Stricter norms for independent directors will boost corporate governance in listed companies

SEBI Board has also agreed to make a reference to the Ministry of Corporate Affairs (MCA) for amendment in the Companies Act, 2013 which may allow independent directors to receive stock options instead of profit linked commission. [Representative Image]

The SEBI board on June 29 approved amendments to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, pertaining to provisions related to independent directors.

SEBI said there should be a three-year cooling-off period for key management personnel and their relatives or the employees of promoter group companies to be appointed as independent directors, a measure that may not go down well with companies. The regulator also assigned more independent directors to the remuneration and audit committees.

“The amendments concerning the appointment process and cooling-off period prescribed should certainly help in bringing additional transparency,” Moin Ladha, a partner at Khaitan & Co., told Moneycontrol. “In addition to this, greater flexibility for deciding remuneration should enable companies to appoint the most suitable individuals with the most appropriate experience and skillset.”

However, SEBI has not implemented the dual approval process for removing independent directors, which companies are resisting.

The appointment/reappointment and removal of independent directors will be through a special resolution that must be passed by 75 percent of the shareholders in listed companies.

The process for selecting candidates for appointment as independent directors on the nomination and remuneration committee has been elaborated and made more transparent. They include enhanced disclosures on the skills required for the position and how the proposed candidate fits that skillset.

“The amendments to the regulatory framework pertaining to independent directors provide for a transparent and an objective approach, coupled with a streamlined process for the appointment, eligibility and resignation of independent directors. The specificity in relation to eligibility requirements, cooling-off period for appointment as an independent director, as well as for transition from an independent director to a wholetime director are welcome changes which will help assuage the apprehensions that were in play on account of the uncertainty that emanated from the lack of identified parameters,” said Gaurav Mistry, associate partner at DSK Legal.

The composition of the nomination and remuneration committee has been modified and two-thirds of the members of such panels will now be independent directors. Shareholder approval for the appointment of all directors, including independent ones, must be taken at the next general meeting or within three months of the appointment, whichever is earlier.

“This would enable these directors to function fearlessly towards protection of shareholders’ interests, thereby strengthening corporate governance in these listed companies,” said Prashaant Vikram Rajput, a partner at White & Brief, a law firm in Mumbai. “These listed companies and their policies and governance standards serve as market precedents and guidelines for other listed companies and therefore we will see a trickledown effect of better governance and shareholder protection on these companies as well.”