SEBI Screwed Up the norms on Independent Director

In an attempt to give non-promoting shareholders in a company more leverage, the markets regulator stated that the majority of the board of the nomination and remuneration committee (NRC) and the audit committee (AC) of a listed company must be comprised of two-thirds of independent directors. Currently, the board's bylaws require that a majority of the members of these two key committees should be independent directors.

SEBI also stated at its board meeting that the nomination of an independent director must be approved by shareholders within three months or at an AGM, whichever comes first. The appointment should be made by a special resolution that requires the approval of at least 75% of the shareholders.

SEBI further stated that if an independent director resigns from the board, the business must disclose the complete content of that director's letter of resignation to the stock exchanges. It said that all related-party transactions should be cleared only by the audit committee's independent directors.

An independent director, according to SEBI, is a person who is not a promoter or a relative of a promoter of the company, its holding, subsidiary, or associate firm, among other requirements. The individual should also be qualified to provide value to the organization.

For an independent director to become a full-time director in the same company, holding, subsidiary, associate company, or any group company, SEBI imposed a one-year cooling-off period. It further stated that if senior management personnel, their relatives, or promoter group employees wish to be independent directors, there should be a three-year cooling-off period.

According to a SEBI release, the board has agreed to consult the government's corporate affairs ministry to "give companies greater flexibility in deciding remuneration for all directors (including independent directors), which may include profit-linked commissions, sitting fees, ESOPs, and other options, within the overall prescribed limit specified under the Companies Act, 2013."

These regulatory amendments will go into effect on January 1, 2022.

SEBI has also attempted to increase transparency in the nomination of an independent director. The NRC, it added, should make increased disclosures when appointing an independent director, including the abilities required for nomination as an independent director and how the proposed applicant fits into that skillset.

Public shareholders would play a significant role in companies with low promoter stakes if the voting threshold for the election of independent directors were raised from 51 percent to 75 percent.

However, a more shareholder-friendly method would have been to adopt the requirement that independent directors be appointed by a majority of public stakeholder vote, as outlined in the discussion paper.
read more..