Do We Need Further Consultation On Independent Directors?

On March 1, the Securities and Exchange Board of India issued a consultation paper on “Review of Regulatory Provisions relating to Independent Directors”.  It seems that it has become a norm to keep changing the rules/regulations with regard to Corporate Governance and particularly the provisions relating to the Independent Directors.

It is a very disruptive move. It cannot be denied that enormous disruptions were caused by the COVID-19 pandemic during the Year 2020 and the formidable challenges posed by the pandemic were negotiated by corporate India with determination and resilience. All this was possible with the support received from the Central Government and other authorities including the other stakeholders like promoters, board members, employees, suppliers, and customers, etc.

It was expected that there would be some pause before some new guidelines or set of rules are introduced, unless, of course, there were some compelling reasons for doing so.

The provisions relating to Independent Directors which were there in the Listing Guidelines were considerably changed when the new Companies Act was implemented during 2014-15. Thereafter Listing Agreement was replaced with the Listing Regulations in the year 2015-16.

Further, the provisions of the Listing Regulations were again revised based on the recommendations of the Kotak Committee in the Year 2018-19.

A new concept was introduced for appointing an Independent Woman Director, before which the requirement was only for appointing a Woman Director simpliciter.

The ink had hardly dried, yet the Ministry of Corporate Affairs (MCA) introduced a requirement for Independent Directors to undergo Proficiency Tests which required certain directors to undergo written tests as well as to have themselves registered. In addition, all the directors are also required to undergo KYC with MCA on yearly basis.

As if all this was not enough, not even the initial scrutiny and approval of the candidature, a test of Independence, etc., which, both the Nomination and Remuneration Committee as also the Board of Directors are required to carry out,  we now again find that SEBI has come out with the said Consultation Paper.

Surprisingly, SEBI has not given any compelling justification about the need for coming out with the proposals to amend the provisions relating to Independent Directors.

One would appreciate that around these uncertain and challenging times, companies/promoters/board of directors should be given breathing time to consolidate their businesses and plans for expansions, creating jobs, realizing the dream of Hon’ble Prime Minister of India to make ‘Atmanirbhar Bharat’ and also to realize the dream of ‘Make in India’, rather than focusing only on the composition of the board, their appointment, their KYC, their written tests, mapping of their skills/competencies, etc.

Every now and then, we come across Press Reports about Independent Directors, resigning from various companies as they are no longer keen to hold board seats in view of the multiplicity of rules and regulations applicable to Independent Directors which are scaring them away from accepting the position of Independent Directors.

It is pertinent to highlight that in the last three years, resignations of Independent Directors have gone up considerably, i.e. from 717 in the year 2017 to 767 in the year 2018, which almost doubled to 1393 in the year 2019 (Source: nseinfobase.com). 

This is quite relevant in the light of the fact that many Independent Directors would be retiring after completing their initial tenure of 5 years or more since the period of their first/second term will be coming to an end and the requirement of a number of Independent Directors will be huge.

In a scenario like this and there being no compelling reasons in the SEBI Press Release or in the consultation paper attached therewith, it is fit to suggest that this proposal be dropped altogether and let various listed companies focus on their respective businesses so that the greater need for economic development, creation of jobs and for realizing the dream of ‘Atmanirbhar Bharat’ can see the light of the day.