Appointment and Removal of Independent Directors in India: Alternate Mechanism Notified

Posted by Written by Melissa Cyrill Reading Time: 3 minutes

The Securities and Exchange Board of India (SEBI) recently announced an alternative method for the appointment and removal of independent directors from the boards of companies. This will bring flexibility to the process and likely reduce the influence exercised by promoters.

The new mechanism will be implemented via the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2022 (hereafter LODR) – notified November 14, 2022.

Now the appointment and removal of independent directors can be done through two considerations – threshold for ordinary resolution and threshold for majority of minority shareholders.

What are the new options for appointment and removal of independent directors?

Under SEBI’s alternate mechanism, if the special resolution for the appointment or removal of an independent director does not get the required majority, two other thresholds can be tested, namely for ordinary resolution and for majority of minority shareholders.

Previously, under SEBI (LODR) Regulations 2015 – an appointment, re-appointment, or removal of independent director is made through a special resolution where the votes in favor must be three times the number of votes against it. More simply, 75 percent of the ‘yes’ votes are required from the company’s board.

Now, if the majority threshold during the special resolution is not reached but crosses the thresholds for ordinary resolution and majority of minority shareholders during the same voting process – then it will be deemed that the resolution for appointment / removal of the independent director is approved by the shareholders.

According to SEBI: “In case a special resolution for the appointment of an independent director fails to get the requisite majority of votes, but the votes cast in favor of the resolution exceed the votes cast against the resolution, and the votes cast by the public shareholders in favor of the resolution exceed the votes cast against the resolution then the appointment of such an independent director shall be deemed to have been made.”

Other disclosure norms introduced by SEBI

The market regulator has also inserted new provisions regarding the schemes of arrangement for entities that have listed debt securities, handle unclaimed amounts pertaining to non-convertible securities of listed entities, as well as continuous disclosure norms for entities with listed non-convertible securities, pertaining to financial results and related requirements.

The entity that has listed non-convertible debt securities or non-convertible redeemable preference shares that wants to undertake a scheme of arrangement has to: a) file the draft scheme of arrangement with the stock exchanges along with b) a non-refundable fee for obtaining the ‘no-objection’ letter – before filing such scheme with the National Company Law Tribunal (NCLT).

The listed entity cannot file any scheme of arrangement with the NCLT or get its approval unless it secures the no-objection letter from the stock exchanges.

SEBI said: “The validity of the no-objection letter of the stock exchange(s) shall be six months from the date of issuance, within which the draft scheme of arrangement shall be filed by the listed entity with the National Company Law Tribunal.”

Further, any amount lying unclaimed in the escrow account for more than seven years pertaining to non-convertible securities issued by listed entities will be transferred to the Investor Protection and Education Fund that is created by SEBI.

SEBI has also eased the requirements and timelines related to the submission of financial results and provided clarity in provisions pertaining to disclosure of line items/ ratios and publication of results in newspapers. The latest amendment to the LODR Regulations thus brings uniformity to the disclosure requirements and in parity with the requirements for specified securities.

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