SEBI’s new rules for Independent directors


Source: Indian Express

 Synopsis: The new rules for independent directors aim to ensure checks and balances.

Background:
  • The recent controversy over the issuance of preference shares by PNB Housing Finance has raised concerns over the role of independent directors in India.
  • Such concerns over the independence of independent directors are not new.
  • Questions have repeatedly been raised over the appointment and selection process of independent directors, their compensation, and to what extent they are “distanced” from the promoters.
  • Matters of propriety and conflict of interest have also been raised over the manner in which regulators, are appointed to boards of private companies they used to oversee.
Issues related to independent directors?
  • Firstly, an investigation by Indian express has revealed that in the last 11 years, at least six heads of top regulatory bodies and two senior associates took directorships with private firms that fell within their regulatory domain.
  • Secondly, even the cooling-off period is ignored in some cases.
    • But it’s not just the private sector.
    • Of the 172 independent directors in 98 public sector entities, at least 86, serving on 67 PSU boards, are linked to the ruling party.
  • Thirdly, two years ago, the Indian Institute of Corporate Affairs noted that “the selection of independent directors for PSUs has not remained independent.

To address some of these concerns, the Securities and Exchange Board of India (SEBI) introduced new rules.

New rules issued by SEBI:
  • It seeks a more robust framework for independent directors.
  • As per the new rules, which will come into effect from January 1, 2022, the appointment or removal of independent directors has to be carried out through a special resolution of shareholders.
    • The earlier ordinary resolution was required with a simple majority.
  • However, a higher threshold for the appointment and removal of independent directors is a deviation from the discussion paper released by SEBI earlier this year on this issue.
    • It had suggested that the appointment/removal be subject to a dual approval process.
    • Greater say will be given to the non-promoter shareholders.
  • The new rules also seek to populate important committees with independent directors.
    • Two-thirds of the members of the nomination and remuneration committee have to be independent directors.
  • All related party transactions have to be approved by independent directors on the audit committee.

Independent directors play a critical role in corporate governance. That is why ensuring their independence will protect their ability to differ from the promoter, and look out for the interests of the non-promoter and minority shareholders.

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