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Evolving independent director regime: Lessons for Proxy Advisors?

Contributed by: Khaitan & Co

Independent directors (“IDs”) have often been seen as the vanguards of shareholders, especially minority shareholders in the corporate boardroom. Needless to say, that IDs hold a fiduciary position, which is critical to corporate governance. Proxy advisors (“PAs”), on the other hand, stand guard for their clients which are typically institutional investors and provide voting recommendations, as for and against the resolution, after vetting the subject matter of shareholder resolutions of a company.

Given the significant role played by IDs, resolutions related to ID appointment and reappointment undergo greater scrutiny at the hands of PAs, who provide voting recommendations.

This article analyses how the recent Securities and Exchange Board of India (“SEBI”) consultation paper titled ‘Consultation Paper on Review of Regulatory Provisions related to Independent Directors’ issued on 1 March 2021 to solicit views from the public by 1 April 2021 (“SEBI Consultation Paper”) is likely to impact PA recommendations, as India Inc gears up for the annual general meeting season.

SEBI Consultation Paper

The SEBI Consultation Paper focuses on almost all aspects of IDs and in a way suggests a 360-degree overhaul in the mechanics of lifecycle of an ID at a company, by addressing aspects right from eligibility to appointment/ reappointment, removal, resignation, remuneration and all the way to the role of IDs in board committees. The SEBI Consultation Paper is indicative of the pro-active role of the regulator in streamlining the legal regime vis-à-vis independent directors in India. The key takeaways are listed below:

  1. Definition of IDs:

  2. Restriction on key managerial personnel or employees of promoter group companies, and their relatives from being appointed as IDs in the company, unless there has been a cooling period of 3 years.

  3. Appointment and re-appointment process of IDs:

  4. Appointment and re-appointment of IDs, by way of ordinary and special resolution, respectively, based on dual approval of shareholders as well as ‘majority of the minority’ (simple majority) shareholders minus promoter and promoter group shareholders, in single voting process and meeting.

  5. In case such resolution is not passed, either same person is proposed after a cooling period and within the window of 90-120 days or an altogether new candidate is proposed.

  6. Removal of IDs:

  7. Dual approval mechanism for removal, and in case such resolution is not passed, re-tabling the proposal after a cooling period, both processes being similar to suggested process for appointment and re-appointment of IDs.

  8. Exchanging and bringing in more transparency in the role of nomination and remuneration committee:

  9. Nomination and remuneration committee to constitute of 2/3rd IDs instead of majority of IDs.

  10. Process for shortlisting of candidate identification and recommendation outlined.

  11. Disclosure in the notice for appointment of ID sent to shareholders to include skills and capabilities of candidate proposed for appointment as ID along with explanation on how the candidate is suited for the requirements of the company, as well as channel used for searching the candidate.

  12. Prior approval of shareholders for appointment of IDs

  13. Appointment of ID by board after prior approval of shareholders at a general meeting, and in case of appointment of ID to fill casual vacancy, approval of shareholders within 3 months.

  14. Resignation of ID

  15. Resignation letter of ID to be disclosed along with list of their present directorships and memberships.

  16. In case ID resigns for reasons like pre-occupation, other commitments or personal reasons, mandatory cooling off period of 1 year before such ID can join board of any other company.

  17. Cooling off period of 1 year before an ID can transition to a whole time director at a company.

  18. Composition of audit committee

  19. Audit committee to constitute of 2/3rd IDs and 1/3rd non-executive director, who are not related to the promoter, including nominee director, if any.

  20. Review of remunerations

  21. Open ended suggestion to explore granting of employee stock option plans (“ESOPs”) with long vesting period of 5 years to IDs and a possible maximum limit of remuneration through ESOPs, instead of profit linked commission.

How this impacts PA recommendations?

PA at times apply standards that are more rigorous than the bare minimum legal requirement. This is the reason why the SEBI circular titled ‘Procedural Guidelines for Proxy Advisors’ dated 3 August 2020,[2] requires PAs to disclose in their recommendations the legal requirement vis-à-vis higher standard that the PA has applied, wherever higher standard has been adopted as a parameter, and PA is required to provide rationale behind the recommendation of higher standards.

In terms of existing higher standards adopted:

  1. There have been media reported incidences in the past, where PA has suggested shareholders to vote against family member of IDs whose tenure in a company have come to an end. The rationale for such recommendation is not based on the merit of candidate recommended but is linked with affinity of the family member(s) and relative(s) with the company and inter alia the possibility of gratification.

  2. On similar lines, a PA roots for an independent director having no material connection (which may be financial or personal or otherwise that a reasonable person would conclude potential influence on objectivity to hamper ID’s individual ability to satisfy requisite fiduciary standards), either directly or indirectly, to the company (other than a board seat) or the dissenting significant shareholder.

  3. Another PA examines the relationship/ association of the proposed candidate with the company, promoters, other directors, senior management or holding company, subsidiaries and associates, to ascertain independence and assess independent decision making capacity based on proposed candidate’s conflict of interest. Flags are also raised if there is any pecuniary relationship other than the director remuneration involved and accordingly, the PA does not view favourably appointment of partner/ proprietor of consultancy/ law firm as ID, services of which are availed by the company.

  4. Another higher standard typically adopted is recommending against candidate who have been a part of two or more board failures, as repetitive board crisis is indicative of ineptitude.

  5. Attendance of ID at the board and committee meetings is also a higher standard adopted in the voting recommendation by the PAs, as a reflection of active role played by the ID and level of involvement and engagement with the company.

  6. Other factors for consideration are inter alia board interlock/ cross linkages across multiple boards, former and/ or prolonged association with company/ promoter/ promoter group, representative of large shareholders/ lenders, reputation risk and inexperienced family members/ relative proposed to be appointed.

The aspects discussed in the SEBI Consultation Paper, which are most relevant for PA while compiling voting recommendation are the suggestions relating to eligibility, appointment and reappointment as well as disclosure relating to candidature in the notice for meeting, especially the statement of the company reasoning the suitability of candidate proposed to be ID. In lines with the existing higher standards, PA can now inter alia recommend against appointment as ID for a candidate who has ties with the promoter or promoter group, with greater vigour.

The other relevant aspect for the PA to consider would be the suggested reconstitution of the nomination and remuneration committee as well as the audit committee. Typically, the PAs make a noting of the legal compliance for constitution of board committees. The suggestions in the SEBI Consultation Paper provide basis for the PAs to suggest investors to engage in conversation with the company for strengthening its corporate governance by imbibing suggestions in the SEBI Consultation Paper.


Although, the suggestions in the SEBI Consultation Paper have not taken the form of law yet, and are at the public scrutiny review level, the fact that such suggestions have been recommended by the market regulator are enough to be adopted as higher standards by the PAs and institutionalised as a factor while arriving at the voting recommendation. This is expected to inter alia streamline appointment of IDs, given the rigorous level of scrutiny a candidate shall now subject to at the hands of PA analysing appointment resolution. This should hopefully result in truly ‘independent’ IDs over IDs that merely give a semblance of independence.

Contributed by Khaitan & Co

The above article is authored by Rabindra Jhunjhunwala (Partner) and Saranya Mishra (Associate).

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