Appointment and Removal of Independent Directors in India: A Comprehensive Guide

Introduction- Independent Directors in India

The appointment and removal of independent directors from the boards of companies in India have undergone significant changes with the recent announcement by the Securities and Exchange Board of India (SEBI). This blog post delves into the alternative methods introduced by SEBI, which bring flexibility to the process and aim to reduce the influence exercised by promoters. We will explore the criteria for appointing and removing independent directors, backup mechanisms, and the additional disclosure standards imposed by SEBI for entities with listed non-convertible securities.

Appointment and Removal Criteria

The traditional requirement for appointing or removing an independent director mandated a special resolution with three times as many votes in favor as against. However, with the new regulations, there are now two alternative criteria available:

Threshold for Ordinary Resolution:

If the special resolution does not receive the required majority, the ordinary resolution can be used. If the majority requirement for the ordinary resolution is met, it will be assumed that the shareholders have approved the appointment or removal of the independent director.

Threshold for Majority of Minority Shareholders:

In case the special resolution fails to garner the necessary votes, but more votes are cast in favor of the resolution than against it, and more public shareholders vote in favor, the appointment of the independent director shall be deemed to have been made.

SEBI's Backup Mechanism

SEBI has introduced a backup mechanism to challenge the alternative thresholds mentioned above. This mechanism ensures that if the special resolution fails, the appointment or removal can still proceed if the ordinary resolution or majority of minority shareholders' criteria are met. This approach brings more flexibility to the process and avoids unnecessary delays in important board decisions.

Added Disclosure Standards

SEBI has not only revised the appointment and removal criteria but has also implemented new disclosure standards for entities with listed non-convertible securities. These standards aim to enhance transparency and protect the interests of shareholders. Some of the key additions include:

Continuous Disclosure of Financial Information:

Entities with listed non-convertible securities must comply with the continuous disclosure requirements set by SEBI. This ensures that shareholders have access to accurate and up-to-date financial information.

Handling Unclaimed Amounts:

SEBI has introduced guidelines for the proper handling of unclaimed amounts related to listed entities' non-convertible securities. Any funds remaining unclaimed in the escrow account for longer than seven years will be transferred to the Investor Protection and Education Fund established by SEBI.

Schemes of Arrangement:

Entities with listed non-convertible debt securities or non-convertible redeemable preference shares must follow a specific process before filing the draft scheme of arrangement with the National Company Law Tribunal (NCLT). This includes filing the draft scheme of arrangement with the stock exchanges and obtaining a no-objection letter (NCLT) after paying a non-refundable fee.

Disclosure of Line Items/Ratios and Publication of Results:

SEBI has clarified the rules governing the disclosure of line items/ratios and publication of financial results in newspapers. The modification ensures uniformity in the disclosure requirements, bringing them on par with those for specified securities.

Conclusion

The alternative methods introduced by SEBI for the appointment and removal of independent directors in India provide greater flexibility and transparency in corporate governance. The criteria based on ordinary resolutions and the majority of minority shareholders allow for smoother decision-making processes. Additionally, the added disclosure standards enhance transparency and protect the interests of shareholders. Entities with listed non-convertible securities must ensure compliance with SEBI's regulations to maintain good corporate governance practices.

By staying updated with the latest changes in the LODR Regulations, companies and stakeholders can navigate the appointment and removal processes of independent directors effectively and contribute to the growth of the Indian corporate landscape.