Companies in India may soon need approval from minority shareholders to appoint or remove an independent directors

Companies in India may soon need approval from minority shareholders to appoint or remove an independent directors
BCCL
On March 1, India’s market regulator proposed a series of changes to norms guiding independent directors on the boards of companies.

One of the biggest changes, in the consultation paper from the Securities and Exchange Board of India (SEBI), is the need for approval from minority shareholders to appoint or remove an independent director from the board.

Independent directors are appointed as watchdogs who are expected to ensure balanced decisions by the Board of Directors and to deter fraud. In India, one out of every three directors in every board has to be ‘independent’ and they are appointed for a period of 5 years. “In the recent past, some listed companies have faced shareholder resistance in having non-executive directors re-appointed, but these are relatively rare in the Indian context,” Arka Mookerjee, partner at law firm J Sagar Associates, said in a statement to Business Insider.

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The new provision is intended to ensure that small shareholders are not shortchanged but there may be a way around, still. “The provision may be somewhat diluted in practice through the secondary approval route through special resolution after 120 days,” Mookerjee added.

The regulator wants to increase the stake for independent directors

SEBI has also proposed profit-linked commissions and long-term stock options for independent directors.

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In the past, India has seen a small pool of people being roped in for this role. Consequently, their compensation had gone up significantly. The number of independent directors charging over ₹1 crore from a company, annually, had reportedly gone up over four fold from 21 at the end of March 2013 to 89 at the end of March 2019.

By giving them long-term stock options, the regulator may want to increase the director’s vested interest as a stakeholder in the company, which, according to Mookerjee, “would ultimately change the viewpoint of the directors and their relationship with the listed company.”

Independent directors need to earn the shareholders’ trust

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From the Satyam scam that exploded in 2009 to the one at IL&FS (in 2017), and beyond, the role of independent directors has come under scrutiny too many times.

A recent survey showed that nearly four out of every five shareholders suspect the ‘independence’ of these directors. As Prithvi Haldea, the founder chairman of Prime Database (a firm that provides data on Indian capital markets), recently argued, the position of independent director is often filled by, what he calls, “home directors” ⁠i.e. friends, ex-colleagues, extended relatives, and, even, neighbours. “The independence of such promoter-appointed independent directors is questionable as it is unlikely that they will stand-up for minority interests against the promoter,” Kalpana Unadkat and Pranay Bagdi at law firm Khaitan & Co, wrote in 2017.

The authorities have brought in a series of changes, in recent years, to the norms to provide some added sanctity to the role.

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Some of the restrictions in place to ensure the neutrality of an independent director include,
  • a person cannot continue as an independent director for more than 2 consecutive terms.
  • a person can be an independent director in, at most, seven listed companies at a time.
  • any vacancy in the office of independent director shall be filled by the next board meeting, or within 3 months of such vacancy, whichever is later.
In October 2019, an online database of all existing and eligible independent directors was created. The government also introduced a proficiency qualification examination for independent directors, mandating a minimum score of 60% for any individual to qualify for appointment. The move faced a lot of backlash from the industry.

SEBI has invited comments from the public, on its latest proposals, until April 1, 2021.


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