SEBI receives confronting views from institutional investors, corporates on proposals about independent directors

Mutual funds and corporate houses are having opposing views on the discussion paper on reviewing the provisions for the appointment of independent directors. The paper was issued by the Securities and Exchange Board of India (SEBI) on March 1 for public comments . It suggests more strength to minority shareholders and increased responsibility for independent directors.

Institutional investors like MFs favour a strong regime for independence directors in listed entities. However, corporates say that companies are already finding it difficult to get independent directors on board, and, if they are mandated with greater responsibility, it will be hard to maintain the statutory number of independent directors on board.

A company board requires 50 percent independent directors if the chairman is executive. If the chairman is non executive and independent, 1/3rd directors can be independent directors.

According to a report by IiAS, a proxy advisory firm, “Till December 2020, around 14 percent or 70 companies from Nifty 500 were non-compliant with board composition norms. Out of these, 55 were PSUs. Board independence has long been a problem for PSUs. The PSUs in NIFTY 500 companies need to appoint around 141 independent directors, according to listing guidelines”.

A source from the industry told Moneycontrol: “Corporates have major issues on the proposed dual voting structure for the appointment or re-appointment and removal of independent directors. As per the discussion paper, for the appointment or removal of an independent director, a majority approval from minority shareholders is required. If they reject the proposal, companies can come up with a special resolution. Corporates also have reservations about disclosing the process of selecting independent directors on board through nominations.”

Richa Choudhary, Partner, Trilegal, feels “the concerns of companies are valid since it puts additional stress on appointments. While it is important for listed companies to keep a finger on the pulse of shareholder opinion and views, relying on minority shareholders could be a risk as they may not be experienced enough to make decisions regarding the composition of a company board.”

The additional requirement proposed by SEBI will entail increased participation from public shareholders, she said.

“However, with the right guidance, shareholders will be able to make decisions. Hiring proxy advisors and corporate governance firms to advise the shareholders, similar to what is being done in certain developed foreign jurisdictions, could ensure a heightened scrutiny for corporate governance. However, effective regulations for proxy advisors should be in place. External agencies for identifying independent directors could also ease the company’s stress,” Choudhary said.

In recent times, there have been several instances where independent directors have not acted independently. In the Jaypee case in 2017, the Supreme Court restrained independent directors of Jaiprakash Associates, including even family members from transferring any personal assets or property without the court’s permission to protect the interest of thousands of flat owners who have invested in the firm’s incomplete residential projects.

On the other hand, regulatory action on independent directors of Jaiprakash Associates or fugitive diamond businessman Nirav Modi’s company, Firestar Diamond International, make professionals reluctant to come on board as an independent directors.

A recent report by the Uday Kotak committee had also advocated strengthening the regulation for independent directors in listed companies.

Anil Choudhary, Partner, FinSec Law Advisor, told Moneycontrol: “The proposal to give more teeth to independent directors is a step in the right direction for improving governance standards in listed companies. However, since some provisions may be onerous and may require some more time for compliance, the proposals can be first introduced in the top 100 or 200 companies by market cap and gradually implement them”.

“I believe there is no scarcity of talent pool in India for professional independent directors. However, due to the onerous liabilities imposed on them, it is becoming more and more difficult for managements to get rubber-stamp IDs. If companies look out for professional IDs and give them the freedom to have independent views, it will do wonders not only to the governance standards but also to the overall performance of the companies,” he said.

Kartik Ganapathy, Founding Partner, IndusLaw, feels that a strong regime of independent director is helpful in strengthening corporate governance: “The remaining avenue would be to see if there is a way to hold the management (being the C Suite) accountable for the actions of the company. While this is likely to be a move fraught with objections from all quarters, it may be the way for regulators to make sure a company is steered properly. Decisions that the management may make, which suffer from long-term myopia and short-term focus on stock price or results, could be at odds with a long-term perspective that the regulators want from companies.”

A source told Moneycontrol: “SEBI may discuss the proposal at the primary market advisory committee (PMAC) meeting, in which corporates are also represented. After taking the PMAC’s views, SEBI may present this in the board meeting”.