Sebi plans ‘dual approval’ for independent directors – The Economic Times

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SynopsisThe regulator plans to introduce the dual-approval system for the appointment and removal of independent directors (ID).

MUMBAI: 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 (ID). 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.

Sebi Plans ‘Dual Approval’ for Ind Directors

“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 firms cannot be appointed as IDs unless there is a cooling-off period of three years. This will also apply to relatives of managerial personnel.

“The overarching thrust is to find the true definition of independence. Distance from promoters, 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.

Sebi suggested changes in the remuneration structure for IDs by allowing long-term stock options to be awarded to them. At present, IDs are paid sitting fees of a maximum of ₹1 lakh and profit-linked commission within an overall limit. However, IDs cannot be given stock options.

The regulator suggested that nomination and remuneration committees can use the services of external agencies to shortlist candidates.

“It reflects the increased expectations from IDs by investors and regulators — be it with regard to their skills… or their role and responsibilities as a part of the audit committee. This is balanced by the fact that Sebi now recognises that companies need to spend more to attract the right person to their board…,” said Amit Tandon, MD, Institutional Investor Advisory Services.

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