SEBI’s New Norm(al): For Independent Directors

On 1st March 2021, SEBI published a consultation paper “Review of Regulatory Provisions related to Independent Directors” proposing a slew of measures relating to independent directors (IDs) being appointed on board of a Listed entity. The paper which solicits comments and suggestions from stakeholders and public is aimed at streamlining various aspects of independent directors – appointment, removal, remuneration, role in committees etc.  

An insight into the same:

Definition

Particulars: Regulation 16 of SEBI (LODR) set out objective conditions to be satisfied to be eligible to be appointed as independent director such a relationship of self and relatives, material pecuniary relationship. There are also restrictions such as cooling off period if related to KMPs/ promoter group. 

PRESENT PROVISION

Cooling off period is  

3 years: If the person has been an employee / KMP/ his or her relative have been a KMP of the listed entity or its holding / subsidiary / associate company 

2 years: in case of a material pecuniary relationship between person or his / her relative and the listed entity / its holding company / subsidiary / associate company

PROPOSED PROVISION

A single 3 years cooling off period is proposed to be introduced. 

This means a KMP or his relationship and anyone with a material pecuniary relationship with the listed entity / its holding company / subsidiary / associate company can be appointed as independent director only 3 years from the date when such employment relationship or material pecuniary relationship ceases to exist.

Remarks / observation: The intention is to harmonize and bring in uniformity in provision.  

Appointment; Re-appointment and Removal of independent director

Particulars: As per SEBI LODR norms

PRESENT PROVISION

Appointment & Re-appointment: The Nomination & Remuneration committee proposes the name of a person as independent director. Such proposal is approved by the Board of directors and subsequently approved in a shareholders meeting through an ordinary resolution.

In case of re-appointment, the above procedure is the same. The approval in shareholders meeting will be through special resolution (and not ordinary resolution).

The procedure is the same for removal of an ID (ordinary resolution if removed in the first term and through a special resolution if removed in the second term).

PROPOSED PROVISION

A dual approval process is to be put in place under which appointment, re-appointment and removal of IDs would require approval from majority shareholders and majority of the minority shareholders (other than promoter and promoter group).

This would also be done by passing an ordinary resolution and or special resolution as in the existing procedure.   

Both votes will be done in single meeting.

Any ID failing to get the dual votes can be proposed again for a second vote after a gap of 90 – 120 days. In such case, it will be a special resolution by all shareholders.

Remarks / observation: The proposed regulation is intended to prohibit any influence in appointment of ID by the promoters or promoter group.

Also since an ID is expected to function independently in interest of all stakeholders, especially minority shareholders, it is only correct that his / her appointment is approved by minority shareholders as well.

Resignation of ID

Particulars: As per SEBI LODR norms

PRESENT PROVISION

The resigning ID has to within 7 days from date of his resignation disclose to the stock exchanges the exact and detailed reason of resignation (including pre-occupation, personal reasons etc.) along with a confirmation that there is no other reason other than that which has been disclosed.

PROPOSED PROVISION

The entire resignation letter shall be disclosed to stock exchanges along with his / her present directorships  in boards / committees.

If reasons such as pre- occupation / personal reasons are stated in the resignation letter, then a cooling off period of 1 year is mandatory before the person can seek appointment in another listed entity.

A cooling off period of 1 year is mandatory for a person to transition from ID to a Whole time director (WTD).

Remarks / observation: The proposal relating to cooling off period is intended to ensure that IDs don’t give reasons such as pre occupation / personal reasons to resign from one listed entity only to immediately join another entity.

In order to curb the increasing instances of the IDs resigning and immediately joining as WTD as this effectively questions the “independence” of the ID and his / her credibility.

Role of Nomination & Remuneration Committee (NRC)

Particulars: As per SEBI LODR norms

PRESENT PROVISION

The members of NRC who are all non-executive with a majority of them being independent directors are entrusted with formulating criteria for appointing IDs, identifying such persons, decide on their terms of appointment, tenure and recommend the same to the Board.

PROPOSED PROVISION

It is proposed for the /NRC to:

Prepare a description of the role and capabilities for appointing an ID after analyzing the skills, knowledge and experience on board.

Based on the description, identify potential candidates and in the process seek help from external agencies.

Requisite disclosure to be made to shareholders in the notice for appointment of IDs – skills and capabilities, channels used for searching and shortlisting candidates including if it is a “recommendation from a person”, details of such person shall be disclosed.

Remarks / observation: The proposed regulation is intended to address the apparent lack of transparency in identify and selecting candidates to be appointed as IDs.

It is proposed to reconstitute the NRC with 2/3rds being IDs (instead of majority being IDs)  

Approval of shareholders for IDs

Particulars: Companies Act 2013 and SEBI LODR norms

PRESENT PROVISION

Board appoints a director as an additional director or additional independent director. Such appointment is regularized by the shareholders in an ensuing general meeting (EGM / AGM).

PROPOSED PROVISION

It is proposed to appoint ID

On the board only with prior approval of shareholders in a general meeting. 

In the event of a casual vacancy due to resignation / death / removal / non re-appointment of ID, the approval of shareholders should be procured within 3 months.

Remarks / observation: There have been instances where an ID is appointed in the Board and continues to serve till the general meeting where his /her appointment is not accepted. The same situation arises for vacancy caused due to resignation or removal of IDs. There is a considerable time gap when there is no ID and that proves detrimental to minority shareholders.

This proposed amendment intends to minimize the time gap and ensure the presence of ID within reasonable period of time.

Audit Committee (AC)

Particulars: As per SEBI LODR norms

PRESENT PROVISION

The AC is entrusted with the crucial activity of reviewing financial statement, especially inter corporate loans, related party transactions (prior approval of AC mandatory), valuation of investment, assets and undertakings of the listed entity. IDs should give their recommendations on schemes of arrangements, open offers etc.  

PROPOSED PROVISION

The AC shall comprise 2/3rds independent directors and 1/3rd non-executive directors including nominee directors, who are NOT related to the promoters.  

Remarks / observation: This proposal has been suggested considering the crucial activity entrusted to the committee.

Additionally, views are sought on the below issue of remuneration to independent directors:

Remuneration of IDs

Particulars: Companies Act, 2013 & SEBI LODR norms

 

PRESENT PROVISION

Remuneration of independent directors include: sitting fee (of a maximum of Rs. 1 lakh), reimbursement of expenses and profit linked commission within the overall limits.

Does not include: stock options 

PROPOSED PROVISION

ESOPs with a long vesting period of 5 years in place of profit linked commission 

What should be the maximum limit of remuneration through ESOPs? 

Remarks / observation: Offering too much as remuneration tends to lose the “independence” of a director in discharging his duties in interest of all stakeholders.

Too little or limiting remuneration may not motivate the independent director to put in his/ her best efforts.

There is increasing need of balancing the remuneration package offered / provided to independent directors in such a way they that the most competent talent is attracted and the ID is motivated to render service to maximize the interest of all stakeholders.

public views are sought on whether it is necessary to review and revisit provisions relating to remuneration of independent directors as this would involve amending the provisions of the Companies Act 2013

Independent directors were brought on board listed companies as there was (and is) need for person(s) to act impartially and safeguard the interest of all stakeholders – promoters, especially small and minority shareholders. They play a very crucial role in the corporate governance.  

SEBI has been pro-active in regulating rules and regulations governing Independent directors. Several amendments have been introduced periodically including in the Companies Act 2013 and SEBI LODR.  

The latest consultation is another step towards strengthening the corporate governance of the country. The Consultation Paper is open for public comments till April 01, 2021 and can be accessed on the  SEBI  website  www.sebi.gov.in  under  the  link  Reports  &  Statistics Reports / Reports for Public Comments.

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