With an intention of reinforcing the role of independent directors the regulator of securities market has recommended few changes in the rules dealing with selection, removal and remuneration of independent directors and their part in the audit committees of a listed company. The consultation paper, broadcasted by the SEBI on its website also suggests that independent directors’ resignation letters be fully revealed to stock exchanges. The SEBI mentioned the suggestions were provoked by enduring worries around efficiency of independent directors and the need to fortify their autonomy and effectiveness in order to safeguard minority investors. On its proposals, the regulator has invited remarks from the public until April 1, 2021.

For listed corporate entities, according to the provisions of the Companies Act, at least one-third of the board of directors who do not possess significant or financial interest in the company must be neutral or non-executive directors. They are appointed for a period of 5 years.With their impartiality, knowledge and expertise independent directors are expected to perform in the welfare of minority stakeholders. They should also act as a flyover between the minor, unvoiced shareholder and the management to contribute to healthier corporate governance.

Bird’s eye view of the proposals

The first proposal links to the definition of an independent director. Presently there are restrictions on those who have been Key Managerial Persons in an organization or those who have had a substantial financial affiliation with a company, its subsidiaries or promoters. The cooling-off term for the each was three and two years, respectively. In order to synchronize the SEBI has suggested to introduce a single cooling-off period of three years. Therefore, as per the new rule a KMP or his relative and anyone that has had a substantial financial affiliation with the company, its subsidiaries or promoters, can be appointed as an independent director in a listed entity only three years from the date when he terminates to have a financial or employment association with the listed entity.

The second proposal relates to the disclosures pertaining to resignation of independent directors. The SEBI has recommended that complete resignation letter of an independent director must be unveiled to the shareholders accompanied by a list of his membership in committees of the Board of Directors. An independent director who resigns from a board quoting pre-occupation, private obligations etc will be subject to a cooling period of one year before joining any other Board of Directors.

The third proposal relates to dual approval process for appointment, reappointment and removal of Independent Directors.As per the present law and SEBI regulations, independent directors are selected and appointed by the company’s board subject to the later consent by shareholders through an ordinary resolution, that is simple majority must vote in favour of the agenda.Re-appointment should be approved through a special resolution, that is not less than 75% of those voting must be in favour of the agenda.The similar method of ordinary and special resolutions applies in case of removal of a director. In such scenario, in the case of promoter-led entities, the shareholder vote upshot would be influenced by the majority.To provide a resilient voice to non-promoter or public shareholders, the SEBI has recommended a dual approval process for appointment, re-appointment or removal of independent directors from the board of a listed company. According to new rule, appointment, reappointment or removal of independent director would require approval of both shareholders and also majority of minority shareholders. The shareholder vote would be through ordinary or special resolution as in the case of existing system for appointments and reappointments.The majority of minority vote would be through simple majority. Both votes would be done through a single method and meeting. If any candidate fails to get twin approval he can be proposed again for independent directorship through a second vote after a period of 90 days.The vote in such a circumstance would be through a special resolution and the same method applicable for removal of independent directors. In addition, the SEBI has suggested comprehensive disclosures by the Nomination and Remuneration Committee pertaining to appointment of candidates for post of independent director. The new candidate’s appointment by the board, in the case of vacancy in an independent director post, must be subject to shareholder approval within 3 months.

The fourth proposal relates to the Audit Committee. As per current regulation, two thirds of a board’s audit committee must include independent directors.Considering the significance of the decisions made by audit committees varying from finalization of accounts to related party transactions, the SEBI has suggested that two thirds of the total strength of an audit committee must include independent directors, while the rest must be non-executive directors who are not related to the promoter.

The fifth proposal links to the issue of remuneration for independent directors. To bring independent directors’ interests in line with shareholders, the SEBI proposes the grant of long-vesting Employee Stock Options (ESOPs). The regulator has mentioned that skin-in-the-game is important but profit-linked commissions may motivate short-termism.

Watchdog need to be more watchful

Since 2014 when the amended Companies Act came into effective the SEBI has been stressing for a greater role for the independent directors. But more needs to be done. More stringent rules should be pronounced for protecting sitting independent directors because in bigger listed establishments especially in family controlled firms they are largely controlled by those intimate to the management. They are also influenced by hanging the carrot of selection and huge sitting fees. The battle between the Ratan Tata and Cyrus Mistry has showed that position of independent directors is in danger because independent directors with difference of opinion with the management were removed.Tata - Mistry corporate boardroom war has uncovered vulnerabilities of independent directors if they stand on the wrong surface of the major shareholders. Therefore, the SEBI should safeguard the voice of the minority which is extremely beneficial for corporate democracy.

Although the SEBI’s suggestion has a good goal, intense examination of the proposal discloses few realistic snags. In spite of getting extra powers, typically retail stakeholders lethargic to corporate voting practices. Institutions also show their unwillingness to vote against current directors. Too many executive directors can also confine promoters with significant stake in the shares of the company they manage. It is prejudicial to expect that independent directors should have a say in every affair of the company from a related party deals to amalgamations and acquisitions. Besides, even for admirably managed organizations supported by friendly promoters, the recommended procedure for appointment and removal of independent directors will increase the compliance load. Surprisingly, the SEBI suggestions are silent on standpoints of independent director liabilities. The amount of accountability on independent directors increasing considerably due to which many reputable professionals hesitating to walk into the circumstances where the assessment of liability is subject to many issues.Additionally, few questions on how entities are required to change to new obligations remain unanswered. They are will the provisions be effective instantly? Whether only big firms will be obliged first to change, with later dates being given for successive classes of entities? Will the present directors be permitted to complete their tenures or will they have to be subject to this test without delay?

Therefore, the capital market regulator, SEBI should address these problems immediately. It should trim the range of accountabilities of independent directors and embolden meticulous candidates who desire to be independent directors. Depending on their proficiency and aptitudes, their statutory responsibilities must be limited to scrutiny of governance violations, involvement in tactical decisions.Moreover, the compensation package should be attractive and match the widespread responsibilities of the role. This can attract the competent executives. Instead of ESOPs which sometimes hit by window-dressing tactic, by taking size and complexity of the entity into account, the watchdog can think through to advise a slab-wise remuneration structure. It also should formulate avenues to enlarge the restricted group of managers who are eager to apply for position of independent director. Thus, to make the proposals successful the SEBI needs to strive hard.

Article Compiled By-

Shivanand Pandit

Goa