New Development
Capital markets regulator SEBI has amended the rules pertaining to the appointment, removing and remuneration of independent directors to guarantee their independence and effectiveness. The changes become significant in the backdrop of the role of independent directors coming under scrutiny for failure to detect and prevent corporate frauds and other issues. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”). These regulations may be called the SEBI (Listing Obligations and Disclosure
The new rules will be applicable from January 1, 2022.
Section 149 (6) of the Companies Act provide for the Independent Director under the Companies Act, 2013.
Key amendments introduced in LODR by said amendment regulations, 2021 are below:
1. Criteria of independent directors have been amended.
2. In case of appointment of directors, shareholders’ approval is required to take in next general meeting or within a time period of three months from the date of appointment, whichever is earlier.
3. In the composition of the NRC Committee at least two-thirds of the directors shall be independent directors.
4. Only independent directors who are members of the Audit Committee shall give approval of related party transactions.
5. For appointment, re-appointment or removal of an independent director, a special resolution is required.
6. The listed entity must fill the vacancy of Independent Director within three months from the date of such vacancy.
7. With effect from January 1, 2022, the top 1000 listed entities by market capitalization calculated as of March 31 of the preceding financial year shall take Directors and Officers insurance (‘D and O insurance’) for all their independent directors.
8. Only after elapse of one year from the date of resignation of the independent director, he can be appointed as executive / whole-time director in the listed entity and its holding, subsidiary or associate company or company belonging to its promoter group
9. Disclose additional information which is required to provide to the shareholders in case of appointment and re-appointment of a director
10. Role of the Nomination and Remuneration Committee is enhanced.
11. Inserted additional disclosures which are required to make to the stock exchanges in case of resignation of independent director
Role of Independent Directors
The definition for independent directors has been laid down in section 149 of the Companies Act, 2013. They are defined as directors other than a managing director or a whole-time director or a nominee director who satisfies the following conditions:
- He is a person of integrity and possesses the relevant experience,
- He is or was not a promoter of the company or any of its holding, subsidiary, or associate companies,
- He is not related to the promoters or directors of the company or its holding, subsidiary, or associate companies,
- Does not have any pecuniary relationship with the company, directors or promoters for two years immediately preceding appointment.
- Does not have any relatives who have or have had pecuniary relationships with the company, directors or promoters for amounts exceeding two per cent of gross turnover or total income.
- Has not and does not have any relatives, who hold key managerial positions or have been an employee of the company, its subsidiaries, holdings, or associate companies.
- Is not a member of the auditors or any legal consulting firm that has transactions with the company, and its subsidiaries, holdings and associate companies.
- Does not hold more than 2% voting power of the company.
- And any other conditions as prescribed.
The Companies Act mandates that at least one-third of the total directors of a public company must be independent directors. Independent directors are also not liable to be given any stock option schemes, although their official expenses can be reimbursed.
Public companies with a share capital greater than INR 10 crore, or public companies with a turnover greater than INR 100 crores, or public companies with outstanding liabilities, debentures, exceeding INR 50 crore; all require a minimum of two independent directors on the board of directors.
Independent directors are required to keep a view over the financial reporting of the company, as well as specific attention to the integrity of transactions between related parties of the company. Independent directors will also be required to exercise independent judgement over the deliberations of the board of directors.
Amid increasing woes regarding promoter mismanagement and financial frauds, SEBI now looks to empower independent directors in the market. Under the SEBI notification dated August 3, the appointment, re-appointment and removal of independent directors in a listed company will only be done by a special resolution of shareholders. The votes will be checked by the organisation and the votes in favour must be at least thrice those against the resolution, for a decision to pass.
The tougher process will ensure better stability as it will avoid the appointments and removal of independent directors based on promoters’ wishes.
The companies will need to consider candidates from a wide range of backgrounds respecting diversity and value the time commitments of the candidates. The market regulator also modified the composition of the nomination and remuneration committee to include two-thirds of independent directors in the panel. Earlier, there was a requirement of 50 per cent of independent directors. Meanwhile, explaining its take on the audit committee, SEBI urged that at least two-thirds of the audit committee will have to be independent directors.
IMAGE: Photo by Tim Gouw on Unsplash
