1. Introduction

In a step to bolster corporate governance norms, the Securities and Exchange Board of India (“SEBI”) has approved a set of amendments to the regulatory provisions governing independent directors (“IDs”) of listed companies.

Whilst the actual amendments to the SEBI (Listing Obligations and Disclosure Requirements Regulations, 2015 (“LODR Regulations”) are awaited, this note sets out the key takeaways of the changes approved by SEBI at its meeting on 29 June 2021.

2. Regulatory Changes

2.1 Approvals

• SEBI has made special resolutions of the shareholders of a listed company mandatory for the appointment or re-appointment and removal of an ID. Currently, only the re-appointment or removal of an ID (in a second term) requires a special resolution. In the consultation paper released by SEBI with the proposed changes for the regulation of IDs (“Consultation Paper”), SEBI had proposed that the appointment, re-appointment and removal should be subject to a dual approval process, i.e., approval by the shareholders and approval by the majority of minority shareholders (shareholders other than the promoter and promoter group). It appears that this proposal may not have been accepted though clarity in this regard is expected once the actual amendments to the LODR Regulations are notified.
• SEBI has clarified that shareholder approval for the appointment of an ID must be obtained within three months or at the first general meeting after the appointment on the board of directors, whichever is earlier. This seeks to minimise the duration for which an ID whose appointment is not approved by the shareholders remains on the board.

2.2 Structured selection process

• SEBI has enhanced the role of the nomination and remuneration committee (“NRC”) in the selection process of IDs. This will include a critical evaluation of the skills of a candidate as well as enhanced disclosures about the selection process. This is a step to nudge the companies to assess the competencies required by the board and evaluate those against the skills of a potential candidate to encourage optimal board composition. SEBI has modified the requirements for composition of the NRC, with a two third strength of IDs instead of the current requirement for half the NRC members to be IDs.

2.3 Eligibility

• SEBI has introduced a three-year cooling-off period before a former employee or key managerial personnel (or their relative) of a listed company or the promoter group can be appointed as an ID of the listed company. There will no such requirement for the appointment of the relatives of an employee of the listed company, its holding, subsidiary or associate company as an ID.

2.4 Resignation of independent directors

• SEBI has increased transparency in relation to resignation of directors by mandating the disclosure of the entire resignation letter of an ID as well details of other directorships held at the time of resignation. An ID who resigns from a company will have to wait for a year before joining the same company, its holding, subsidiary or associate companies or any company from the promoter group as a wholetime director.

2.5 D&O Insurance

• The top 1,000 listed companies by market capitalisation will have to obtain directors’ and officers’ insurance coverage for their IDs. Currently this is mandatory only for the top 500 companies.

2.6 Related party transactions

• The resolution of the Audit Committee required for approving related party transactions must be passed only by the ID members of the Audit Committee. The composition of the Audit Committee remains the same with two-thirds of the members required to be IDs. This allows IDs greater independence in assessing a related party transaction and is likely to bring more transparency into the process.

2.7 Remuneration

• In the Consultation Paper, SEBI had considered granting employees stock options with a long vesting period (five years) to replace the profit linked commission to ensure that IDs have interest in the long-term growth of the company. Whilst this proposal has not been implemented, SEBI will consult the Ministry of Corporate Affairs on providing greater flexibility to companies to include profit linked remuneration or stock options for IDs within the overall limits prescribed under the Companies Act, 2013. Currently, the Companies Act, 2013 has a specific prohibition on granting options to IDs.

3. Impact

• These changes follow the introduction of the eligibility test and databank for IDs last year and seek to bring greater transparency in the appointment process and are another step to strengthen the corporate governance framework for listed companies. Coupled with the increased powers being granted to IDs, these steps demonstrate SEBI’s intention to ensure true independence of IDs and consequently better corporate governance of listed companies.
• Further clarity about these changes will be provided in the amendments to the LODR Regulations, expected to be notified in the coming days. The amendments will come into effect from 1 January 2022.

Author: Rebha Dakshini – Managing Associate