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Can the new SEBI rules produce TN Seshan-like independent directors?

How independent are independent directors? SEBI’s fresh rules for the appointment of independent directors, who form the fulcrum of governance framework in any corporate setup, will be watched with keen interest.

June 30, 2021 / 03:27 PM IST

Much before the deadly coronavirus spread its wings across the globe, the concept of arm's-length distance (a la social distancing) has sort of existed in the corporate world. COVID-19 scare still persists. But the painful truth is that social distancing as a norm is observed more in breach.

What is happening in the corporate world is no different. Not surprisingly, rules have to be refreshed intermittently to enforce the distancing concept to beef up governance in the corporate world.

Governance became a central issue in the corporate world ever since the explosive Satyam Computer episode hit national headlines very many summers ago. The Companies Act of 2013 was indeed seen as the consequence of the ugly Satyam imbroglio. Since then, corporate governance issues have consistently caught the attention of the regulators and others.

Following its consultation paper published sometime in March this year, the Securities and Exchange Board of India (SEBI) has just laid out fresh rules for the appointment of independent directors (IDs), who form the fulcrum of governance framework in any corporate setup. On many occasions, the role of IDs has come under intense criticism.

How Independent are Independent Directors?

Often, doubts have been raised over their ability to practice distancing norms. How independent are independent directors? When do they cease to be independent directors? Who picks them for board appointments? How independent are these selectors? Who decides their compensation? Who can be independent directors?

There are rules, no doubt. But do they help to create a water-tight independent director? In reality, the answer is a firm no. How else can we justify an independent director transiting into a whole-time director to eventually become a managing director in a company?

Examples are dime a dozen in the Indian corporate world. At board-level, everybody is perceived to be free, fearless and independent. And, everybody is supposed to work for the larger interest of the organisation sans bias of any kind. Ironically, the system requires rules to classify and certify an independent director!

A reading of the latest SEBI rules suggests that the regulator is keen to put in place a stronger institutional mechanism that will screen and select an independent director in a transparent manner and in accordance with a pre-defined prescription. Such an arrangement is obviously intended to keep promoters away from influencing the choice of an independent director.

SEBI has made it mandatory for the nomination and remuneration committee to be filled with 2/3rd independent directors. As of now, the committee comprises majority independent directors.

After all, it is this committee that selects an independent director. Also, 2/3rd of the audit committee must comprise independent directors. All related party transactions will hereafter have to be approved only by independent directors on the audit committee.

A page from UK rulebook

It is widely known that promoters wield considerable influence when it comes to the appointment of independent directors and auditors. Recognising this, the SEBI consultation paper had earlier suggested that independent directors be appointed only in general meetings and only with a majority of non-promoter shareholders approving the same.

The paper took the cue from the model followed in the UK. The consultation paper did throw a hint or two at institutional market players such as mutual funds, Life Insurance Corporation of India, foreign portfolio investors and the like.

Yet, the regulator has stopped short of giving these non-promoter shareholders a veto power as suggested by the consultation paper. Maybe, SEBI is suggesting that these non-promoter shareholders have obligations that extend well beyond making money for their stakeholders and investors.

Well, will rules produce TN Seshan-like IDs? That will be interesting to watch out for.

KT Jagannathan is a senior journalist based in Chennai
first published: Jun 30, 2021 03:27 pm