Sebi plans change in norms to trim promoters' sway on independent directors

Topics SEBI | Indian promoters

Sebi says the current system gives undue advantage to promoters as they can have significant influence on appointment and removal by virtue of their shareholding
The Securities and Exchange Board of India (Sebi) on Monday proposed to overhaul norms pertaining to the appointment, removal and remuneration of independent directors, considered to be the flag-bearers of minority shareholders.

The market regulator suggested a “dual approval” process for the appointment and removal of independent directors. At present, an independent director can be appointed or removed by way of an ordinary resolution, where all shareholders, including promoters, are allowed to cast their vote. Going ahead, majority of the minority shareholders would also need to give approval. If either of the two approvals fails, the resolution to appoint or remove the independent director would get defeated.

In such an event, the company will either have to propose a new candidate or the same person after a cooling-off period of 90 days, giving reasons. In the case of removal, a second vote of all shareholders can be called after a cooling-off period of 90 days.

According to Sebi, the current system gives undue advantage to promoters as they can have significant influence on the appointment and removal by virtue of their shareholding.


“This may hinder the ‘independence’ of independent directors and undermine their ability to differ from the promoter, especially in cases where the interests of promoter and of minority shareholders are not aligned,” Sebi said in a discussion paper floated on Monday.

The regulator has also said an independent director shall be appointed on the board only with prior approval of the shareholders at a general meeting. Currently, companies appoint independent directors as additional directors, subject to the approval of shareholders at the next general meeting. As a result, they serve on the board without shareholder approval.

Sebi has also proposed to tighten rules with regard to the resignation of independent directors. “If an ID resigns from the board of a company stating reasons such as preoccupation, other  commitments or personal reasons, there will be a mandatory cooling-off period of 1 year before the ID can join another board.”

Further, Sebi has favoured tightening the process of selection of independent directors by the nomination and remuneration committee (NRC). The NRC will be tasked with evaluating the skills, knowledge and experience for shortlisting candidates. Also, the appointment of key managerial personnel (KMP) and employees of promoter group companies as independent directors would require more checks and balances.

Sebi has also sought public feedback on the remuneration of independent directors, particularly on the debate of linking their payouts to profits. “The concern with this approach -- that profit or performance-linked commission may encourage short-termism and lead to conflicts.”

Sebi has said this concern can be addressed by permitting Esops to them with a long vesting period.

Over the years, the market regulator has strengthened the institution of independent directors. However, Sebi feels more needs to be done.

“Concerns around the efficacy of independent directors as a part of corporate governance framework continue. There is therefore a need to further strengthen the independence of IDs and enhance their effectiveness in protection of the interest of the minority shareholders, and other functions,” Sebi said.

The functions of an independent director are key, particularly in ensuring a balance between the interests of the promoters and other stakeholders.



Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel