Sebi has proposed that the Companies Act should also clearly mention that a person should vacate the office of a director if Sebi orders his or her disqualification.
Securities and Exchange Board of India (Sebi), India’s capital markets regulator, has asked the government to amend the Companies Act to ensure that a director declared as a disqualified person should immediately vacate the position, media reports. The plea has been triggered by defaulter businessman Vijay Mallya's reluctance to do so.
Notably, under the existing Companies Act, the office of a director becomes vacant in case he or she is disqualified by an order of a court or a tribunal, among other reasons. However, there is no explicit mention of an order by Sebi.
Sebi has proposed that the Companies Act should also clearly mention that a person should vacate the office of a director if Sebi orders his or her disqualification, media reports.
The finance ministry is in agreement with Sebi on the proposed amendment and has asked the regulator to get it approved by its board and subsequently forward it to the corporate affairs ministry, which is the nodal ministry for the Companies Act,
In its proposal to the finance ministry, Sebi has referred to its interim order dated January 25, 2017, barring Mallya and six others from holding directorship in any listed company till further directions.
Notably, Sebi order had come on the heels of a probe into alleged illegal fund diversions at United Spirits Ltd. Sebi had also barred Mallya and others from the securities markets in the same order.
However, Mallya did not comply with the order and did not step down as a director of United Breweries Ltd, another listed company of his group, for months. He had also targeted Sebi in a series of tweets saying the allegations of fund diversion were baseless and called it a "witch hunt".
It was only after months, presumably under pressure from other directors that Mallya finally ceased to be a director of United Breweries Board in August 2017. In April 2015, he was asked by the new owner Diageo to quit the United Spirits board for alleged fund diversion.
Mallya’s failure to comply with Sebi’s direction has brought forward a "legal conundrum" as to whether Sebi has the power to enforce its direction when a director refuses to comply with the same, and has prompted Sebi to seek changes in the Companies Act.
Currently, the market regulator’s order restraining a person from acting as a director is not a ground for vacation of his or her directorship under the existing provisions of Section 167 of the Companies Act, 2013.
Notably, sections 164, 167 and 169 of the Companies Act, dealing with appointment, vacancy and removal of directors, are administered only by the central government through the Corporate Affairs Ministry.
Also, though Sebi is empowered to initiate adjudication proceedings under the Sebi Act for non-compliance of its directions in such cases, it can only be a penal proceeding for non-compliance and not for enforcement of the direction.
It is because of these concerns that Sebi has proposed the issue be resolved by amending section 167 of the Companies Act to include "order of Sebi” as one of the grounds for vacation of office of a director.
Source: Media reports