By: Saket Agarwal
The Securities and Exchange Board of India (hereinafter ‘SEBI’) is an establishment made for the regulation of the securities market, and the protection of the interests of investors in securities. To achieve these goals, SEBI was granted certain powers. However, with the passage of time, the powers of SEBI have increased manifold.
In addition to the listed entities, SEBI has the power to regulate those which are yet to be listed on the stock exchange. Due to this, SEBI, which works primarily under the Securities and Exchange Board of India Act, 1992 (hereinafter ‘SEBI Act’), also plays a vital role in the Companies Act, 2013, which was brought into power to consolidate and amend the laws relating to companies. Owing to the overlapping affairs of the aforementioned Acts, SEBI was endowed with certain powers under the Companies Act as well. The present-day debate is about the power of SEBI to remove a director, which, as of now, solely lies with the shareholders of the company and the National Company Law Tribunal (hereinafter ‘NCLT’).
TRACING THE HISTORY: THE CASE OF VIJAY MALLYA
The allegations against Vijay Mallya revolved around the illegal diversion of funds during his tenure as the Director of United Spirits Limited (hereinafter ‘USL’). The funds of USL were distributed to some intermediaries as trade receivables. At the request of Mallya, these intermediaries further loaned the funds to certain shell companies of the United Breweries Group (hereinafter ‘UB’) of which Mallya was also a Director. Thereafter, the intermediaries refused to return the money citing the dues pending on part of UB. SEBI investigated this case, and after inquiry barred Vijay Mallya from being appointed as the Director in any company, which the latter refused to comply with. Here, the controversy arose as neither the SEBI Act nor the Companies Act gives any such powers to SEBI to mandate the disqualification of a director.
Current Position of the Law in India
Section 11(d) of the SEBI Act provides “…it may pass an order requiring such person to cease and desist from committing and causing such violation.” In the case of Vijay Mallya, he had illegally diverted the funds by abusing his power as a director in the companies. His act of fund diversions was directly linked to his directorship. SEBI could have also resorted to this section with this possible interpretation.
Section 24 of the Companies Act maintains “…listed companies or those companies which intend to get their securities listed on any recognized stock exchange in India, except as provided under this Act, be administered by the SEBI.” The section acknowledges the fact that SEBI has the power to regulate the conduct of those entities mentioned above. However, at the same time, certain areas were reserved exclusively for the Companies Act in relation to such entities when it says ‘except as provided under this Act.’
Section 164 of the Companies Act lays out disqualifications for the appointment of a director. Clause (e) of the same Section provides for the order of disqualification passed by a court and tribunal as one of the grounds. SEBI is neither a court nor a tribunal for the purposes of this Act. This shows that this is an exclusive area kept for the company law provisions, where SEBI has no role to play.
STATUS OF THE LAW IN THE UNITED STATES: THE CASE OF ELON MUSK
In the US, the market regulator, i.e. the Securities and Exchange Commission (hereinafter ‘SEC’), is required to approach the courts for the removal of a person from the post of director in any entity under Section 21(d) of the Exchange Act, 1934. The language of section 21(d) reads as “…it may in its discretion bring an action in the proper district court of the United States …to enjoin such act or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond.”
The same procedure was adopted by the SEC for the removal of Elon Musk from the post of the Director of Tesla when he shared his idea of taking Tesla, a publicly-traded company, private through a tweet, which he later revealed to not be his true intention.
POSSIBILITY OF JURISDICTIONAL CONFLICTS BETWEEN SEBI AND NCLT
Granting the power to SEBI to remove a director may give rise to a situation of conflict. A director can be appointed by the shareholders through voting under section 162 of the Companies Act, or by the order of NCLT under Section 242 of the same. In case a director is appointed by the NCLT, even the shareholders cannot seek the removal of such a director. This prompts a question that if SEBI is given the power to remove a director, can such a director be removed by SEBI? This will build a situation of chaos, and would ultimately lead to a clash of powers between NCLT and SEBI, along with numerous jurisdictional disputes.
One such instance of a tussle between NCLT and SEBI can be found out in the case of Bhanu Ram v. HBN Dairies & Allied Ltd. In this case, SEBI, under sections 11 and section 11B of the SEBI Act, had confiscated the assets of the defaulter for their sale to recover the money. However, an insolvency petition was also filed under Section 7 of the Insolvency & Bankruptcy Code, 2016 before the NCLT, where the NCLT imposed a moratorium on the sale of those assets. In this case, the purpose of both the Acts was the same to a certain extent, i.e. to provide stability in the market. However, this overlapping has caused serious confusion among the stakeholders, and the matter is pending before the Hon’ble Supreme Court.
ADVERSE IMPACT ON CORPORATE DEMOCRACY
Corporate democracy is considered to be an essential part of corporate governance. It is about the sharing of information with the shareholders and ensuring their participation in the administration of the companies. Recommendations of the Kumar Mangalam Birla Committee focused on the improvement of democracy within the companies where the shareholders have increased participation for efficient corporate governance. If any person from the board or the management commits any wrong by way of misusing that post, then it would be considered as prejudicing the interests of those who have reposed faith in him, i.e. the shareholders and investors. Therefore, the shareholders should be the one to decide the fate of such a person.
Under the Companies Act, a director can be removed by the shareholders and investors, in consonance with the NCLT. Referring to the power of shareholders to remove a director, it can be done through a simple majority by way of an ordinary resolution. To secure the rights of the minority shareholders, a provision under Section 242 was also made which provides for the power of NCLT to remove a director if a petition is filed under section 241. Essentiality which is manifest here is that in both cases, it is ultimately the shareholders who have a role to play in the removal of the directors of a company. Creating a scope for SEBI to remove a director under the Companies Act will overshadow this right of the shareholders, in addition to their activism.
- If SEBI receives a complaint against a director, it can order the director to present their stand before the shareholders and allow the shareholders to make a decision upon the matter.
- The position of a director is such that they are predominantly in touch with the securities market. SEBI can debar such a person from accessing the securities market. Owing to this, the person will automatically be removed from the company due to his inability to perform the required functions.
- SEBI may also refer such matters to the NCLT which can use its power under Section 242 to remove such a director if the grounds for such a removal exist.
SEBI is the parens patriae when it comes to the rights of the investors and shareholders in the securities market. A parent has the duty to be a support system for their child. However, at the same time, they should abstain from becoming overly protective, which may otherwise lead to a hindrance in the development of the child and would make him/her incessantly dependent.
SEBI should indeed protect the investors, but not to the extent where they become disabled to raise their voice. The decision of the removal of a director should be left in the hands of the investors who have appointed them. Any forceful action against the directors endangers the investment of the investors, especially in a country like India where most of the directors are also the promoters of the company, and the shareholders invest in these companies keeping in mind their promotional abilities.
(Saket is currently a law undergraduate at National Law University, Jodhpur.)