Changes in Provisions Relating to Independent Directors

INTRODUCTION:

Independent Directors play crucial roles in the governance of their companies. They bring invaluable, independent, and objective judgements, views, and opinions to the Board of Directors, (in short, the Board), raise important questions on the functioning of the company and seek appropriate answers. They are presumed to keep the management vigilant and make them follow the best governance practices in the best interest of the company and in the public interest.

For these reasons and more, the provisions of independent directors in the Companies Act 2013 and the SEBI laws have been constantly in the limelight. Changes have ushered in from time to time by the authorities to make them more effective and based on the experience of implementation of these laws during these years.

Very recently, SEBI at its Board meeting dated 29th June 2021 has taken crucial decisions on this subject and come out with a PR NO. 22/2021 as follows against each of which certain comments have been given herein.

Review of Regulatory provisions related to Independent Directors.

The Board approved amendments to Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) pertaining to regulatory provisions related to Independent Directors (IDs), which include the following:

1. Appointment/Reappointment and Removal of IDs

SEBI DECISION: Appointment/Reappointment and Removal of IDs shall be through a special resolution of shareholders for all listed entities.

COMMENTS:

Keeping in view section 152{2} of the Companies Act 2013, appointment of IDs require ordinary resolution of the shareholders in general meeting, however, as per section 149{10}, the reappointment of IDs for the second term will require a special resolution. Similarly for removal, an ordinary resolution of shareholders u/s 169 {1} is needed except that as per its proviso, IDs reappointed for the second term shall be removed only by passing a special resolution. These provisions for listed companies are amended, bringing in uniformity as well as the weight of three fourth majority decision of the shareholders to the appointment/removal of IDs, in all cases.

SEBI DECISION: The process to be followed by Nomination and Remuneration Committee (NRC), while selecting candidates for appointment as IDs, has been elaborated and made more transparent including enhanced disclosures, regarding the skills required for appointment as an ID and how the proposed candidate fits into that skillset.

COMMENTS:

This process by NRC is laudable since IDs play such an important role in the governance of companies that their skills, experience, background and suitability while appointment, need adequate public transparency. This may perhaps deter companies, which may be few and far between, to appoint unsuitable candidates as IDs thus jeopardising their corporate governance.

SEBI DECISION: The composition of NRC has been modified to include 2/3 IDs instead of existing requirement of majority of IDs.

COMMENTS:

Section 178{1} says that Nomination & Remuneration Committee shall consist of three or more non-executive directors out of which not less than one half shall be independent directors. This change of NRC composition gives more weight to the deliberations and the decisions of the IDs in the meetings of NRC, and a good direction towards the corporate governance can be achieved.

SEBI DECISION: Shareholder approval for appointment of all directors including IDs shall be taken at the next general meeting, or within three months of the appointment on the Board, whichever is earlier.

COMMENTS:

This should be welcomed as shareholders’ approval timeline has been significantly shortened to ensure that a director, including an ID, does not remain in the Board after the Board appointment, for a long period of months without shareholders’ approval. Perhaps this could do away with a hypothetical lacuna that an undesirable director gets appointed by a Board, remains as a director for a considerable number of months, participates in all significant decisions and then resigns before the next AGM/GM without the scrutiny of the shareholders for his appointment.

2. Eligibility requirement

SEBI DECISION: A cooling off period of three years has been introduced for Key Managerial Personnel (and their relatives) or employees of the promoter group companies, for appointment as an ID.

Relatives of employees of the company, its holding, subsidiary or associate company have been permitted to become IDs, without the requirement of a cooling off period, in line with Companies Act, 2013.

COMMENTS:

This a relaxation in line with corporate governance which can bring in talent as IDs in the Board. Relatives of non-restricted employees of companies, its holding /subsidiary/associate companies can become IDs without any cooling off period.

3. Resignation of IDs

SEBI DECISION: The entire resignation letter of an ID shall be disclosed along with a list of her/his present directorships and membership in board committees.

COMMENTS:

Many times, an ID resigns due to significant negative reasons which have made him discontinue his association with his company. It will be in the fitness of corporate governance practises that these reasons are disclosed so that necessary corrective steps are initiated, wherever called for.

SEBI DECISION: A cooling off period of one year has been introduced for an ID transitioning to a whole-time director in the same company/ holding/ subsidiary/ associate company or any company belonging to the promoter group.

COMMENTS:

There is a considerable difference between an Independent Director defined u/s 2 {47} referred u/s 149 {5} who functions basically through the Board process with his duties and accountabilities, and a whole-time director defined u/s 2 {94} who includes a director in the whole-time employment of a company bound by his obligations. In fact, as WTD, he becomes a key managerial personnel defined u/s 2{51}. In view of this, it is but legally and practically tenable that a cooling-off period has been prescribed for the transition.

4. Audit Committee

SEBI DECISION: At least 2/3 rd of the members of the audit committee shall be independent directors and all related party transactions shall be approved by only Independent Directors on the Audit Committee.

COMMENTS:

In terms of section 177 {2}, the Audit Committee shall consist of a minimum of three directors with independent directors forming a majority. This is amended in line with Nomination & Remuneration Committee’s new provisions. As regards, related party transactions as regulated u/s 188, and related parties as defined u/s 2 {76}, it is but logical that the same need to be approved by IDs on the Audit Committee to bring impartiality, fairness and ultimately corporate governance.

5. Directors and Officers insurance

SEBI DECISION: The requirement of undertaking Directors and Officers insurance has been extended to the top 1000 companies (by market capitalization).

COMMENTS:

This a welcome step as in today’s complex legal scenario, directors and officers are constantly at the risk of facing litigations and need the protection of insurance for contesting these.

6. Others

SEBI DECISION: These amendments shall be made applicable with effect from Jan 01, 2022.

The Board also agreed to make a reference to the Ministry of Corporate Affairs (MCA), for giving greater flexibility to companies while deciding the remuneration for all directors (including IDs), which may include profit linked commissions, sitting fees, ESOPs etc., within the overall prescribed limit specified under Companies Act, 2013.

COMMENTS:

These changes have a prospective effect. Moreover, the authorities including MCA definitely need to give more flexibility to companies to fix the remuneration of all types of directors so as to attract and retain the best talent in the corporate sector.

CONCLUSION:

Overall, the changes are progressive as well as in line with the enhancement of corporate governance. Hopefully, in the periods to come, further changes will usher in so as to make corporates more accountable and self-disciplining for the greater public good.