The requirement of a special resolution for reappointment/ removal of an independent director dilutes promoters’ control.
For decades now, both SEBI as also the department of corporate affairs has worked to enhance the role of independent directors (IDs). The Kotak Committee had noted that they form the backbone of the corporate governance framework worldwide as also in India.
The regulator mandated that starting 2022, appointments or reappointments or the removal of IDs would require a special resolution of shareholders.
In its Tuesday’s board meeting, SEBI also said that an appointment of an independent director should be approved by shareholders within three months or through an AGM, whichever is earlier. The appointment should be through a special resolution, one that would need the nod of at least 75% of the shareholders.
It said that all related-party transactions should be cleared only by the independent directors on the audit committee.
So far, promoters had enough clout and ownership to be able to push through a general resolution; now, they will need to get the small shareholders on board. It is also a good idea to make the selection of IDs by the nomination and remuneration committee (NRC) in a listed company more transparent.
Moreover, SEBI said at least two-thirds of the NRC should comprise IDs; currently, they comprise the majority. This, again, is an attempt at improving governance. In addition, the SEBI wants that disclosure to be made on what exactly a director brings to the table; in other words, what his or her area of expertise is. Such a move is probably aimed at discouraging companies from packing their boards with retired bureaucrats or bankers. The fact is that these bureaucrats do have skills, namely, they know how to liaise with the government or regulators. For businessmen, these ‘skills’ can be more useful than others.
One of the new norms—that the contents of the resignation letters of IDs—be disclosed, together with the list of present directorships and memberships on various board committees. The need for a one-year cooling-off period for an independent director transitioning to a whole-time director in the same entity is not convincing.
Also, unlike globally where more than three independent directorships are not appreciated, in India, there are many individuals who have a presence on half a dozen boards. It is unlikely they can make a meaningful contribution.
According to Sebi, among other qualifications, an independent director is a person who is not a promoter or a relative of the promoter of the company, its holding, subsidiary or an associate company. The person should also be qualified to add some value to the company. The person, other than receiving director’s remuneration, should have no other pecuniary relationship with the company during the two immediately preceding financial years.
Sebi also introduced a cooling off period of one year for an independent director becoming a whole-time director in the same company, holding, subsidiary, associate company or any group company. It also said that if key managerial personnel, their relative, or an employee of the promoter group companies wants to be an independent director, there should be a cooling off period of three years.
A Sebi release noted that the board has agreed to make a reference to the corporate affairs ministry of the government for “giving greater flexibility to companies while deciding the remuneration for all directors (including independent directors), which may include profit-linked commissions, sitting fees, ESOPs, etc, within the overall prescribed limit specified under Companies Act, 2013”.
These changes to the rules will be effective from January 1, 2022.
Sebi has also tried to make the appointment of an independent director more transparent. It said that the NRC, while appointing an independent director, should make enhanced disclosures that should include the skills required for appointment as an independent director and specify how the proposed candidate fits into that skillset.
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