Directors Appointment in India Maybe Suject to Dual Approval

In a consultation paper, the market regulator tightened norms with regard to the resignation of independent directors on the grounds of personal reasons or other commitments

The Securities and Exchange Board of India (Sebi) is proposing to give a greater say to minority shareholders in the appointment, re-appointment and in the removal of independent directors. 

In a consultation paper, the market regulator tightened the norms with regard to the resignation of the independent directors on the grounds of personal reasons or other commitments by suggesting a cooling off period of one year before the directors can join another board. Similar cooling off period has been proposed if the directors are elevated to a position such as   a whole-time director in the same company. It also mooted the grant of long-vesting ESOPs to the independent directors in lieu of cash-based commissions.

The appointment and the re-appointment of the independent directors shall be subject to dual approval — the approval of the shareholders and the approval by “majority of the minority” (simple majority) shareholders. Minority shareholders mean shareholders, other than the promoter and promoter group.

If either of the approval thresholds are not met, the person would have failed to get appointed or re-appointed. 

In such a case, the listed entity may either propose a new candidate or propose the same person for a second vote of all shareholders,without a separate requirement of approval by “majority of the minority”, after a cooling-off period of 90 days but within a period of 120 days.

The removal of the directors will also be subject to the dual approval process.

Further, if a casual vacancy arises because of resignation, removal or the death of an independent director, the approval of shareholders should be taken within a time period of three months.

Sebi said that considering the importance of the audit committee with regard to related party transactions and financial matters, it should comprise two-third independent directors and one-third non-executive directors who are not related to the promoter, including nominee directors, if any.

“While some these suggestions may increase the compliance burden, Sebi’s move will help broad-base corporate governance norms in Indian entities. These moves have the capacity to increase the independent oversight of Indian listed entities,” Arka Mookerjee, partner, J. Sagar Associates, said.