Capital markets regulator Sebi has overhauled the rules pertaining to the appointment, removal, and remuneration of independent directors to ensure their independence and effectiveness.
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 new rules will be applicable from January 1, 2022, the Securities and Exchange Board of India (Sebi) said in a notification.
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 listed entity will have to ensure that approval of shareholders for appointment of a person on the board of directors is taken at the next general meeting or within a time period of three months from the date of appointment, whichever is earlier, Sebi said in a notification dated August 3.
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.
“For every appointment of an independent director, the nomination and remuneration committee shall evaluate the balance of skills, knowledge, and experience on the board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director,” Sebi said.
The person recommended to the board for appointment as an independent director will have the capabilities identified in such description.
For the purpose of identifying suitable candidates, the committee can use the services of external agencies, if required; consider candidates from a wide range of backgrounds, having due regard to diversity; and consider the time commitments of the candidates.
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.
The 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.
“No independent director, who resigns from a listed entity, shall be appointed as an executive / whole time director on the board of the listed entity, its holding, subsidiary or associate company or on the board of a company belonging to its promoter group, unless a period of one year has elapsed from the date of resignation as an independent director,” Sebi said.
The regulator has modified the composition of nomination and remuneration committee to include two-third independent directors in the panel against the earlier of requirement of 50 per cent of independent directors.
With regard to audit committee, Sebi said at least two-thirds of the members of the audit committee will have to be independent directors and all related party transactions will be approved by only independent directors on the audit committee.
The markets watchdog has made certain changes to the eligibility criteria for independent directors.
Under this, independent director, other than receiving director’s remuneration, should have no other pecuniary relationship with the company or their promoters or directors during the three immediately preceding financial years. Earlier this requirement was two years.
Also, the regulator has eased restrictions pertaining to employment in a listed entity in case of independent directors’ relative, who is an employee other than key managerial personnel.
The clause, which required that independent directors’ relative should not be an employee (other than key managerial personnel) of the listed entity or any firm belonging to its promoter group during the three immediately preceding financial years in which they are proposed to be appointed, will no longer be applicable.
To give effect to the new rules, Sebi has amended LODR (Listing Obligations and Disclosure Requirements) Regulations.
This comes after the board of Sebi approved amended to the rules governing independent directors in June.
Also, the board had 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, among others within the overall prescribed limit specified under Companies Act, 2013.