SEBI

SEBI Review on Independent Directors

The article talks about the background of the concept of independent directors and the SEBI review on the independent director’s regulatory provisions.

Concept of Independent Directors

• Independent directors are an important part in the overall structure of Corporate Governance. This concept came into existence to ascertain a number of directors to act independently and to bring about a health balance between the interests of the promoters & the other stakeholders including minority & small shareholders.
• The concept of independent directors was introduced by SEBI on the recommendations of the Committee on Corporate Governance in the year 2017. After this, the MCA also introduced the provision related to independent directors in the Companies Act, 2013^[1] and also laid down related rules.
• Independent directors are required to act in a certain manner in the interest of the company. They are required to pay specific attention to the financial information & on related party transactions and also safeguarding the interests of the minority shareholders.
• The independent directors are supposed to act independently and in the interest of the company.
• In spite of various provisions & measures taken, the concerns of the efficiency of the independent directors as a part of corporate governance.

As a result of the lack in transparency in the regulations, SEBI presented the paper to review the provisions of Independent directors.

Need of SEBI review of Independent Directors

SEBI is the market regulator and it has proposed changes by presenting the consultation paper to review the current situation of independent directors. The paper was published on SEBI’s website on 1^st march and it talks about change in the regulations dealing with appointment, removal & renumeration of independent director & their role in the audit committee.

The paper recommends that the resignation letters of independent directors must be fully disclosed to the stock exchanges.

SEBI in its paper talks about giving the shareholders a strong voice and the need to strengthen the independence & effectiveness of the independent directors to protect minority shareholders.

Key proposals in the consultation paper

The SEBI presented a consultation paper to review the regulatory provisions of independent directors.

The paper contained these key proposals:

• Definition of Independent directors

Presently, there are several limitations on the KMP (Key Managerial Persons) in a company or for the persons who had a material pecuniary relationship with the company, its subsidiaries or promoters; the cooling off period for each was 2 or 3 years respectively.

In order to balance the interests of the company, SEBI proposed to introduce a single cooling off period must be of 3 years. In simpler terms, it means, any KMP or a relative who had a pecuniary relationship with the company, its subsidiaries or promoters, can be appointed as independent director in a listed entity after 3 years of cooling period.

• Appointment & re-appointment and removal of Independent Director

SEBI in its paper proposes dual approval to be taken for appointment or re-appointment or removal of independent director, through a single voting process & the meeting following 2 thresholds:

• Shareholder’s approval;
• Approval by ‘majority of the minority’ shareholders.

SEBI also proposed detailed disclosures by the Nomination & Renumeration Committee (NRC) about selection of candidates for the post of independent director.

When the office of independent director is vacant, a new candidate can be appointed by obtaining shareholder’s approval.

• Resignation of Independent Directors

SEBI in the paper proposed that there is a need to strengthen the disclosure of resignation of directors.

 It states that:

• Whenever an independent director resigns, citing pre-occupation or personal commitments, etc, will have to go for a cooling period of at least 1 year before joining any other board.
• The resignation letter must be disclosed to the shareholders with a list of his membership in the board committees.

• Composition of Audit Committee

Presently, 2/3^rd of the Board’s Audit Committee comprises of independent directors.

The SEBI has reviewed and proposed that:

• 2/3^rd of the total strength of audit committee should comprise of independent directors, whereas others must be non-executive directors, not related to the promoter.

SEBI proposed this because the audit committee holds the finalizing of accounts to the related party, thus, it needs people who can act independently and in the interest of the company.  

Conclusion

The SEBI presented with the consultation paper with an objective of inviting comments from the public in respect of the Independent Directors. In the paper there are various key changes proposed to have transparency and better functioning, by giving the shareholders a stronger voice.

Thus, the public can comment till 1st April 2021, on the paper that deals with the independent director, their eligibility to be appointed and the process.

Read our article:Securities & Exchange Board of India: SEBI Intermediaries Amendment Regulations, 2021