Sebi moots dual approval process for appointment of independent directors

07:46 AM Mar 02, 2021 | Agencies

Seeking to further strengthen the regulatory framework for independent directors, Sebi on Monday proposed putting in place a dual approval system for their appointment as well as removal, and disclosure of entire resignation letters of such directors.

In a significant move, the regulator has suggested that independent directors' appointments should be cleared by the "majority of the minority" shareholders under the dual approval system. Minority shareholders would mean those other than the promoter and promoter group.


Besides, the watchdog has mooted whether ESOPs with a vesting period of five years should be allowed instead of profit-linked commission for independent directors as part of reviewing their remuneration structure.


Sebi on Monday issued a consultation paper for reviewing the regulatory provisions related to independent directors, giving minority shareholders a greater say in their appointment, re-appointment and removal by proposing the dual approval process.

Other proposals include broadening the eligibility criteria for independent directors, enhancing transparency in their nominations strengthening the composition of board committees.

According to Sebi, the present system of appointment of independent directors may be influenced by the promoters' in recommending the name of an independent director and in the approval process by virtue of shareholding.

The latest proposals are aimed at strengthening their independence and enhancing their effectiveness in the protection of interests of minority shareholders and performing other functions.

For appointment, re-appointment and removal of independent directors, Sebi has proposed that there should be approval of shareholders as well as that of the "majority of the minority" shareholders.

The consultation paper has also suggested steps to be taken if either of the approval thresholds are not met.

"If an independent director resigns from the board of a company stating reasons such as preoccupation, other commitments or personal reasons, there will be a mandatory cooling-off period of one year before the independent director can join another board," the consultation paper said.

Proposing a uniform cooling period, Sebi said key managerial personnel or employees of promoter group companies, as well as relatives of such personnel, cannot be appointed as independent directors in a company unless they have completed a cooling-off period of three years.

Sebi proposed that the composition of the nomination and remuneration committee be modified to include two-third of independent directors.

In addition, Sebi proposed certain procedures that should be followed by the committee for shortlisting candidates for the role of independent directors and disclosures that need to be made to shareholders with respect to such appointments.

Independent directors should be appointed only with prior approval of the shareholders at a general meeting. In case of a casual vacancy due to resignation/ removal/ death/ failure to get re-appointed, shareholders' nod should be taken within three months, it said.

"Considering the importance of the audit committee with regard to related party transactions and financial matters, it is proposed that audit committee shall comprise of 2/3rd independent directors and 1/3rd non-executive directors who are not related to the promoter, including nominee directors, if any," as per the consultation paper.

The deadline for submitting comments on the consultation paper is April 1.

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