BY REENA ZACHARIAH, ET BUREAU | UPDATED: JUN 12, 2017, 12.14 AM IST
MUMBAI: The Securities and Exchange Board of India (Sebi) has asked the government to tighten rules related to the removal of independent directors in companies. The capital market regulator has written that boards should be allowed to remove independent directors only through a special resolution. Sebi has asked for changes in the Companies Act 2013 to this effect.
This proposal comes in the wake of Nusli Wadia’s removal by Tata Sons from three listed Tata group companies —Tata Chemicals, Tata Motors and Tata Steel — following a boardroom battle that led to the ouster of Cyrus Mistry as chairman of the group. Wadia was an independent director on the boards of the three Tata companies.
The Companies Act stipulates that an independent director can be appointed through an ordinary resolution. But if an independent director is eligible for reappointment, a second term needs a special resolution.
The Companies Act stipulates that an independent director can be appointed through an ordinary resolution. But if an independent director is eligible for reappointment, a second term needs a special resolution.
An independent director can be removed from the board by passing an ordinary resolution, under the Companies Act. The resolution may be proposed by the company or by shareholders.
An ordinary resolution requires a simple majority to be passed.
A special resolution needs a super majority or 75% members in favour of the proposal.
The regulator is of the view that the provisions for removal of an independent director should be aligned to that for reappointment.
“There is a lacuna in the law which needs to be addressed. If an independent director is reappointed through special resolution, then he can be removed by special resolution,” said a person familiar with the development.
Late in 2016, Wadia had met the then Sebi chairman UK Sinha and briefed him about what he alleged were corporate governance issues at Tata group companies in a rare instance of an independent director meeting the market regulator on such a matter.
Small investors in the three listed Tata group companies also filed a petition in the Bombay High Court saying that since independent directors discharge a fiduciary duty towards minority shareholders and act to protect their interest, they have been given a special status under the Companies Act. “If the removal is proposed by the management, then they shouldn’t vote — it should be majority of the minority,” said Amit Tandon, managing director of proxy advisory firm Institutional Investor Advisory Services. “But, if it's proposed by minority shareholders then you need to be more nuanced about how this is voted on.”
The regulator has received a lot of feedback from the industry saying that this needed to be addressed.
“The process of appointment of an independent director itself is faulty,” said Prithvi Haldea, chairman of Prime Database. “They are not external appointees but are internal appointees, and in almost all cases are wellknown to the promoters and serve at their pleasure.”
However, some lawyers and company secretaries feel the proposed changes could have unintended consequences and make Indian promoters vulnerable.
“This could lead to ownership battles,” said a corporate lawyer.
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