Independent Directors : New SEBI Rules – UPSC GS2

Who is an Independent Director?
  • An independent director is a non-executive director who does not have any kind of stake in the firm.
  • Purpose: They are expected to help strengthen corporate governance. Further, they bring an element of objectivity and safeguard the interests of shareholders, especially minority shareholders.
  • Under the Companies Act, 2013, all listed companies are required to have at least a third of their board made of independent experts from varying fields.
  • Section 149(1) of the Act mandates that out of all independent directors, at least one independent director must be a woman.
Role of Independent Directors: The independent directors bring in transparency and accountability in corporate governance by:
  • Ensuring a balance of conflicting interests of all stakeholders and bring in an objective view in the evaluation of management and board performance.
  • Playing the role of a watchdog by bringing in independent judgment regarding strategy, risk management, resources, key appointments and standards of conduct.
  • By chairing the audit and compensation committee to ensure transparency in fixing compensation and perks for top executives and in preparing independent reports.
Are the new norms of independent directors applicable to PSUs?
  • Yes, the rules for Public Sector Undertakings(PSUs) are the same as for private listed firms.
  • At PSUs, the administrative ministry recommends the nominee/ independent director. These recommendations are cleared by the appointments committee chaired by the prime minister.
Issues related to independent directors:
  • Questions have repeatedly been raised over the appointment and selection process of independent directors, their compensation, and to what extent they are “distanced” from the promoters.
  • Matters of propriety and conflict of interest have also been raised over the manner in which regulators, are appointed to boards of private companies they used to oversee.
Facts:
  • In the last 11 years, at least six heads of top regulatory bodies and two senior associates took directorships with private firms that fell within their regulatory domain.
  • Even the cooling-off period is ignored in some cases.
  • Of the 172 independent directors in 98 public sector entities, at least 86, serving on 67 PSU boards, are linked to the ruling party.
To address some of these concerns, the Securities and Exchange Board of India (SEBI) introduced new rules.
New rules issued by SEBI:
  • It seeks a more robust framework for independent directors.
  • As per the new rules, which will come into effect from January 1, 2022, the appointment or removal of independent directors has to be carried out through a special resolution of shareholders.
  • The earlier ordinary resolution was required with a simple majority.
  • The new rules also seek to populate important committees with independent directors.
  • Two-thirds of the members of the nomination and remuneration committee have to be independent directors.
  • All related party transactions have to be approved by independent directors on the audit committee.
Independent directors play a critical role in corporate governance. That is why ensuring their independence will protect their ability to differ from the promoter, and look out for the interests of the non-promoter and minority shareholders.