Understanding Regulation 16(1)(b)(viii) of SEBI LODR: A Googly for Independent Directors

Introduction

The Securities and Exchange Board of India (SEBI) Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, set forth comprehensive governance norms for listed companies. Regulation 16(1)(b) defines the term "Independent Director" (ID) and lays down specific criteria that a director must meet to qualify as an Independent Director. One of the most intriguing provisions in this regulation is Regulation 16(1)(b)(viii), which prevents cross-holding of independent directorships. Let’s analyze this provision in detail.

Understanding Regulation 16(1)(b)(viii)

The provision states:

"Independent Director means a Non-Executive Director, other than a nominee director of the listed entity: (viii) who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director."

This clause introduces a unique restriction, ensuring that Independent Directors remain truly independent and free from mutual or cross-holding arrangements between companies. The regulation aims to prevent directors from reciprocally appointing each other as Independent Directors, which could compromise their independence and objectivity.

Simplified Interpretation

To simplify, the regulation mandates that:

• A proposed Independent Director of a listed entity should not be a Non-Executive Director (NED) or Executive Director in another company where any of the NEDs or Executive Directors of the listed entity is serving as an Independent Director.

• This provision is designed to prevent directors from holding cross-independent directorships, which could lead to conflicts of interest.

Practical Example

Let’s analyze this provision with an example:

Scenario

There are two companies:

• X Ltd (a listed company)

• Y Ltd (another company, not necessarily listed)

Composition of X Ltd’s Board

1. A – Non-Executive Director (NED)

2. B – Proposed Independent Director

Composition of Y Ltd’s Board

1. A – Independent Director

2. B – Non-Executive Director (NED)

Analysis

B cannot be appointed as an Independent Director in X Ltd because:

• In Y Ltd, A is an Independent Director.

• In X Ltd, A is a Non-Executive Director.

• B is a Non-Executive Director in Y Ltd.

• The regulation prevents B’s appointment in X Ltd since he is a Non-Independent Director in Y Ltd, where an NED of X Ltd (A) is an Independent Director.

Thus, the provision prevents the cross-holding of directorships, ensuring greater independence and transparency.

Objective Behind the Provision

The rationale behind this clause is to:

1. Ensure True Independence: Independent Directors should not have reciprocal or indirect relationships that could affect their independent judgment.

2. Prevent Favoritism & Cross-Influence: Directors should not engage in mutual arrangements where they appoint each other as Independent Directors in different companies.

3. Enhance Corporate Governance: It strengthens the governance structure by ensuring IDs remain unbiased and do not have professional dependencies on fellow board members.

Practical Implications for Companies

• Nomination and Appointment Process: Companies should thoroughly review the existing directorships of a proposed Independent Director to ensure compliance with this provision.

• Board Composition Planning: Listed companies need to strategize their board composition to avoid inadvertent non-compliance.

• Disclosure and Compliance Checks: The Company Secretary and compliance teams must regularly check and disclose directorships to the stock exchanges and regulators.

Conclusion

Regulation 16(1)(b)(viii) of SEBI LODR is a critical safeguard ensuring that Independent Directors remain genuinely independent and free from indirect influence. By preventing cross-holding arrangements, SEBI enhances corporate governance, fostering transparency and investor confidence.

DISCLAIMER: The interpretation provided in this article is intended solely for informational purposes and does not constitute professional legal advice. Readers should seek expert consultation before making any decisions based on this analysis.

CS J SWARNALAKSHMI