Independent Directors-स्वतंत्र निदेशक
🔆Independent Directors
✅Why in news: SEBI made stringent rules for appointment and removal of independent directors to reinforce their independence.
▪️Who is an Independent director?
✅An Independent director (ID) is a non-executive director
who does not have any kind of relationship, material or
financial, with the company.
✅They ensure the independence of decisions taken in matters related with the board.
▪️What are the existing rules?
✅In 2018, SEBI made sweeping changes in its regulations thereby enlarging the role, responsibilities and eligibility criteria for IDs.
✅ In 2019, the Ministry of Corporate Affairs prescribed compulsory registration and written exam requirements
for IDs.
✅Currently IDs are recommended for appointment by the Nomination and Remuneration Committee (NRC) of the Board.
✅ This will be later ratified through an ordinary resolution passed by the board.
▪️What is the new rule?
✅Now SEBI recommends to replace the present rules with a dual approval process.
✅It suggests that NRC‘s recommendation should be approved by a majority of a company‘s minority shareholders in addition to the ordinary resolution by the board.
✅Removal of IDs should also go through the same process.
✅To align ID interests with shareholders, it suggests the grant of long-vesting Employee Stock Options (ESOPs).
▪️What are the flaws with new rules?
✅Veto Powers for the minority shareholders will prevent the promoters from appointing their favourite IDs.
✅But the issue is that retail shareholders are mostly concerned about corporate voting exercises and institutions will hesitate to vote against incumbent managements.
✅ Hence for well-run companies backed by promoters without ill-intent, this new process will only raise the compliance burden.
✅Moreover too many non-executive directors in the board can affect the promoters.
✅ It is also unfair to expect IDs to view everything from a company‘s related party deals to mergers and takeovers.
▪️What can be done now?
✅ To encourage only diligent candidates to apply for IDs, their responsibilities need to be narrowed down and their role needs to be matched to wide-ranging responsibilities of the company.
✅The statutory obligations must be restrict IDs to check governance infringement.
✅ Their participation in strategic decisions should be left to their discretion based on their sector expertise and qualifications.
✅Regulators can consider prescribing a slab-wise fee structure for IDs based on company size and complexity.
✅They can also devise ways to expand the limited pool of managers who are willing to apply for ID positions.
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