Sebi tightens norms for independent directors

In efforts to bolster corporate governance among listed companies, Sebi on Tuesday approved various amendments to rules governing the appointment, re-appointment and removal of independent directors, including the requirement to disclose resignation letters of such individuals.

There will be a one-year cooling period for an independent director transitioning to a whole-time director in the same company/ holding/ subsidiary/ associate company or any company belonging to the promoter group.

As part of the review of regulatory provisions related to independent directors, the Sebi board has cleared amendments to Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Appointment, re-appointment and removal of independent directors should be done only through a special resolution passed by shareholders.

This will be applicable to all listed entities.

Further, the process to be followed by the Nomination and Remuneration Committee (NRC) while selecting candidates for appointment as independent directors has been made more transparent.

These include enhanced disclosures regarding the skills required for appointment as an independent director and how the proposed candidate fits into that skillset, Sebi said in a release.

The composition of the NRC has been modified to include 2/3rd independent directors instead of the current requirement of a majority of independent directors.

"Shareholder approval for the appointment of all directors, including independent directors, shall be taken at the next general meeting, or within three months of the appointment on the Board, whichever is earlier," the release said.

In terms of eligibility criteria for appointment as an independent director, the regulator said there will be a cooling-off period of three years for Key Managerial Personnel and their relatives or employees of the promoter group companies.

"Relatives of employees of the company, its holding, subsidiary or associate company have been permitted to become independent directors, without the requirement of a cooling-off period, in line with the Companies Act, 2013," the release said.

When an independent director resigns from the board of a listed company, Sebi said the individual's entire resignation letter should be disclosed along with a list of her/his present directorships and membership in board committees.

Among others, at least 2/3rd of the members of an audit committee should be independent directors and all related party transactions should be cleared only by independent directors on the committee.

"The requirement of undertaking Directors and Officers insurance has been extended to the top 1,000 companies (by market capitalisation)," Sebi said.

These amendments shall be made applicable with effect from Jan 1, 2022.

Sebi board also agreed to make a reference to the corporate affairs ministry for "giving greater flexibility to companies while deciding the remuneration for all directors (including independent directors), which may include profit linked commissions, sitting fees, ESOPs, etc., within the overall prescribed limit specified under Companies Act, 2013", the release said.

Photograph: Shailesh Andrade/Reuters