without filling the vacancy created by such resignation or removal, the requirement of replacement by a new independent director shall not apply."

18. The aforesaid provision provides that where an

Independent Director resigns or is removed from the

Board of Directors. Such Independent Director is

required to be replaced by a new Independent Director

within three months from the date of such vacancy.

19. We find that this provision relates to a vacancy

being created on account of removal or resignation of a 11

Director under Section 168 and 169 of the Companies

Act. It does not relate to filling up a casual vacancy

under Section 161(4) on account of death of a Director.

20. The composition of the Board of Directors is

provided under Regulation 17 of the LODR

Regulations. Regulations 17(1A) and 17(1C) provides

as under:

"Board of Directors

17. 1) The composition of board of directors of the listed entity shall be as follows:

...............

(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."

.............

(1C) The listed entity shall ensure that approval of shareholders for appointment of a person on the Board of Directors or as a manager is taken at the next general meeting or within a time 12

period of three months from the date of appointment, whichever is earlier."

21. Regulation 17(1A) provides that no person shall be

appointed or continue the directorship as a Non-

Executive Director who has attained the age of 75 years

unless a special resolution is passed to that effect by the

members in the general meeting.

22. A perusal of the Regulation 17(1C) indicates that

the listed entity shall ensure that the appointment of a

person on the Board of Directors is approved by the

shareholders at the next general meeting or within a

period of three months from the date of appointment

whichever is earlier.

23. Thus, upon the death of Dr. Chauhan on 22nd

November, 2020, a casual vacancy in the office of

Independent Director came into existence which could

be filled up by the Board of Directors under Section

161(4) of the Companies Act read with Regulation

17(1C) of the LODR Regulations and proviso to Rule 4 13

of the Rules. Such appointment was required to be

subsequently approved by the shareholders of the

Committee in the next general meeting.

24. From the aforesaid it is clear

(i) That there is no provision in the LODR

Regulations for filling up a casual vacancy of a

Director in a Company.

(ii) Casual vacancy can only be filled up under

Section 161(4) of the Companies Act read with

the proviso to Rule 4 of the Rules.

(iii) Regulation 17(1A) is not applicable for

purpose of filling up a casual vacancy under

Section 161(4) of the Companies Act.

(iv) 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 as provided under Regulation 17(1C) of 14

the LODR Regulations read with the proviso to

Rule 4 of the Rules.

(v) Regulation 17(1A) cannot be read in isolation.

It has to be read along with Section 152(5) of

the Companies Act which reads as under:

"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 fulfils the conditions specified in this Act for such an appointment."

(vi) The above provision provides that the

appointment of an Independent Director is to

be made by the shareholders in the general

meeting and an explanatory statement for such

appointment is to be annexed in the general

meeting which shall include a statement that in

the opinion of the Board of Directors the

person fulfills the conditions specified in the

Act for such appointment. Regulation 17(1A) 15

of the LODR Regulations provides that a

special resolution is required to be passed by

the shareholders of the Company and the

explanatory statement shall indicate the

justification for appointment of such a person.

(vii) Thus, under the proviso to Section 152(5) the

Board of Directors has to justify that the person

who is going to be appointed as an Independent

Director fulfills the conditions for appointment

of such a Director as specified in the Act

whereas under Regulation 17(1A) a special

resolution is required to be passed indicating

the justification for appointment of such

person.

(viii) Therefore on a harmonious reading of the

proviso to Section 152(5) and Regulation

17(1A), we are of the opinion that when an

appointment of an Independent Director above

the age of 75 years is made by the Board of 16

Directors under Section 161(4) such

appointment is required to be approved by the

shareholders of the Company in the next

general meeting to be passed by a special

resolution. The Board of Director would be

required to indicate in the explanatory

statement that the person fulfills the

qualifications specified in the Act and also

quote reasons for appointing such person who

has crossed the age of 75 years.

(ix) Section 17(1A) should be read harmoniously

with the provisions of Sections 152, 161(4) of

the Companies Act read with Rule 4 of the

Rules and Regulation 17(1C) of the LODR

Regulations which makes it clear that even if a

person above the age of 75 years is appointed

by the Board of Directors to fill up a casual

vacancy, such appointment is required to be

approved subsequently within the prescribed 17

period by a special resolution in the next

general meeting by the members of the

Company.

(x) 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 appointment of a

person as a Director.

25. In view of the aforesaid, the finding of the

respondent that no persons can be appointed or

continued to be appointed as a Non-Executive

Director unless prior approval of the shareholders is

made is erroneous.

26. In view of the aforesaid, the impugned order

cannot be sustained. No penalty could have been

imposed for violation of Regulation 17(1A) of the

LODR Regulations. Nothing has been brought on

record to indicate violation of any provision of the

Companies Act or Regulation 17(1C) of the LODR 18

Regulations. In view of the aforesaid, the impugned

order cannot be sustained and is quashed. The appeal

is allowed.

27. This order will be digitally signed by the Private

Secretary on behalf of the bench and all concerned

parties are directed to act on the digitally signed copy

of this order. Certified copy of this order is also

available from the Registry on payment of usual

charges.

Justice Tarun Agarwala Presiding Officer

Ms. Meera Swarup Technical Member

RAJALAKS Digitally signed by HMI RAJALAKSHMI

27.4.2023 HARISH HARISH NAIR NAIR Date: 2023.05.02 16:09:47 +05'30' RHN