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Indian Economy

New Norms for Independent Directors

  • 05 Jul 2021
  • 6 min read

Why in News

The Securities and Exchange Board of India (Sebi) has approved stricter norms related to appointment of independent directors and decided to introduce a framework for accredited investors along with other measures.

  • Sebi is a statutory body established in accordance with the provisions of the Securities and Exchange Board of India Act, 1992. The basic functions of the Sebi is to protect the interests of investors in securities and to promote and regulate the securities market.

Key Points

  • Independent Directors:
    • Independent directors can be appointed only through a special resolution passed by shareholders. A special resolution requires 75% of votes in favour to be passed.
    • The regulator has also elaborated and strengthened the disclosure requirements for the skills required to be an independent director.
    • The nomination and remuneration committee of the board of directors, which decides on appointments and compensation, and the audit committee should have two-thirds independent directors compared to a simple majority now.
      • All related party transactions (between a company and its related entities) shall be approved by only independent directors on the audit committee.
    • Also, a listed company will be required to disclose the resignation letter of an independent director.
      • Also, there will be a one-year cooling period for an independent director transitioning to a whole-time director in the same company/holding/subsidiary/associate company or any company belonging to the promoter group.

Independent Director

  • An Independent Director (also sometimes known as an outside director) is a director on a board of directors representing minority shareholders and who does not have a pecuniary relationship with the company or related persons, except for sitting fees.
  • Their role is to take a stand unambiguously and independently to have a check and balance on the whims of majority shareholders that may expose the company to unwarranted risks.
  • The Companies Act, 2013 has mandated all listed public companies to have at least one-third of the total Directors to be independent.
  • Their role requires them to be clinical while businesses expect them to be practical, that’s the tight rope they walk on.
  • Accredited Investors:
    • Sebi has approved this new category of wealthy, well-informed investors who will be allowed to invest in riskier products, not usually allowed to individuals.
    • These entities (accredited investors) could be individuals, family trusts, proprietorships, etc.
    • They will be given the flexibility to invest the less than minimum amount mandated in Sebi rules and also to some extent get relaxation from regulatory requirements.
    • They will enhance the attractiveness of alternative investment funds (AIFs).
      • AIF means any fund established in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
  • Other Important Changes Undertaken:
    • To provide easy access to investors to participate in public and rights issues by using various payment avenues, Sebi has also decided to permit banks, other than scheduled banks, to act as a banker to such issues.
      • Unlike initial and follow-up public offering, the rights issue is not open for the general public but only to existing shareholders of the company.
    • Sebi also increased the maximum reward amount for an informant who blows the whistle on insider trading to Rs 10 crore from Rs 1 crore now.
      • Insider trading involves trading in a public company's stock by someone who has non-public, material information about that stock for any reason.
    • The regulator has also approved amendments to its mutual fund regulations which requires asset management companies (AMCs) to use more funds in riskier schemes (New funds).
      • Currently, AMCs have to invest only 1% of the amount raised in a new fund offer, or Rs 50 lakh, whichever is lower.
    • The new norms will be effective from 1st January, 2022.
  • Significance:
    • The changes seek to strengthen the corporate governance practices as well as attract more investors.
    • It will help maintain the interest of minority shareholders in the corporate boardroom where their representation is minimal.
    • This should hopefully result in truly ‘independent’ independent directors and not those with merely a semblance of independence.

Source: IE

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