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Sebi plans change in rules for appointment of independent directors

The regulator plans to introduce the dual-approval system for the appointment and removal of independent directors

twitter-logoPTI | March 1, 2021 | Updated 23:30 IST
The regulator plans to introduce the dual-approval system for the appointment and removal of independent directors
The Securities and Exchange Board of India

The Securities and Exchange Board of India has proposed sweeping changes to rules governing independent directors, including norms that pertain to their appointment and removal, eligibility criteria and remuneration structure.

The regulator plans to introduce the dual-approval system for the appointment and removal of independent directors. This requires the majority of all shareholders as well as the majority of minority shareholders, other than the promoter and promoter group, to approve the appointment and removal of such directors.

The dual-voting structure has been adopted in countries such as the UK for premium listed companies which have a controlling shareholder.

"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," Sebi said in a discussion paper on Monday, seeking public comments on the proposals by April 1.

On the eligibility criteria for IDs, Sebi proposed that key managerial personnel and employees of promoter group companies cannot be appointed as IDs in a company unless there is a cooling-off period of three years. This restriction will also apply in case of relatives of such managerial personnel.

"The overarching thrust is to find the true definition of independence. Distance from promoters, distance of self and family from the entire ecosystem of the entity, any hint of pecuniary benefits that may influence the future are all welcome elements of independence," said Shailesh Haribhakti, non-executive chairman of companies including L&T Finance Holdings, Blue Star and NSDL e-Governance Infrastructure.

Sebi suggested changes in the remuneration structure for IDs by allowing long-term stock options to be awarded to them. At present, IDs are paid sitting fees of a maximum of Rs 1 lakh and profit-linked commission within an overall limit. However, IDs cannot be given stock options.

The regulator has proposed employee stock option plans for IDs with a five-year vesting period in place of profit-linked commission.

"Remuneration in the form of board-set limits to sitting fees and share-based compensation with the right safeguards of long-term holding are very welcome. Trust and involvement in depth will strengthen the institution of IDs," Haribhakti said.

According to the regulator's proposals, in case an independent director steps down, the full text of the resignation letter should be disclosed to the stock exchanges.

IDs resigning citing pre-occupations, other commitments or personal reasons must wait for one year before joining the board of another company. There will also be a one-year cooling-off period before an ID can become a whole-time director.

"IDs often resign for reasons such as pre-occupation, other commitments or personal reasons and then join the boards of other companies, cases have also been observed where IDs have resigned and then joined the same company as an executive director, such instances where an ID knows that he/she may move to a larger role in the company in the near future may practically lead to a compromise in independence," Sebi said.

The regulator suggested that nomination and remuneration committees can use the services of external agencies to shortlist candidates as IDs. Companies must also disclose the channels used to look for candidates. If one of the channels is "recommendation from a person," the category of such a person - whether promoter, institutional shareholder or director - should be disclosed.

"It reflects the increased expectations from independent directors by investors and regulators - be it with regard to their skills at the time of appointment or their role and responsibilities as a part of the audit committee. This is balanced by the fact that Sebi now recognises that companies need to spend more to attract the right person to their board, so they are open to IDs getting ESOPs," said Amit Tandon, MD of Institutional Investor Advisory Services.

Also Read:SEBI imposes Rs 80 lakh fine on 5 firms for fraudulent trading activities

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