Sebi Moves To Make Independent Directors More Powerful

The Securities and Exchange Board of India (Sebi), the capital market regulator, has proposed approval of the non-promoter shareholders for the appointment or removal of an Independent Director (ID). A proposal to this effect is a part of a consultation paper put up for public comments on Sebi’s website.

IDs are expected to pay specific attention to 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 the 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 judgment on the company 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.

Hitherto, appointments of directors including IDs were proposed by the promoters and approved by the shareholders in the general meeting where the promoter’s shareholding was decisive.

Now, as suggested in the consultation paper, the appointment of IDs will only be ratified if both resolutions; one with promoters voting, and another, without promoter voting (where only public shareholders’ votes will be counted) are passed.

According to experts, Sebi’s proposed move is to reign control over the promoters having a high stake in their companies, who appoint only those individuals as IDs in their companies, who are accommodative in nature. 

Makarand Joshi, partner, MMJC and Associates LLP, a corporate compliance firm said, “Sebi’s consultative paper intends to trim the wings of the promoters by reducing their powers in the appointment of IDs”. 

According to him, the Sebi proposal, though idealistic, will add resistance to the appointment process. India Inc has already been facing challenges to get good IDs on board and, as any ID losing resolution by non-promoter shareholders, may bring disrepute to the ID, apart from the troubles to company with substantial promoter holding.

The Sebi consultation paper on proposed amendments relating to IDs also has some other far-reaching suggestions on appointment, removal, and remuneration of IDs. 

Arka Mookerjee, Partner, J Sagar Associates, said, “Among the key proposals are increased cool-off period for pecuniary transactions to establish independence between the executive and independent roles, detailing of the selection procedure to be adopted by a listed entity in searching and selection of independent directors and prior shareholders’ approval for the appointment of independent directors (or within a period of three months from the appointment, down from the current time limit of the ensuing general meeting)”. 

Also interesting is the proposed change in the remuneration structure with a grant of long-term stock options to IDs, which would ultimately change the viewpoint of the directors and their relationship with the listed company, Mookerjee said. 

While some of these suggestions may increase the compliance burden on companies, Sebi’s move to increase the relative involvement of the IDs in a listed entity, she hoped, this move ultimately will help broad-based corporate governance norms in Indian entities. 

Read together with the qualification requirements for independent directors brought in by Sebi previously, these moves have the capacity to increase the independent oversight of Indian listed entities, Mookerjee concluded. 

Sebi has sought public comments till April 1, 2021, on the consultation paper for Independent directors for compilation. The collated comments will be put before the Sebi board before taking a final decision on the issue.