The Securities and Exchange Board of India amended regulations for independent directors on June 29 to address concerns over the efficacy of such directors as a part of the corporate governance framework.
Who are independent directors?
Independent directors those who are not connected to the company in any material way or those who do not have a pecuniary relationship with the company.
The objective of appointing independent directors to a company’s board is to have members who will safeguard the interests of the promoters and other stakeholders, including minority and small shareholders, and maintain the overall framework of corporate governance.
The possibility of promoter-members steering the company towards their own interests is checked when a significant number of independent directors are appointed.
It is mandatory under the Companies Act, 2013, for all listed companies and prescribed public companies to appoint independent directors. The act also lays down a code of conduct for such directors, describing their functions, duties and professional conduct that needs to be maintained.
Here are some of the key changes in the norms for independent directors:
Explained | SEBI’s new rules for independent directors, accredited investors and more
Appointment and removal
The appointment/reappointment or removal of independent directors will now take place through a special resolution, which needs to be approved by 75 percent of the shareholders, instead of a simple 50 percent majority earlier. Such approval needs to be obtained at the next general meeting or within three months of the appointment, whichever is earlier.
Composition of nomination and remuneration committee
The power of independent directors on this committee has been increased, with SEBI mandating that at least two-thirds of its total members should be independent directors. Earlier, the minimum was 50 percent.
The nomination and remuneration committee guides and advises the board on who to appoint or remove and the amount of remuneration to be paid to key personnel, directors and senior management. The committee also formulates the criteria and qualifications in such matters.
Composition of audit committee
Similarly, the composition of the committee that reviews and monitors financial statements and disclosures, scrutinises inter-corporate loans and investments, and approves related-party transactions now requires two-thirds of the members to be independent directors instead of the previously allowed 50 percent.
Transition from independent to fulltime director
The market regulator has tightened norms related to the resignation of independent directors. It is now mandatory to disclose an independent director’s entire resignation letter. A one-year cooling-off period must be observed before an independent director who resigns can become a whole-time director on the board of a company.
SEBI had observed that independent directors would resign and join the same company as an executive director. This compromises the impartiality of an independent director who resigns knowing that he/she will be given a bigger role in the company, SEBI observed.
KMP appointments, stock options
A three-year cooling-off period has been mandated for the appointment of key managerial personnel and their relatives or employees of promoter group companies as independent directors.
In a fresh turn, SEBI agreed to make a reference to the Ministry of Corporate Affairs for an amendment in the Companies Act, 2013, to allow independent directors to receive stock options instead of profit-linked commission. Currently, independent directors cannot receive stock options.