The role of independent directors has been under scrutiny for their failure to detect and prevent corporate fraud and promoter mismanagement. The Securities and Exchange Board of India (SEBI) has amended its rules pertaining to the appointment, removal, and remuneration of independent directors in order to ensure independence and effectiveness by giving more power to non-promoting shareholders in a company. These new rules are set to be applicable from 1st January, 2022.
Under the new rules, any appointments, re-appointments and removals of independent directors in a listed company will have to be done through a special resolution of the shareholders, with the votes in favor being at least three times the number of votes against, in order for the resolution to pass. Furthermore, the process of selection of independent directors is required to be transparent, with sufficient disclosure and evaluation of the skills, knowledge, and experience required for the appointment. The committee may you external agencies, if required, to identify suitable candidates for the positions. These requirements have been introduced to ensure that promoters do not remove or appoint independent directors arbitrarily. Listed entities will have to receive the approval of shareholders at the next general meeting or within three months from the date of appointment of an independent director, whichever is sooner.
SEBI has also made amendments to the eligibility criteria for one to be considered for the position of independent director. An individual who has had a pecuniary relationship with the company or its promoters outside of the remuneration received as a director in the three immediately preceding financial years will not be eligible for the position. Restrictions regarding the employment of the independent director’s relative in a listed entity (except key managerial personnel) have been made inapplicable.
When an independent director resigns, the company will now be required to disclose to the exchanges the entire resignation letter, as well as a list of the exiting director’s present directorships and memberships in board committees. An independent director transitioning into a whole-time director within the same company or its holding, subsidiaries, etc., must first complete a cooling off period of one year from the date of resignation from the original position.
Amendments have also been made to the composition of the nomination and remuneration committee to allow two thirds of its strength to be composed of independent directors, as opposed to the previous requirement of 50 percent. Additionally, two thirds of the audit committee will also have to be composed of independent directors, and all related party transactions will have to be approved only by the independent directors on the committee.
In order to give effect to the new rules, the Listing Obligations and Disclosure Requirements (LODR) Regulations have been amended. Reference has also been made to the Ministry of Corporate Affairs to allow companies greater flexibility in determining the remuneration of all directors, including profit linked commissions, sitting fees, and ESOPs, within the overarching limits prescribed in the Companies Act, 2013.