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Why Sebi is strengthening independent directors

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The Sebi has tightened rules for appointing and removing independent directors, aimed at strengthening the corporate governance framework. Mint explains the rationale for appointing independent directors on company boards

The Securities and Exchange Board of India (Sebi) has tightened rules for appointing and removing independent directors, aimed at strengthening the corporate governance framework. Mint explains the rationale for appointing independent directors on company boards.

Who is an independent director?

An independent director is a non-executive director who does not have any kind of stake in the firm. They are expected to help strengthen corporate governance and 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 of them, at least one independent director must be a woman. While most companies have complied, some have done so by inducting family members.

What is their role on company boards?

The Act mandates the appointment of independent directors to bring transparency and accountability in corporate governance. They are required to ensure balancing of conflicting interests of all stake-holders and bring in an objective view in evaluation of management and board performance. They would help safeguard the integrity of financial information and ensure that financial controls and risk management systems are robust. With corporate frauds rising and independent directors failing in preventing them, Sebi has announced several steps to ensure they are not appointed or removed at the whims of promoters.

The framework
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The framework

What is the defined role of independent directors?

They play the role of a watchdog, bringing in independent judgement in deliberations with regards to strategy, performance, risk management, resources, key appointments and standards of conduct. They are obliga-ted to chair the audit and compensation committee thereby ensuring transparency, fix compensation and perks for top execu-tives, and prepare independent reports.

What is considered a corporate fraud?

Corporate fraud is an intentional falsification of financial data or activities of a firm with an intention to mislead the public and wrongly project an increase in profits. Such frauds dent investor confidence and result in destruction of wealth. At Satyam Computer, promoters had raised large scale dummy bills and conducted financial irregularities of 7,855 crore. Deloitte India in its India Corporate Fraud Perception Survey, Edition IV, said independent directors could significantly improve fraud risk management.

Are the new norms applicable to PSUs?

Yes, the rules for PSUs are the same as for private listed firms. At PSUs, the administrative ministry recommends the nominee/independent director, which is to be cleared by the appointments committee chaired by the prime minister. A report by IiAS based on a study of the board composition of Nifty 500 firms states that the fall in the number of independent directors in 2020 to 2,249 from 2,396 in 2019 is mainly due to non-appointment of directors in PSUs.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

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