Xone Control Room Management Proprietary Limited (Xone), a private company that meets the relevant public interest score for an SEC, sought a ruling from the Tribunal that it should be allowed to appoint an SEC composed entirely of its own staff, without the need to include an “independent member”. (To be more technically correct, the Companies Act and regulations require a non-executive director to be appointed to the SEC, i.e. someone who is not involved in the day-to-day management of the company and has not been so involved in the past three financial years.) The key question at hand was whether the company could be exempt from the requirement to appoint an independent member to the SEC.

Defining the Tribunal’s powers

The Tribunal concluded that while section 72(5) of the Companies Act allows for exemptions from the requirement to establish an SEC, it does not grant the Tribunal jurisdiction over the specific composition of the committee, such as the need for non-executive directors. The Tribunal emphasised that its jurisdiction is limited to determining whether the SEC requirement itself can be dispensed with altogether (for instance, on the ground that the nature of the company’s activities do not warrant an SEC), but it cannot change the composition rules prescribed by the Companies Act.

This ruling means that Xone’s request to be exempt from appointing a non-executive director was outside the Tribunal’s powers.

The Companies Amendment Act 16 of 2024, which recently partially came into effect, requires public and state-owned companies to elect SEC members at their annual general meeting, as opposed to being appointed by the board. Additionally, the SECs of public companies must have no fewer than three members, with the majority being non-executive directors. This is an increase from the previous requirement of one non-executive director.

For listed public companies, which typically have large boards, with a majority being non-executive directors, this change is unlikely to pose any issues. However, unlisted public companies – for example those that used to be listed and whose boards are now often more akin to those of private companies – may face difficulties if they need to constitute an SEC. These companies will now need to appoint at least two non-executive directors to their SECs, a requirement that could prove burdensome, especially for companies with smaller or more concentrated boards. For such companies, the ruling makes it clear that they cannot bypass the requirement for non-executive members of their SECs, even if they do not feel that these positions are necessary due to the nature of their operations.

For private companies, the requirements remain relatively unchanged, with section 72(7A)(b) mandating the inclusion of only one non-executive director on the SEC.

Notably, putting things in perspective, the Companies Act requirement is that the relevant member(s) be non-executive directors; they need not additionally be “independent”. This distinction is significant because it allows companies to appoint non-executive directors who are not necessarily independent in the strict King IV sense.

The Tribunal’s ruling serves as a reminder of the enhanced role and position of SECs under the Companies Act. If a company is required to have an SEC, there are no half measures available – the membership must comply with the legislation.