In a move intended towards fixing accountability and ensuring transparency, Sebi on Tuesday has made some crucial amendments pertaining to regulatory provisions related to independent directors (IDs) on the boards of listed companies.

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The market regulator in its board meeting said appointment/re-appointment and removal of independent directors shall be through a special resolution of shareholders for all listed entities. Also, the process to be followed by the Nomination and Remuneration Committee (NRC), while selecting candidates for appointment as independent directors has been elaborated and made more transparent including enhanced disclosures regarding the skills required for appointment as an independent director and how the proposed candidate fits into that skillset.

As per current regulatory norms for the appointment of IDs, the NRC proposes a person as ID, who is then appointed by the board. Subsequently, shareholders approve the appointment through an ordinary resolution.

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Experts say that the current mechanism for the appointment of independent directors may be influenced by the promoters in recommending the name of the independent director who does not fit the skill set. This may hinder the independence of independent directors and undermine their ability to differ from the promoter, especially in cases where the interests of the promoter and that of minority shareholders are not aligned.

Sebi has also mandated that 2/3 of NRC shall comprise independent directors instead of the existing requirement of the majority being independent directors. Sebi in its consultation paper had said direct there is a lack of transparency in the process followed by NRC.

Market regulator, in its board meeting, has also specified the eligibility requirement for independent directors. Sebi has introduced a cooling-off period of 3 years for key managerial personnel (and their relatives) or employees of the promoter group companies, for appointment as an independent director. Relatives of employees of the company, its holding, subsidiary or associate company have been permitted to become independent directors, without the requirement of a cooling-off period, in line with the Companies Act, 2013.

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Sebi has also moved towards tightening regulations around resignations of independent directors. Sebi has mandated companies to disclose the entire resignation letter of an ID along with a list of her/his present directorships and membership in board committees.

Also, a cooling-off period of one year has been introduced for an ID transitioning to a whole-time director in the same company/holding/subsidiary/ associate company or any company belonging to the promoter group. Importantly, Sebi has said all related party transactions shall be approved only by independent directors on the audit committee.

According to industry experts, the tightening around the resignation of independent directors was taken as in many cases it was observed independent directors often resigned for reasons such as pre-occupation, other commitments or personal reasons and then joined the boards of other companies. There was, therefore, a need to further strengthen the disclosure norms around the resignation of independent directors.

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First Published:Jun 29, 2021 8:56 PM IST