Sebi mulls five-board cap for independent directors; curbs on whole-time directors likely

Jan 10 2014

MUMBAI: Indian companies may soon be on the hunt for independent directors, of whom there seem to be a finite number. But if the market regulator has its way, a person may not be allowed to serve in this capacity on the boards of more than five listed companies, forcing them to widen the pool of such candidates.

To be sure, this is in line with the new Companies Act and is aimed at strengthening corporate governance, thereby protecting minority investors.

The measure is among sweeping changes being planned by Sebi. Among other stipulations, a whole-time director may not be allowed to act as independent director on the board of more than two listed companies, said two persons familiar with the development. Also part of the proposal are measures asking companies to appoint women directors, again as mandated by legislation. A senior Sebi official said the proposals are likely to be taken up at the next board meeting.

HDFC Chairman Deepak Parekh was critical of the proposal. "There is a paucity of good directors and many existing listed companies, including Navratna companies, have not fulfilled the criteria laid down by Sebi on corporate governance," he said.

"I feel five independent directorships is far too restrictive as independent directors also sit on subsidiary companies", apart from Section 25 (or non-profit) entities, which are also deemed to be public limited companies.

Sebi feels the curbs are needed to give independent directors the time needed to analyse the agenda of board and committee meetings at a company and prevent wrongdoing, especially in the light of recent developments such as those at the Financial Technologies-run National Spot Exchange Ltd.

"The job of an independent director is onerous. He is accountable under the law as any other director and his performance is also evaluated. For him to make a meaningful contribution, he needs to devote reasonable time to the affairs of the company," said MS Sahoo, former Sebi member and now secretary, Institute of Company Secretaries of India. "A person can't do justice to his job as an independent director if he sits on the boards of more than half-a-dozen companies, particularly when he also sits on a few board committees."

According to data on, 481 directors hold 589 independent directorship positions in the top 100 listed companies by market capitalisation. Some of these individuals hold directorships in more than 10 listed companies each.

The number of independent directors needed ranges from half the board to a third, depending on whether the chairman is full-time or part-time.  

Currently, there is no restriction on the number of independent directorships. But the Companies Act of 2013 mandates that a person can only be a director in 10 public companies, be they independent, executive or non-executive posts. Several experts were critical of the Sebi plan.

"This is a clear case of over-regulation. The board of a company and the professional can decide whether he/she can give quality time," said a senior partner at a leading law firm, who did not want to be identified.

"Why should the regulator set a cap? A professional can decide and apportion time from his schedule. If the company is unhappy with the contribution made by a board member it will certainly look at options." Restricting quantity doesn't necessarily have an impact on quality, said Shailesh Haribhakti, chairman of audit firm DHC, who is on the board of nine listed companies.

"The more important aspect to focus on is to improve the actual performance of the board in a qualitative manner," he said.

Prithvi Haldea, chairman of Prime Database, is of the same view. "Number, age, tenure of directors is meaningless if the primary role of independence is not being exercised," he said.

The regulator is also considering a proposal to make the appointment of independent directors subject to approval by a majority of minority shareholders, a practice followed in some developed markets. Currently, this is done through election by the majority. As such, these nominations are decided by the promoters. Critics said the independent director concept has been imported from overseas markets, where companies have a widely held shareholding structure.

It's not as relevant in India where most companies are family controlled, some experts said. The responsibility for governance should rest with the promoters or the management and not on independent directors.

"Independent director itself is a myth because they are appointed by the very same promoters from whom they are supposed to be independent," Haldea said.

Among those who may have to give up some of their posts, if the new rules are implemented, are lawyer Anil Harish, who is an independent director in 12 listed companies.

Sanjay K Asher serves as independent director on the boards of 11 companies and Haigreve Khaitan holds the post in nine listed companies.

The Economic Times