SEBI proposes regulatory changes related to Independent Directors
On March 1, 2021, the Securities and Exchange Board of India (SEBI), released a consultation paper titled, ‘Review of Regulatory Provisions Related to Independent Directors ’. In order to harmonize cooling-off periods for eligibility, the paper proposes that a three year cooling-off period be enforced for key management personnel (KMPs), relatives of KMPs, or employees of promoter group companies before they may act as independent directors. The same three year cooling-off period is to apply to persons or their relatives who have a material pecuniary relationship with the listed entity or its holding company, subsidiary, or associate company.
To facilitate the independence of candidates, a dual voting process has been proposed. This process would entail approval of shareholders by ordinary resolution in case of appointment and special resolution in case of re-appointment. It will also involve approval by a majority of the minority shareholders (excluding promoter and promoter groups). Failure to obtain approval in either vote must result in a second vote after 90 days and within 120 days. The dual approval process will also be necessary for removal of independent directors, through ordinary resolution in case of removal in the first term and special resolution in case of removal in the second term. Failure to obtain approval in either vote must result in a second vote after 90 days and within 120 days. Independent directors may only be appointed following prior approval of the shareholders at a general meeting. In the event a casual vacancy arises, the approval of shareholders should be taken within a maximum period of three months.
The resignation letter of an independent director must be accompanied by a list of their present directorships and membership in board committees. Subsequent to resigning from the board of a company, the paper proposes a one year cooling-off period before they can join another board. A one year cooling-off period has also been prescribed for an individual’ s transition from the position of an independent director, to that of a full-time director. In relation to remuneration, recommendations will be made to the Ministry of Corporate Affairs on whether to increase the sitting fees of the independent director or to link remuneration to profit or performance. There has also been discussion on whether independent directors should be entitled to employee stock options. Recommendations have also been made to increase transparency in the functioning of the Nomination and Remuneration Committee (NRC), by proposing criteria for selection, and by increasing the threshold of the number of independent directors on the NRC to two-thirds of the total number of members.