Sebi plans change in norms to trim promoters' sway on independent directors

The Securities and Exchange Board of India (Sebi) on Monday proposed to overhaul norms pertaining to the appointment, removal and remuneration of independent directors, considered to be the flag-bearers of minority shareholders.

The market regulator suggested a “dual approval” process for the appointment and removal of independent directors. At present, an independent director can be appointed or removed by way of an ordinary resolution, where all shareholders, including promoters, are allowed to cast their vote. Going ahead, majority of the minority shareholders would also need to give approval. If either of the two approvals fails, the resolution to appoint or remove the independent director would get defeated.

In such an event, the company will either have to propose a new candidate or the same person after a cooling-off period of 90 days, giving reasons. In the case of removal, a second vote of all shareholders can be called after a cooling-off period of 90 days.

According to Sebi, the current system gives undue advantage to promoters as they can have significant influence on the appointment and removal by virtue of their shareholding.

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“This may hinder the ‘independence’ of independent directors and undermine their ability to differ from the promoter, especially in cases where the interests of promoter and of minority shareholders are not aligned,” Sebi said in a discussion paper floated on Monday.

The regulator has also said an independent director shall be appointed on the board only with prior approval of the shareholders at a general meeting. Currently, companies appoint independent directors as additional directors, subject to the approval of shareholders at the next general meeting. As a result, they serve on the board without shareholder approval.

Sebi has also proposed to tighten rules with regard to the resignation of independent directors. “If an ID resigns from the board of a company stating reasons such as preoccupation, other commitments or personal reasons, there will be a mandatory cooling-off period of 1 year before the ID can join another board.”

Further, Sebi has favoured tightening the process of selection of independent directors by the nomination and remuneration committee (NRC). The NRC will be tasked with evaluating the skills, knowledge and experience for shortlisting candidates. Also, the appointment of key managerial personnel (KMP) and employees of promoter group companies as independent directors would require more checks and balances.

Sebi has also sought public feedback on the remuneration of independent directors, particularly on the debate of linking their payouts to profits. “The concern with this approach -- that profit or performance-linked commission may encourage short-termism and lead to conflicts.”

Sebi has said this concern can be addressed by permitting Esops to them with a long vesting period.

Over the years, the market regulator has strengthened the institution of independent directors. However, Sebi feels more needs to be done.

“Concerns around the efficacy of independent directors as a part of corporate governance framework continue. There is therefore a need to further strengthen the independence of IDs and enhance their effectiveness in protection of the interest of the minority shareholders, and other functions,” Sebi said.

The functions of an independent director are key, particularly in ensuring a balance between the interests of the promoters and other stakeholders.