The Securities and Exchange Board of India (“SEBI”) has issued Consultation Paper on Review of Regulatory Provisions Related To Independent Directors (“Consultation Paper”) in order to solicit public comments / views on the proposals on review of regulatory provisions related to Independent Directors (IDs) on the boards of listed entities.
Comments and suggestions on the Consultation Paper may be sent on or before 1st April, 2021 in the following format –
1. By email to consultationcmd2@sebi.gov.in and/or Mr. Ishan Sood, Assistant Manager, at ishans@sebi.gov.in
2. By post to the following address: Ms. Surabhi Gupta, General Manager Corporation Finance Department, CMD-II, Securities and Exchange Board of India SEBI Bhavan, Plot No. C4-A, “G” Block, Bandra Kurla Complex, Bandra (East), Mumbai -400 051
Name of entity / person / intermediary/ Organization:
Sr. No. Proposal Suggestions Rationale
Background :
The concept of Independent Directors (IDs) emerged from the need to have a certain number of directors on the Board who would think and act independently to bring about a healthy balance between the interests of the promoters and other stakeholders including minority and small shareholders. IDs are an important component in the overall framework of Corporate Governance.
As per the Code of Conduct, IDs are expected to pay specific attention on the integrity of financial information and on related party transactions along-with safeguarding the interests of the minority shareholders.
Accordingly, the Audit Committee of the board which is responsible for approving related party transactions and for oversight of the financial reporting process and the sanctity of financial information, is mandated to have at least two–third of Independent Directors. Besides, IDs are also expected to bring in independent judgement on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct; as well as bring an objective view in the evaluation of the performance of board and management.
Despite the above provisions and various measures taken, concerns around the efficacy of independent directors as a part of corporate governance framework continue. There is therefore a need to further strengthen the independence of IDs and enhance their effectiveness in protection of the interest of the minority shareholders, and other functions.
In light of this, sharper focus is required in the areas of appointment and role of the IDs. Accordingly, proposals including broadening the eligibility criteria for IDs, the process of appointment / re-appointment and removal of IDs, enhancing transparency in the nomination and resignation of IDs, strengthening the composition of Board Committees, are being placed for public consultation. Additionally, views are also sought on the need for review of remuneration of IDs.
This has also been informed by SEBI through a Press Release dated 1st March, 2021.
Proposed changes:
1. Definition of Independent Directors:
It is proposed that KMPs or employees of promoter group companies, cannot be appointed as IDs in the company, unless there has been a cooling-off period of 3 years. The said restriction shall also extend to relatives of such KMPs for the same period. The prescribed cooling-off period in case of a material pecuniary relationship between person or his / her relative and the listed entity / its holding company / subsidiary / associate company is proposed to be harmonized to 3 years.
2. Appointment and re-appointment process of Independent Directors:
It is proposed that the appointment and re-appointment of IDs be subject to “dual approval”, taken through a single voting process and meeting following two thresholds:–
i. Approval of shareholder
ii. Approval by ‘majority of the minority’(simple majority) shareholders.
If either of the approval thresholds are not met, the person would have failed to get appointed / re-appointed as ID.
3. Removal of Independent Directors:
Removal of IDs is proposed to be subject to “dual approval”, taken through a single voting process and meeting following two thresholds:–
i. Approval of shareholders.
ii. Approval of ‘majority of the minority’ (simple majority) shareholders.
4. Enhancing and bringing in more transparency in the role of NRC:
The detailed procedure to be followed by NRC for selection of candidates for the role of ID is proposed.
5. Prior approval of shareholders for appointment of IDs:
It is proposed that Independent Directors be appointed on the board only with prior approval of the shareholders at a general meeting. For casual vacancy arising due to resignation / removal / death / failure to get re-appointed etc., the approval of shareholders must be taken within a time period of 3 months.
6. Resignation of Independent Directors:
It is proposed that the entire resignation letter of an ID be disclosed along with a list of his/her present directorships and membership in board committees.
If an ID resigns from the board of a company stating reasons such as pre-occupation, other commitments or personal reasons, a mandatory cooling-off period of 1 year is proposed before the ID can join another board
It is also proposed that there should be a cooling-off period of 1 year before a director can transition from an ID to a whole-time director.
7. Composition of the Audit Committee:
It is proposed that audit committee shall comprise of 2/3rd IDs and 1/3rd Non-Executive Directors (NEDs) who are not related to the promoter, including nominee directors, if any.
8. Review of remuneration:
An opinion is sought on whether there is a need for reviewing the remuneration structure for ID. If yes.
i. Whether ESOPs with a long vesting period of 5 years, be permitted for IDs, in place of profit linked commission and
ii. What should be the maximum limit of remuneration through ESOPs
The existing provisions related to IDs under LODR Regulations are placed at Annex-1 of the consultation paper.
Source: Securities and Exchange Board of India
