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Sebi tightens norms on independent directors

Mumbai: In an attempt to give more power to non-promoting shareholders in a company, markets regulator Sebi on Tuesday said that two-thirds of the members of the nomination & remuneration committee (NRC) and the audit committee (AC) of the board of a listed company should be independent directors. Currently, rules say that a majority of the members of these two important committees of the board should be independent directors.

In its Tuesday’s board meeting, Sebi also said that an appointment of an independent director should be approved by shareholders within three months or through an AGM, whichever is earlier. The appointment should be through a special resolution, one that would need the nod of at least 75% of the shareholders.

Sebi further said that if an independent director resigns from the board, the company should disclose to the exchanges the full content of the letter of resignation of that director. It said that all related-party transactions should be cleared only by the independent directors on the audit committee.

According to Sebi, among other qualifications, an independent director is a person who is not a promoter or a relative of the promoter of the company, its holding, subsidiary or an associate company. The person should also be qualified to add some value to the company. The person, other than receiving director’s remuneration, should have no other pecuniary relationship with the company during the two immediately preceding financial years.

Sebi also introduced a cooling off period of one year for an independent director becoming a whole-time director in the same company, holding, subsidiary, associate company or any group company. It also said that if key managerial personnel, their relative, or an employee of the promoter group companies wants to be an independent director, there should be a cooling off period of three years.

A Sebi release noted that the board has agreed to make a reference to the corporate affairs ministry of the government for “giving greater flexibility to companies while deciding the remuneration for all directors (including independent directors), which may include profit-linked commissions, sitting fees, ESOPs, etc, within the overall prescribed limit specified under Companies Act, 2013”.

These changes to the rules will be effective from January 1, 2022.

Sebi has also tried to make the appointment of an independent director more transparent. It said that the NRC, while appointing an independent director, should make enhanced disclosures that should include the skills required for appointment as an independent director and specify how the proposed candidate fits into that skillset.

According to Anand Lakra, partner at corporate law firm J Sagar Associates, by increasing voting threshold for appointment of independent directors from 51% to 75%, public shareholders would play an important part in companies with low promoter stake.

However, “a more public shareholder-friendly approach would have been to introduce the requirement of seeking majority of public shareholder vote for appointment of independent directors which was articulated in the discussion paper”, Lakra said.

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