Sebi plans change in rules for appointment of independent directors

The Securities and Exchange Board of India has proposed sweeping changes to rules governing independent directors, including norms that pertain to their appointment and removal, eligibility criteria, and remuneration structure.

The regulator plans to introduce the dual-approval system for the appointment and removal of independent directors. This requires the majority of all shareholders as well as the majority of minority shareholders, other than the promoter and promoter group, to approve the appointment and removal of such directors.

The dual-voting structure has been adopted in countries such as the UK for premium listed companies that have a controlling shareholder.

“The present system of appointment of IDs may be influenced by the promoters – in recommending the name of ID and in the approval process by virtue of shareholding. This may hinder the ‘independence’ of IDs 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 on Monday, seeking public comments on the proposals by April 1.

On the eligibility criteria for IDs, Sebi proposed that key managerial personnel and employees of promoter group companies cannot be appointed as IDs in a company unless there is a cooling-off period of three years. This restriction will also apply in the case of relatives of such managerial personnel.

“The overarching thrust is to find the true definition of independence. Distance from promoters, a distance of self and family from the entire ecosystem of the entity, any hint of pecuniary benefits that may influence the future are all welcome elements of independence,” said Shailesh Haribhakti, non-executive chairman of companies including L&T Finance Holdings, Blue Star and NSDL e-Governance Infrastructure.

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