SEBI revamps norms for Independent Directors appointment & removal

Ashish M. Shaji

01 Jun, 2024

With a view to empower independent directors of listed companies, the Securities Exchange Board of India overhauled rules related to their appointment, removal and remuneration aimed to provide more say to the shareholders. The announcement was made after a board meeting held on 29^th June 2021. In this article we shall discuss the overhauled norms for Independent Directors.

Who is an Independent Director?

An independent director refers to a non-executive director of a company who assists the company in improving the corporate credibility and governance standards.

Such director does not have any kind of relationship with the company that may affect the independence of his or her judgment. The term “Independent Director” is defined in the Companies Act, along with several new requirements pertaining to their appointment, duties, role, & responsibilities.

The provisions of the appointment of an Independent director is contained in Section 149 of the Companies Act, 2013, read along with Rule 4 and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

Regulation Norms for Independent Directors (IDs)

The regulations for the Independent Directors shall include the following:

• The appointment/re-appointment, as well as the removal of IDs, will be executed through a special resolution of shareholders for all listed companies.
• The procedure to be followed by Nomination and Remuneration Committee, while selecting candidates for the appointment as IDs, has been elaborated, and it has been made more transparent, including enhanced disclosures about the skills required for the appointment as an ID and how the proposed candidate fits into that skillset.
• The composition of Nomination & Remuneration Committee has been modified to include 2/3^rd IDs rather than existing requirement of majority of the IDs.
• Shareholder approval for appointment of all directors, including IDs, will be taken at next general meeting or within 3 months of appointment on the Board, whichever is earlier.

Eligibility Requirement: Cooling off Period

• A 3 year cooling off period has been introduced for Key Managerial Personnel (KMP) (and their relatives) or employees of promoter group companies for appointment as an ID.
• The Relatives of employees of the company, its holding, subsidiary or the associate company are allowed to become IDs, without the need of a cooling-off period, in line with the Companies Act, 2013.

Norms for Independent Directors: Resignation of Independent Directors (IDs)

SEBI has also tightened rules pertaining to the resignation of IDs. The regulation regarding the resignation of IDs is as follows:

• The entire resignation letter of an ID must be disclosed along with a list of their present directorships and membership in the board committees.
• A cooling-off period of one year is introduced for an ID transitioning to a whole-time director in the same company/ holding/ subsidiary/ in associate company or any company which belongs to the promoter group.

Norms for Independent Directors: Audit Committee and Insurance of directors and officers

• Audit Committee – Minimum 2/3^rd of the audit committee members shall be independent directors, and all related party transactions would be approved by only Independent Directors on the Audit Committee.
• Directors and Officers insurance – The need to undertake Directors and Officers insurance has been extended to top 1000 companies (by market capitalization).

Other decisions taken by SEBI

SEBI also pronounced a host of other decisions, such as permitting resident Indian fund managers to be constituents of foreign portfolio investors. It reduced the minimum investment level in listed infrastructure investment trusts and Real Estate Investment Trusts to 10,000 rupees-15,000 rupees from 50,000 rupees.

SEBI has also amended the ‘skin in the game’ norm for the Asset Management Companies (AMC) based on risk of the schemes, rather than mandatory 1 per cent of the amount raised. Further, with a view to improve information flow on insider trading cases, the market regulator has increased the reward to informants to 10 crore rupees from 1 crore rupees

The board of SEBI permitted payment and small finance banks to register as a banker to an issue. It is expected to help broaden the reach of the capital markets. The SEBI also introduced the concept of ‘accredited investors’, these are a class of investors who are well-informed and well-advised about investment products. Such investors will enjoy various benefits as those enjoyed by the institutional investors.

In order to deepen the debt market, SEBI has introduced the Non-Convertible Securities Regulations. Experts believe that it would encourage public issuances of debt securities and lower the burden on the banking system. SEBI further streamlined rules for Indian fund managers to act as foreign portfolio investors.

Conclusion

The changes have been proposed to be in place from 1^st January 2022. Moreover, the SEBI Board has also proposed some radical norms for independent directors like permitting independent directors to receive profit-linked commissions and Employee Stock Ownership Plan within the prescribed limit as provided under the Companies Act 2013.

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