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SEBI Rules To Counter Promoter Impasse In Hiring, Firing Independent Directors: Experts

SEBI's alternate mechanism for appointment of independent directors will give minority shareholders a greater say.

<div class="paragraphs"><p>The SEBI logo, in Mumbai. (Source: BQ Prime)</p></div>
The SEBI logo, in Mumbai. (Source: BQ Prime)

Minority public shareholders will get a greater say if the special resolution for the appointment or removal of independent directors fails, according to the recent changes notified by the Securities and Exchange Board of India.

However, according to experts, the new rule is meant to deal with situations where the company's promoters are at an impasse.

The regulator has amended its listing regulations to lay down the threshold for the hiring and removal of independent directors.

The appointment, reappointment, or removal of an independent director of a listed entity requires the approval of shareholders by way of a special resolution, i.e., 75% of shareholders should vote in favour of the proposal.

However, at times, listed entities face challenges in obtaining the requisite approval of shareholders for the appointment and/or removal of independent directors, said Harish Kumar, partner at L&L Law Offices.

The regulator's objective is to secure the interests of the company and its public shareholders in situations where appointment resolution fails due to infighting among the promoter group, according to JN Gupta, founder and managing director at Stakeholders Empowerment Services.

Look at what's happening at Kirloskar Brothers, Omaxe, and Finolex Groups. Due to the shareholding structure, resolutions will get defeated because of differences in the promoter group. And who suffers as a consequence of it? The company and the public shareholders. The regulator's intent is to minimise the impact of such fights.
JN Gupta, MD, Stakeholders Empowerment Services

SEBI has amended the regulations and stated that if the special resolution fails, an independent director's appointment resolution will pass if two conditions are fulfilled:

  • Votes cast in favour of the appointment resolution exceeds the votes cast against it.

  • Votes cast by the public shareholders in favour of the resolution exceeds the votes cast against it.

Gupta said that the first condition is the threshold under the company law since the regulator cannot override it. An independent director's appointment needs to be passed via an ordinary resolution, i.e., 50% of the votes cast should be in favour, according to the Companies Act, 2013.

However, the regulator has added an additional condition if the special resolution threshold is not met. Gupta explained that the public shareholder vote in favour should be higher than the votes against the resolution.

SEBI is saying I have imposed the condition of a special resolution for listed companies to appoint independent directors. If that, for some reason, can't be met, I'm ready to go back to the company law threshold, but I'm making a further condition—that public votes cast in favour should be more than votes against. That's how this change needs to be read.
JN Gupta, MD, Stakeholders Empowerment Services

Similarly, the revised rules say that if an independent director is appointed via the above two thresholds, their removal can be done only when:

  • Votes cast in favour of the removal exceeds the votes cast against the resolution.

  • Votes cast by the public shareholders in favour of the removal exceeds the votes cast against the resolution.

In short, the amendment provides an alternate mechanism for the appointment and removal of independent directors.