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Sunday, August 01, 2021

Cleanup in boardroom

Independent directors, company boards ensure checks and balance. Who gets on to them is critical to corporate governance

By: Editorial |
Updated: July 5, 2021 8:34:28 am
Unfortunately, such concerns over the independence of independent directors are not new.

The recent controversy over the issuance of preference shares by PNB Housing Finance has raised disconcerting questions over the role of independent directors in India. Unfortunately, such concerns over the independence of independent directors are not new. 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, after demitting office, are appointed to boards of private companies they used to oversee. An investigation by this newspaper has revealed that 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. In some of these cases even the cooling off period was ignored. But it’s not just the private sector. As reported by this newspaper, of the 172 independent directors in 98 public sector entities, at least 86, serving on 67 PSU boards are linked to the ruling party. In fact, two years ago, the Indian Institute of Corporate Affairs noted that “the selection of independent directors for PSUs has not remained independent”. To address some of these concerns, last week, the Securities and Exchange Board of India (SEBI) introduced new rules that seek 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, as compared to an ordinary resolution earlier which requires a simple majority. A higher threshold for the appointment and removal of independent directors is certainly welcome. But this is a deviation from the discussion paper released by SEBI earlier this year on this issue, which had suggested that the appointment/removal be subject to a dual approval process, giving greater say to the non-promoter shareholders. The new rules also seek to, and rightly so, populate important committees with independent directors. Two-thirds of the members of the nomination and remuneration committee have to be independent directors. Further, all related party transactions have to be approved by independent directors on the audit committee. These steps will address some of the concerns raised in the past.

Considering the critical role played by independent directors in corporate governance, measures to tighten the norms governing them are timely. Ensuring their independence, protecting their ability to differ with the promoter and look out for the interests of the non-promoter and minority shareholders, especially when the interests of the two are not in sync, would go a long way in strengthening corporate governance in India.

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