SEBI’s new norms may force 97 independent directors to step down

The new norms set out by SEBI limiting each independent director’s presence to the boards of seven listed companies will result in 97 directors resigning from 283 companies listed on the NSE. The regulation, which comes into effect in eight months, also limits the director’s position to three companies in case the person serves as a whole-time director in a listed company.

Interestingly, even today 247 (17 per cent) NSE-listed companies are non-compliant with the listing agreement regarding composition of the board. With SEBI’s new norms of not treating nominee directors as independent, non-compliance will go up to 319 companies (22 per cent), finds a study conducted by indianboards.com, a joint initiative of Prime Database and the NSE. Currently, nominee directors in 227 companies are considered independent in as many as 382 cases.

The new Companies Act which mandates that an independent director cannot serve on the company’s board for more than two successive terms of five years each will not have much effect as it is being implemented in a prospective basis. This means that the provision would take effect only after ten years.

Pranav Haldea, Managing Director, Prime Database, said the market regulator has prescribed that if a person has already served as an independent director for five years or more in a listed company (as on October 1, 2014), he shall be eligible for appointment for only one more term of five years.

“Limiting independent directors’ position to seven companies would help them spend more time on each company they represent,” he added.

According to indianboards.com, about 1,287 independent directors representing 660 NSE-listed companies have already crossed the 10-year tenure as on February.

There are nearly 1,456 companies listed on the NSE with 6,050 independent director positions. Interestingly, 48 per cent of independent directors have served five years in a company.

The longest serving independent director is Klaus Carl Uebel who has been on the board of Hercules Hoists for 51 years.

“A fixed term for independent directors would have served better had it been implemented with immediate effect without a compliance leeway of one year,” said Haldia. Effectively, no new independent directors are likely to be seen at least for the next five years as a result of this provision, he added.