SEBI’s Consultation Paper Makes Minority-Shareholder Friendly Proposals on Independent Directors

The Securities and Exchange Board of India (“SEBI”) has released a consultation paper making minority-shareholder friendly proposals mainly relating to independent directors (“IDs”). The paper proposes a dual-approval process for appointment and removal of IDs, which includes a “majority of minority shareholders” approval. If this approval is not received, a special resolution would be required should the same director be proposed again. The audit committee would now not have any promoter related or nominee directors, thus removing their influence. Remuneration of IDs is also proposed to be enhanced by increasing sitting fees (which the Ministry of Corporate Affairs (“MCA”) will have to decide on) and permitting grant of employee stock options (“ESOPs”) with a vesting period of at least five years.

IDs would be rightly restricted from giving vague reasons like ‘other commitments’ or ‘preoccupation’ for their resignation and then promptly joining other boards. They would have to wait for one year. This should encourage them to be forthright. There are a few other changes proposed as well.

However, while giving more say to minority shareholders, the proposals still do not give a more powerful status to IDs. The proposals may remove them from promoter influence, but this opportunity has not been used to increase their powers. The enhanced status could actually increase their implied responsibilities. The remuneration proposals are also inadequate and may still not attract the best of talent.

All in all, it is a mixed bag, though a net positive step: my short piece on this today in moneycontrol.

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CA Jayant Thakur

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