Redefining the independence of the so-called independent directors on the boards of listed companies, the Securities and Exchange Board of India (Sebi) is coming out with a set of proposals on who should be considered an independent director.
These new criteria include setting minimum age limits, educational qualifications, defining relationships with the promoter and the number of companies that a single independent director can serve.
This is in response to criticism by experts and institutions that independent-director positions are largely misused by companies that stack such slots with those who help the interests of the promoters.
“Based on representations from various organizations and experts, Sebi has decided to invite public view on what should be the qualifications of independent directors. We are giving 15 days’ time to people to give their feedback, based on which Sebi will redefine criterion relating to independent directors,” a senior official at Sebi, who did not wish to be quoted, told Mint.
He said the proposals will be put up on the Sebi website (www.sebi.gov.in) within a day or two for the public to view and send in comments.
Areas where public views are being sought by Sebi include the question of whether a chairman’s relatives, either maternal or by marriage, should be considered as part of the extended family and thus not be allowed to be called an independent directors. Currently, such candidates are not considered as part of the family and thus can be dubbed as “independent.”
Public opinion is also being sought on whether nominees of institutional lenders and private equity investors should be taken as independent directors, and whether there should be a minimum age limit of 30 years to be an independent director. As of now, anyone above the age of 18 can be an independent director and while nominees of institutional lenders are accepted, there is lack of clarity on nominees of private equity investors.
In 2005, the regulator, through Clause 49 of the Listing Agreement, mandated induction of independent directors on the boards of listed companies. Clause 49 stipulates that if a company has a executive chairman, 50% of the board should comprise independent directors. In case of a non-executive chairman, only one-third of its board should consist of independent directors. Unlike a non-executive chairman, executive chairman is one who is involved in day-to-day activities of a company and takes benefits from the company. Companies were required to comply with these norms by 31 December 2005.
But with many firms appointing friends, relatives, bankers, private-equity partners or former auditors on the board, there has been growing concern about how “independent” some of these independent directors really are. Several industry chambers have expressed concern that Clause 49 was being complied only in letter and such independent directors were not in keeping with the spirit of the law.
“Because of lack of entry norms and loopholes in guidelines, it was easy for companies to appoint neighbours, friends and relatives as independent directors,” says Prithvi Haldea, managing director of Delhi-based PRIME Database. Haldea also notes that there are no guidelines prescribing a time limit for the appointment of an independent director in case there is an opening because of a resignation, removal or death of an existing director. “There should be a time limit of 90 days for the firm to comply in such cases,” says Haldea.
Concerns have also been raised over promoter-directors of listed companies holding several independent directorship positions, with some suggesting that such directors may not be effective independent directors of other companies when they have a full-time responsibility of running their own companies.
Not everyone thinks this is as big an issue as it is being made out to be. Prem Chand Gupta, minister for company affairs, is of the view that independent directors are useful in promoting corporate governance but it cannot be considered as panacea for all evils.
“World over chairmen of big corporates have wanted their friends, investors or bankers to be on the board of their companies,” notes Notes Ameeth Parikh, managing director and partner, Axis Risk Consulting. “This is largely because of the comfort factor they enjoy with these men at various levels.”