Experts hail new Sebi rules on independent directors

Proxy advisory firms have welcomed the markets regulator Sebi overhauling the rules pertaining to the appointment, removal and remuneration of independent directors. The measure, put in place by the Securities and Exchange Board of India last week to improve the quality of corporate governance, would particularly help the minority shareholders, they said.

Under the new rules, appointment, re-appointment and removal of independent directors in a listed company will be done through a special resolution of shareholders. In the special resolution, the number of votes in favour of the resolution should be at least three times those against the resolution. This will ensure that independent directors are not removed or appointed at the whims and fancies of the promoters. The new rules will be applicable from January 1, 2022, the said in a notification.

Shriram Subramaniam, managing director

InGovern, a proxy advisory firm, said, “Corporate India should not find the new norms onerous. The removal of independent directors will now have to be voted by shareholders and this empowers the minority shareholders,”

Vikesh Wallia, board member of the national governing council, Institute of Directors, said, “Independent directors’ remuneration has now been regularised. However, a key issue of ESOPs is still pending and Sebi has recommended it to the MCA for consideration. The point is that when you hire an independent director, you hire him to add value to the company and the value is reflected in the market capitalisation and that is the entitlement of the independent director. Hence Esops will do justice to this need.”

“A loss making company could earlier not remunerate an independent director. However, this restriction has now been removed, which is welcome. Also, the appointment and re-appointment of independent directors will now require a special resolution with 75 per cent votes in favour, instead of the earlier requirement of an ordinary resolution and a simple majority. This is a major change in making independent directors truly independent.”

Another expert, who preferred anonymity, said, “In several companies that are promoter-driven, the management (CEO) has an incentive to control the board. Independent directors appointed are often not allowed to really express their views, and if they do go against the management opinion, they are likely to be replaced. The new norms are a welcome move.”

The development assumes significance in the backdrop of the role of independent directors coming under scrutiny for their failure in detecting and preventing corporate frauds and promoter mismanagement.

The regulator has modified the composition of the nomination and remuneration committee to include two-third independent directors in the panel against 50 per cent independent directors earlier.