Corporate governance has undergone significant changes in recent years, with the concept of Independent Directors being one of the most crucial transformations. The independent directors (“IDs”) connect the management and shareholders of the Company. Their primary responsibility is to protect stakeholders’ interests, including minority shareholders. The Companies Act, 2013 (“CA 2013”) establishes the qualifications for IDs in all types of companies, while the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) set additional requirements for IDs in listed companies. Although there have been no significant changes in the ID provisions of the CA 2013, SEBI has actively reinforced the regulations concerning IDs in listed companies to ensure strong corporate governance.
The regulatory body overseeing capital markets has implemented a fresh alternative for appointing and removing independent directors on company boards. This change aims to offer greater flexibility in carrying out these procedures.
Regulatory Framework for Appointment, Reappointment, and Removal of Independent Director
Section 149 of the CA 2013 outlines the procedures for appointing and re-appointing independent directors (IDs) in companies. According to this section, an individual can be selected as an ID for five consecutive years through an ordinary resolution (requiring at least 50% approval) in a general meeting. In the procedure of reappointment as an ID, a special resolution (requiring at least 75% approval) in a general meeting is necessary. Similarly, the tenure of IDs in compliance with the LODR Regulations aligns with the CA 2013. However, in listed companies, the appointment or reappointment of IDs is subject to approval through a special resolution rather than an ordinary one.
To further strengthen the process of appointing, re-appointing, or removing IDs in listed companies, SEBI introduced an alternative mechanism through the SEBI (LODR) (Sixth Amendment) Regulations, 2022. This mechanism comes into play when a resolution for appointing IDs fails to receive 75% approval from shareholders. In such cases, the listed companies must follow the alternative mechanism outlined below to ensure a fair and sensible decision regarding the appointment of IDs:
(a) Determine whether the votes in favor of the resolution, cast by all shareholders, exceed the votes against the resolution (i.e., more than 50% approval from all shareholders).
(b) Assess whether the votes in favor of the resolution cast by public shareholders exceed any votes against the resolution from them (i.e., at least 50% approval from public shareholders).
If both conditions of the alternate mechanism are fulfilled, the appointment of IDs will be considered approved by the shareholders.
The procedure for removing an independent director (ID) depends on whether they are initially appointed through a special resolution or an alternate mechanism. If the IDs were appointed via a special resolution, the same process would be required for removal. However, if the IDs were appointed through the alternate mechanism mentioned earlier, they can only be removed using that same alternate mechanism.
The market regulators implemented an alternate mechanism to reduce the influence of promoters on the appointment of IDs due to their significant shareholding. It is important to note that the application of the alternate mechanism, as specified in regulation 25(2A), is limited to the following two situations:
Not applicable in case of reappointment of Independent Director
Regulation 25(2A) states that an independent director’s appointment, reappointment, or removal in a listed entity must receive shareholder approval through a special resolution.
The provision in regulation 25(2A), which introduces the alternate mechanism, applies only to the appointment of independent directors. While sub-regulation 2A mentions both “appointment” and “reappointment” of IDs, the proviso of regulation 25(2A) explicitly emphasizes the appointment of IDs. Generally, the term “appointment” encompasses “reappointment,” which created ambiguity regarding the interpretation of sub-regulation 2A. It could be interpreted that the entire sub-regulation, including the alternate mechanism, applies to both initial appointment and reappointment of IDs.
If that were the case, using the alternate mechanism (ordinary resolution) for the reappointment of IDs would breach the corresponding section of the CA 2013, which requires a special resolution for reappointment. Therefore, the alternate mechanism does not apply to the reappointment of IDs. SEBI clarified this in its agenda papers for the board meeting held on September 30, 2022. Furthermore, with the amendment in the LODR Regulations on January 17, 2023, SEBI clarified that the provisions outlined in regulation 17(1C) apply to both appointment and reappointment of directors by including the term “or reappointment.” Based on this clarification, it can be inferred that the term “appointment” does not encompass reappointment in the LODR Regulations.
Not applicable in case of an individual has attained the age of 75 years
According to Regulation 17(1A), a listed company is not allowed to appoint or maintain the directorship of any person, including non-executive directors (IDs), who is 75 years or older, unless a special resolution is passed for that purpose. Typically, listed companies present a single resolution for the appointment of IDs and specific approval for individuals aged 75 years or above. In such cases, the alternate mechanism would only work effectively if it requires a majority of minor approvals for the appointment on the one hand. At the same time, a special resolution is necessary for the selection of individuals above 75 years of age on the other hand.
Even if the listed companies propose two separate resolutions: one for the appointment of IDs and another specifically addressing the aspect of the 75-year age limit, a hypothetical situation arises where one might not support the first resolution (appointment) but still keep the second resolution (the aspect of the 75-year age limit). Consequently, the alternate mechanism is not applicable or suitable for appointing individuals 75 years or older as IDs.
In summary, there needs to be more consistency between the Companies Act of 2013 provisions and the SEBI Listing Obligations & Disclosure Requirements (LODR) regulations regarding the appointment, reappointment, and removal of Independent Directors (IDs). While SEBI LODR provides an alternative mechanism for appointing and removing IDs, it does not include the corresponding provision for this in its regulations. Similarly, the reappointment of IDs requires a special resolution under the Companies Act of 2013, making it impossible for SEBI to implement an alternative mechanism for reappointment. To resolve this ambiguity, SEBI has recommended to the Ministry of Corporate Affairs (MCA) to consider amending the Companies Act of 2013, particularly for listed entities, to incorporate the alternative mechanism for the reappointment of Independent Directors.