Analysis of Consultative Paper on “Review of Regulatory provisions related to Independent Directors”

SEBI vide its recently issued consultative paper dated 01.03.2021 on ‘Review of Regulatory provisions related to Independent Directors‘, proposed to make stringent regulatory changes in the provisions of the Listing Obligation and Disclosure Requirements Regulations (LODR/ Listing Regulations) relating to:

1. Eligibility criteria for determination of independence of Directors,

2. Prior approval of Shareholders for appointment of IDs

3. Process of appointment / re-appointment/ Removal of IDs,

4. Enhancing transparency in the nomination of IDs,

5. Resignation of IDs

6. Strengthening the composition of Board Committees, etc.

7. Review of remuneration of IDs.

The Consultation paper is open for public comments till April 01, 2021. The highlights of the said consultative paper are given as under:

S.No. Particulars Existing Provision Proposal Remarks
1. Eligibility Criteria for
determination of independence of Directors
Regulation 16 of SEBI LODR Regulations set out certain for determination of independence of a director. Few of such criteria’s are

a) persons who have been employees/ KMPs or his/her relatives have been KMPs of the listed

entity / its holding company / subsidiary /
associate company in the past 3 years, cannot be appointed as IDs.

b) Cooling-off period of 2 years in case of a material pecuniary relationship between person or his / her relative and the listed entity / its holding company / subsidiary / associate company

It is proposed that KMPs or employees of promoter group companies, cannot be appointed as IDs in the company, unless there has been a cooling-off period of 3 years. The said restriction shall also extend to relatives of such KMPs for the same period.

The prescribed cooling-off period for material pecuniary relationship as mentioned in point (b) shall be harmonized to 3 years.

In order to establish the independence of the person it is important that KMPs or employees of companies
forming part of the promoter group and relatives of such KMPs should also be excluded from acting as independent
directors.Cooling-off period for eligibility of IDs will be harmonized to 3 years.
2

 

Prior approval of Shareholders for appointment of IDs Presently, companies appoint independent

directors as additional directors, subject to
approval of the shareholders at the next general meeting.

In the case of vacancy of an Independent Director due to resignation or removal, existing provisions provide a time-period of up to 3 months to appoint another director. However, the approval of
shareholders would be taken at the next AGM.

Independent Directors shall be appointed on the board only with prior approval of the shareholders at a general meeting.

In case, a casual vacancy arises due to resignation / removal / death / failure to get re-appointed etc., the approval of shareholders should be taken within a time period of 3 months.

Reduction/ elimination of this gap may give more say to shareholders in the appointment process.

 

3

 

Process of appointment / re- appointment/ Removal of
IDs
As per the extant regulatory norms for appointment of IDs, the Nomination and Remuneration Committee (“NRC”) proposes a person as ID, who is then appointed by the Board.

Subsequently, shareholders approve the appointment through an ordinary resolution
(special resolution in case of re-appointment).

 

Appointment/ re-appointment and removal of IDs shall be subject to “dual approval”, taken through a

single voting process and meeting following two thresholds: –

i. Approval of shareholders

ii. Approval by ‘majority of the minority’ (simple majority) shareholders.

‘Minority shareholders’ would mean shareholders, other than the promoter and promoter group.

If either of the approval thresholds are not met, the person would have failed to get appointed / re- appointed or removed as ID. Further, in such case, the listed entity may either:

i. Propose through a second vote of all shareholders (without a separate requirement of approval by ‘majority of the minority’), after a cooling-off period of 90 days but within a period of 120 days. Such approval for appointment/re-appointment shall be through special resolution and the notice to
shareholders will include reasons for proposing the same person despite not getting approval of the shareholders in the first vote.

ii. Propose a new candidate for appointment / re­appointment.

SEBI is of the view that the present system of appointment of IDs may be influenced by the promoters – in recommending

the name of ID and in the
approval process by virtue of shareholding. This may hinder the “independence” of IDs and undermine their ability to differ from the promoter, especially in cases where the interests of promoter and of minority
shareholders are not aligned.

Additionally, considering that the primary duty of Independent Directors is to protect the interest of minority
shareholders, there is a need for minority shareholders to have greater say in the appointment /re-appointment/ removal
process of IDs.

 

4 Enhancing transparency in the
nomination
LODR Regulations prescribe the following role of the nomination and remuneration committee
(NRC) in the matter of appointment of IDs:a. Formulation of the criteria for determining qualifications, positive attributes and independence of a directorb. Identifying persons who are qualified to become directors in accordance with the criteria laid down, and recommend to the board of directors for their appointment and removalc. Whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors
The following procedure shall be followed by NRC for selection of candidates for the role of ID –

a. Process for shortlisting of the candidate

i. For each appointment, the NRC shall evaluate the balance of skills, knowledge and experience on the board. In the light of this evaluation, a description shall be prepared of the role and capabilities required for a particular appointment.

ii. The person who is recommended to the Board for appointment as ID should have the capabilities identified in this description

b. Disclosures to be made to shareholders

The notice for appointment of director shall include the following disclosures:

i. Skills and capabilities required for the appointment of the ID and how the proposed individual meets the requirement of the role.

ii. Channels used for searching appropriate candidates. In case, one of the channels is
‘recommendation from a person’, the category of such person (viz. promoters, institutional
shareholders, directors (non-executive, executive, ID) etc) shall be disclosed.

In order to strengthen disclosures regarding the
process followed by NRC for selection of candidates for the post of ID, this change is proposed by SEBI.
5 Resignation of IDs As per current provisions of LODR, the resigning ID within 7 days of his resignation, has to disclose to stock exchanges, detailed reasons for the resignation along-with a confirmation that there is no other material reason for resignation other than those already provided. The entire resignation letter of an ID shallbe disclosed to the Stock Exchange along with a list of his/her present directorships and membership in board committees.

The Paper provides for a cooling off period of 1 year in two cases:

  •  Where the ID resigns on account of discretionary reasons of pre-occupation,
    other commitments or personal reasons – Mandatory cooling period of 1 year before joining another Board as an ID;
  • Similar cooling period of 1 year in case of transition from ID to WTD in the same company.
In order to further strengthen the disclosures around resignation of Independent Directors, this change is proposed by SEBI.
6 Strengthening the composition of Board
Committees, etc
The LODR Regulations cast specific responsibilities on the Audit Committee (two- thirds of its members are independent directors), to review financial statements, scrutinize inter- corporate loans & investments and valuation of undertakings and assets of the listed entity, wherever applicable. Composition of NRC may be modified to include 2/3rd IDs instead of majority of IDs.

It is proposed that audit committee shall comprise of 2/3rd IDs and 1/3rd Non-Executive Directors (NEDs) who are not related to the promoter, including nominee directors, if any.

Considering the importance of the Audit Committee with regard to related party transactions and financial matters, Such change is proposed by SEBI.
7 Review of remuneration of IDs As per the Companies Act, apart from reimbursement of expenses, IDs are permitted to be paid sitting fees (max 1 lakh) and profit linked commission within an overall limit.Further, in terms of both Companies Act and LODR Regulations, IDs cannot be given stock options. Following views are sought by SEBI with respect to the existing remuneration structure of IDs:

a. Whether ESOPs with a long vesting period of 5 years, be permitted for IDs, in place of profit linked commission and

b. What should be the maximum limit of remuneration through ESOPs.

SEBI sought the views on modification of exiting remuneration structure of IDs.

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Company: JK group
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I am Company Secretary having extensive knowledge of Companies Act and SEBI Regulation. Apart from indian Companies have exposure or knowledge of UK, USA, HK and Singapore Law as well. Keen learner. View Full Profile

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