Kastury & Talati
Independent Director can sit on 7 Listed Companies
Strengthening the corporate governance norms, market regulator Sebi has allowed an individual to be an independent director on the board of not more than seven listed companies simultaneously. Sebi also asked companies to have preset criteria to measure the performance of independent directors, which should be published in its annual report. Besides, each board should have at least one woman director, and the composition of the board should have "an optimum combination of executive and non-executive directors", the market regulator said, adding that at least 50% of the board of directors should have a non-executive role.
The market regulator mandated that an independent director can have a maximum of two consecutive terms of five years each with the same company. However, Sebi has relaxed this rule a bit for those independent directors who are currently on the boards of companies for more than five years, allowing them another five-year term in the same post.
The regulator also suggested the companies to segregate the role of chairman and managing directors and chief executive officer. However, this clause is non-mandatory in nature, meaning this is not binding on the companies to follow.
Sebi on Thursday notified these changes under clause 49 of the listing agreement - which deals with corporate governance of listed entities. The changes were necessitated subsequent to the notifications of Companies Act, 2013. Some of the changes to the clause 49 of listing agreement are more stringent than the ones in the Companies Act, a Sebi official said. The changes will be effective October 1, although companies are at liberty to move to the new regime even earlier, a Sebi release said.
The Companies Act allows a person to be on the board of 10 companies, while Sebi has limited this to seven listed companies. So in effect, a person can be an independent director on the boards of seven listed companies and three unlisted ones. Sebi also said that a whole-time director in any listed company cannot be an independent director in more than three listed entities.
"An independent director shall hold office for a term up to five consecutive years on the board of a company and shall be eligible for reappointment for another term of up to five consecutive years on passing of a special resolution by the company," Sebi said. It also said that if an independent director completes his terms, he can again join the board of the same company as an independent director after a cooling-off period of three years.
Sebi also said that all the independent directors of a company should hold at least one meeting in a year, without the attendance of non-independent directors and members of the management. "All the independent directors of the company shall strive to be present at such meeting," it said, in which these directors should evaluate, among others, the performance of the chairman of the company, of the non-independent directors and also of the board as a whole.
A note from Institutional Investor Advisory Services (IIAS) said that the changes indicate that Sebi has used internal disclosure mechanisms to curb promoters' powers. "The crux of strong internal controls lies in the independence and objectivity of the internal administrators. Therefore, Sebi has tightened the definition of independent directors and then provided them with stronger oversight," IIAS said.
Times of India, New Delhi, 18-04-2014