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SEBI’s New Norms for Independent Directors and their Implications

Nevin Clinton,

Who are independent directors?
    Independent directors are directors of a company who neither have a material relationship with the company nor are they a part of the executive team. They are not involved in the day-to-day activities of a company as well. However, they play an important role in corporate governance. This is because they offer advice from the perspective of a third party since they themselves don’t have a material relationship with the company. Further, their opinions and activities will be completely free of bias more often than not due to their non-involvement with the personnel who are involved in the day-to-day activities of the company.

SEBI’s norms on appointment of independent directors and composition of committees
    The Securities Exchange Board of India (SEBI) which regulates the securities and commodity market in India approved amendments relating to new norms and regulations on independent directors of companies on 29 June, 2021. These norms were brought in after a board meeting in early June and they will come into effect from January, 2022. 

    The first and most important change in norms regarding independent directors is that two-thirds of the members of two committees in every listed company – the Nomination and Remuneration Committee (NRC) and the Audit Committee (AC) must be independent directors. The rules before the new norms were brought in stated that a majority in these two committees must be independent directors. So from a majority of 51% being the requirement, SEBI has increased it to 67%.

    There were also changes brought in to the appointment of an independent director. The said appointment must now be approved within three months by shareholders or through an Annual General Meeting (AGM) depending on whichever comes first. At least 75% of the shareholders must approve the appointment. Further, for appointment, there must be disclosure of the skills of candidates along with why he/she is the right person (or not the right person) for the job by the shareholders. Details on the process used for searching and shortlisting candidates must also be revealed. 

     With regard to the resignation of an independent director, the company must make available the contents of the letter of resignation which was submitted. Any transaction that is pending related to the director must be taken up by the fellow independent directors in the Audit Committee.

Meaning of ‘independent director’ clarified
    The meaning of ‘independent director’ is given in the Companies Act, 2013 wherein Section 149(6) provides for various characteristics of an independent director. Now, in the new norms, SEBI has clarified the definition and stated that an independent director is one who adds some value to the company and is not a promoter or relative of a promoter of the company. Further, there should have been no relationship with the company for the director regarding finances in the preceding two financial years. 

    SEBI has also brought in a cooling off period of one year for independent directors becoming full-time directors in the same company or its associates. Further, this cooling off period has been set at three years if managerial personnel or their relatives are to become an independent director.

    Finally, SEBI has also announced through a release that there would be ‘greater flexibility to companies while deciding the remuneration for independent directors which may include profit-linked commissions, sitting fees, ESOPs, etc, within the overall prescribed limit specified under Companies Act, 2013’. A reference to the Ministry of Corporate Affairs has been made in this regard and it is expected that the same will be approved soon.

    The new norms proposed by SEBI seem sound on paper and if the same are implemented well, this could be a positive change. Independent directors are an integral part of any company as they play a crucial advisory role. By streamlining their appointment and making the process stricter, SEBI has ensured that independent directors will well and truly stay ‘independent’. By also providing for more transparency in the appointment process and the requirement to make information available for scrutiny, a sense of heightened confidence is bound to be directed at the appointed independent directors. By extending similar requirements in case of resignations, there is once again more transparency, confidence and lesser room for unfairness. 

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