After the role of independent directors comes in for criticism for their failure in detecting and preventing corporate frauds and promoter mismanagement, the board of the Securities and Exchange Board of India (Sebi) on Tuesday gave nod to a slew of changes that ensures independence and effectiveness of these directors.
According to the new changes, 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 fancy of the promoters.
Besides, new regulations require that the process of selecting independent directors should be transparent and fully elaborated. The panel selecting the directors should also disclose the skills required for appointment as an independent director and how a particular candidate fits into that skill set.
In case of an independent director resigns, the company must disclose the entire resignation letter along with a list of her/his present directorships and membership in board committees.
A cooling-off period of one year has been introduced 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.
Key managerial personnel (and their relatives) or employees of the promoter group companies cannot get appointed as independent directors before completing a cooling-off period of three years.
The Board has also agreed to make a reference to the Ministry of Corporate Affairs (MCA), 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.
Suraj Malik, Partner - M&A Tax and Regulatory Services, BDO India, says that “The current cap and the quantum and components of the remuneration that can be offered to Independent directors is a damper to attract professionals to Boards. “SEBIs move to make a reference to MCA to consider flexibility in the remuneration structure including the ability to issue ESOPs to IDs will make it possible for companies including start-ups to offer advisory equity and stock options to reward professional talent at the Board level,” he added.