SEBI Proposes New Norms For Independent Director Appointment, Removal, Remuneration

The securities market regulator has proposed a slew of changes in the regulations dealing with appointment, removal and remuneration of independent directors and their role in the audit committees of a listed entity. Key among them is a dual vote on appointment of independent directors, giving public shareholders a stronger voice.

The consultation paper, published by the Securities and Exchange Board of India on its website on Mar. 1, also recommends that independent directors' resignation letters be fully disclosed to stock exchanges.

SEBI said the proposals were prompted by continuing concerns around efficacy of independent directors and the need to strengthen their independence and effectiveness in order to protect minority investors.

Here are the key proposals....

Definition Of Independent Director

The first proposal relates to the definition of an independent director. Currently there are restrictions on those who have been Key Managerial Persons in a company, or those who have had a material pecuniary relationship with a company, its subsidiaries or promoters. The cooling-off period for the each was three and two years, respectively.

In order to harmonise that, SEBI has proposed to introduce a single cooling-off period of three years. That means, a KMP or his relative, and anyone that has had a material pecuniary relationship 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 ceases to have a pecuniary or employment relation with the listed company.

Dual Approval Process For Appointment, Reappointment And Removal Of Independent Directors

Under existing company law and SEBI regulations, independent directors are nominated and appointed by the company's board subject to the subsequent approval by shareholders through an ordinary resolution (simple majority must vote in favour). In case of a re-appointment the approval must be via a special resolution (atleast 75% of those voting must be in favour). The same process of ordinary and special resolutions (second term) applies in case of removal of a director.

In the case of promoter-led companies, the shareholder vote outcome would be swayed by the majority. In order to give non-promoter or public shareholders a stronger voice, SEBI has proposed a dual approval process for appointment, re-appointment or removal of independent directors from the board of a listed entity.

• Appointment, reappointment or removal of independent director would require approval of both —shareholders and also majority of minority shareholders.
• The shareholder vote would be via ordinary or special resolution as is the existing case for appointments and reappointments.
• The majority of minority vote would be via simple majority.
• Both votes would be done through a single process and meeting.
• Any candidate failing to get dual approval can be proposed again for independent directorship via a second vote after a period of 90 days. The vote in such a case would be via a special resolution put to all shareholders.
• The same process would apply for removal of independent directors.

SEBI has also proposed more detailed disclosures by the Nomination and Remuneration Committee regarding selection of candidates for post of independent director.

And, in the case of vacancy in an independent director post, the new candidate appointed by the board must be subject to shareholder approval within 3 months.

Resignation Of Independent Director

Noting the need to strengthen disclosures around resignation of independent directors, SEBI has proposed that:

• Entire resignation letter must be disclosed to the shareholders along with a list of his membership in committees of the board.
• An independent director who resigns from a board citing pre-occupation, personal commitments etc... will be subject to a cooling period of 1 year before joining any other board.

Audit Committee

Currently, two thirds of a board's audit committee must comprise independent directors. Given the import of the decisions made by audit committees, ranging from finalisation of accounts to related party transactions, SEBI has proposed that:

• 2/3rds of the total strength of an audit committee must comprise of independent directors, while the remaining must be non-executive directors who are not related to the promoter.

SEBI has also, once again raised the issue of remuneration for independent directors. The regulator has noted that skin-in-the-game is important but profit-linked commissions may encourage short-termism. A better option may be to allow long-vesting ESOPs. Incidentally, when the new company law was legislated in 2013, ESOPs were disallowed on the same concerns of short-termism.

SEBI has now sought the views of the ministry of corporate affairs on this issue as any change would first have to be made in company law before SEBI could follow suit.

Hetal Dalal, president and chief operating officer at proxy advisory firm IiAS, said the discussion paper reflects the increasing expectations of investors from independent directors.

SEBI also recognises that companies need to attract right talent at the board level, and, hence, is now open considering stock option grants for independent directors, she added.

Stakeholders can comment on the paper till April 1.

SEBI's efforts come a year after the corporate affairs ministry mandated a test to determine eligibility of an individual to be appointed independent director and include their names in a data bank last year.