Revised Regulatory Framework for IDs of listed entities in India – Independence becomes stricter!

[2021] 129 taxmann.com 99 (Article)

The concept of independent directors was first introduced in the Desirable Corporate Governance Code issued by the Confederation of Indian Industry1 followed by the recommendation in the Corporate Governance Committee constituted by SEBI and headed by Mr. Kumar Mangalam Birla2 (Kumar Mangalam Birla Committee). Later in the year 2000, SEBI incorporated the recommendations of the Kumar Mangalam Birla Committee under Clause 49 of the Listing Agreement3. Independent directors have always been regarded as the means to strengthen the corporate governance framework in a public or a listed company.

Keeping in mind the intent of the lawmakers to introduce the requirement for having Independent Directors (IDs) on the board of certain companies, it is understood that SEBI cannot accept a situation where the IDs themselves turn out to either be ineffective for strengthening the corporate governance or act against the interest of the public shareholders. Therefore, with the intent to further strengthen the role and responsibility of IDs, SEBI had introduced a Consultation Paper4 (Paper) on review of regulatory provisions related to IDs on the 2nd of March, 2021. Through this Paper, SEBI had proposed to make stringent regulatory changes in the provisions of the Listing Obligation and Disclosure Requirements Regulations (LODR/ Listing Regulations) relating to

• • Eligibility criteria of IDs,
  • role of Nomination and Remuneration Committee (NRC),
  • composition of Audit Committee (AC) and Nomination and Remuneration Committee (NRC)
  • appointment and removal procedure of IDs

Further, SEBI, in its Board Meeting held in July 2021 discussed reviewing the regulatory framework applicable on IDs and incorporate amendments in the Listing Regulations based on public comments and discussions w.e.f. 1st January 2022. However, the changes in the regulatory framework as notified on 3rd August 2021 vide SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2021 [the Amendment Regulations], was initially notified to be applicable with immediate effect whose applicability has now been deferred to the date as originally decided in the Board Meeting of SEBI, i.e., 1st January 2021.

This write-up critically covers the changes in the regulatory framework for IDs pursuant to the Amendment Regulations and discusses the potential impact of the same on the working of a company including the corporate governance aspects. The amendments are discussed below under the relevant heads.

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