The Securities and Exchange Board of India (Sebi) has implemented new, more stringent regulations regarding the appointment of independent directors. In addition, a framework for accredited investors has been introduced, along with other measures. Sebi was established in accordance with the Securities and Exchange Board of India Act, 1992. It operates to safeguard investor interests in securities and to promote and regulate the securities market.
Enhanced Protocols For Independent Directors
Under the new Sebi guidelines, independent directors will only be appointed through a special resolution endorsed by shareholders. For such a resolution to pass, it must secure 75% of the votes. The regulator has also clarified and strengthened the disclosure requirements concerning the skills mandatory for an independent director.
The nomination and remuneration committee, responsible for deciding appointments and compensation, as well as the audit committee, should now comprise two-thirds independent directors, compared to a simple majority previously. All transactions between a company and its associated entities will require approval solely from independent directors on the audit committee. If an independent director resigns, listed companies are required to disclose the resignation letter. There will be a one-year cooling period for an independent director transitioning to a whole-time director in the same or related company.
Role of an Independent Director
An Independent Director serves on a board of directors to represent minority shareholders. Crucially, they should not have any financial relationship with the company beyond receiving sitting fees. Their responsibility is to act independently and unambiguously to check and balance the whims of majority shareholders, which might expose the company to undue risks.
In accordance with the Companies Act, 2013, all listed public companies should have at least one-third of the total directors as independent. This role presents a challenging balance between being clinical in their duties while maintaining practicality in business dealings.
Accredited Investors
Sebi has approved a new category of educated, wealthy investors known as accredited investors, who will be authorized to invest in riskier products that are typically not available to individuals. These investors may be individuals, family trusts, or proprietorships. They will be permitted some flexibility to invest lower than the minimum amount specified by Sebi rules, and receive some regulatory relaxations.
Additional Changes by SEBI
For ease of access for investors participating in public and rights issues, Sebi now allows banks other than scheduled banks, to function as a banker to these issues. Sebi has also upped the maximum reward for whistle-blowers reporting insider trading from Rs 1 crore to Rs 10 crore.
Moreover, amendments have been approved to mutual fund regulations requiring asset management companies (AMCs) to invest more funds in riskier schemes. From January 1, 2022, AMCs will have to invest more than just 1% of the amount raised in a new fund offer, or Rs 50 lakh, whichever is lower.
Significance of Changes
These changes aim to reinforce corporate governance practices and entice more investors. It is hoped that they will uphold the interests of minority shareholders in the corporate boardroom where their representation is minimal. The intent is to foster truly ‘independent’ independent directors who don’t only appear to be independent in name alone.
