SEBI’s consultative paper on corporate governance redefines the role of independent directors

SEBI’s consultative paper on corporate governance redefines the role of independent directors

The Securities and Exchange Board of India (SEBI) has issued a consultative paper on corporate governance and invited comments from the public. One of the most important aspects of corporate governance is the role played by independent directors. SEBI wants them to play a greater role in corporate governance, empower them and make them more accountable. Here are some key points from SEBI’s paper.

Appointment by Minority Shareholders: SEBI wants a discussion on the need for appointment of independent directors by minority shareholders. This indicates that SEBI is a trifle confused on this issue. After all, independent directors are expected to protect the interests of the company which would include all shareholders.

If independent directors are failing in their duty, then getting them appointed by minority shareholders is hardly the solution. There is every possibility of a gross misuse of such a provision, as a company’s detractors would attempt to get their nominee on the board. The Companies Act provides for the appointment of a director by small shareholders of a public company having paid-up capital of Rs5 crore or more or having 1,000 or more small shareholders. A ‘small shareholder’ has been defined as a shareholder holding shares of nominal value of not more than Rs20,000, or such other sum, as may be prescribed. This provision is hardly used by the public companies to which it is applicable.

Formal Letter of Appointment: Most companies do not have the practice of issuing a formal letter of appointment to an independent director. However, voluntary guidelines earlier, issued by the ministry of corporate affairs (MCA), provide that companies should issue formal letters of appointment to non-executive directors and independent directors—in the same manner as they do while appointing employees and executive directors. The letter should specify the following:
• The term of the appointment;
• The expectation of the board from the appointed director; the board-level committee(s) in which the director is expected to serve and its tasks;
• The fiduciary duties along with liabilities;
• Provision for insurance, if any;
• The code of business ethics that the company expects its directors and employees to follow;
• The list of actions that a director should not do; and
• The remuneration, including sitting fees and stock options, etc, if any.

SEBI would like that such a formal letter be made a part of the disclosure made to its shareholders at the time of the ratification of his/her appointment or re-appointment. In addition, SEBI would like this letter to be placed by the company on its website, if any, and, in case the company is listed, also on the website of the appropriate stock exchange.

Training for Independent Directors: Today, directors don’t have to undergo any formal training. SEBI has proposed setting up of a school for corporate governance under National Institute of Securities Market (NISM). Independent directors may be mandated to clear an NISM course, before their appointment.

SEBI also wants to make the following mandatory:

a) Minimum and maximum age;
b) Clarity on liabilities and on remuneration of independent directors;
c) Fixing maximum tenure for independent directors;
d) Requiring Independent directors to disclose reasons for their resignation;
e) Separate meetings of Independent Directors;
f) Restriction on the number of directorships.

With the proposed efforts by SEBI, there will be greater clarity about the role and responsibilities of independent directors. With transparency and accountability, independent directors will be able to play the role expected of them and protect the interests of all stakeholders.

SD Israni is a corporate lawyer and Fellow of ICSI