Stock market regulator Securities and Exchange Board of India (Sebi) on Friday proposed to change the regulations of Clause 49 that governs the appointment of independent directors on the boards of listed Indian firms.
The regulator has proposed to make five key amendments in regard to composition of boards of companies, relation between independent directors, their age and qualifications, role of nominee directors as independent directors, and the gap between resignation of one director and appointment of another.
These proposals were put on the Sebi website inviting comments and suggestions from the public till 2 April 2007.
Earlier this week, Mint had reported that Sebi would make these changes.
As per the proposed amendments, if the non-executive chairman of a firm is the promoter or related to promoters or persons occupying management positions at the board level—and even one level below the board—he would not be treated as an independent director. In such a situation, the company would require to have 50% independent directors on its board.
The existing provision says if the chairman of the board is a non-executive director, one- third of the board should consist of independent directors; and in case he holds an executive position, the board should have 50% independent directors. The second amendment proposes that the companies should make full disclosures about the relationship between their independent directors as well as with other directors. Such disclosures should be made in all documents where the details of the board of directors are incorporated. There is no existing provision which talks about the relationship among independent directors.
Yet another amendment specifies that there should not be a gap of more than 90 days between the resignation of an independent director and the appointment of a new one. The existing provisions do not deal with this issue. “This is important as there could be situations where crucial decisions are taken after some of the independent directors have resigned,” says Ruetveij Pandya, senior associate, capital markets group at Nishith Desai Associates, a legal advisory firm.
There is also a proposal to specify that minimum age limit of the director should be 21 years, a new provision. However, experience, maximum age or qualifications of the independent directors have not been stipulated.
The last amendment proposes to exclude the nominee directors from being considered as independent directors.
All listed firms were required to appoint independent directors by 31 December 2005, but many of them have not yet complied. At a Confederation of India Industry seminar in August 2006, Sebi chairman M. Damodaran had said: “Let it not be misunderstood that we will not take action.Before the year is out, we will persuade the stock exchanges to target big companies who are able to comply but have not made the effort to do so.”
At another CII seminar on corporate governance on February 19, 2007, Deepak Parekh, chairman of Sebi’s primary market committee, had severely criticised the implementation of clause 49 saying, “around 50% of the listed companies have not yet filed their compliance details with the stock exchanges and tegulators should wake up and penalise erring companies.”