Capital Market Regulator, SEBI, vide its amendment dated May 9, 2018 has, added a new eligibility requirement in the definition of the term “Independent Directors”, thereby imposing a restriction on Board Inter locks.

The said amendment has become effective from October 1, 2018.

Now, SEBI has issued an Informal Guidance dated October 15, 2018 in the matter of Sundaram Finance Limited (SFL), clarifying the applicability of the new eligibility criteria of Independent Directors, as mentioned above. .

1. Facts of the Querist Company:

1.1	There are 2 listed entities: Company 1: M/s Sundaram Finance Limited (SFL) and Company 2: M/s. India Motors Part & Accessories Limited.
1.2	Out of 6 Independent Directors (ID) on the Board of SFL, 1 ID (i.e. Ms. Shobhna Ramachandran) is a Non-Independent Director (NID) on the Board of the 2nd Company (i.e. India Motors Part & Accessories Limited).
1.3	An ID of the 2nd Company (Mr. S. Ravindran) is a Non- Independent Director on the Board of SFL.

With the above factual position and considering the new eligibility criteria, SFL approached SEBI seeking clarifications on the same.

2. Query:

2.1	Whether Ms. Shobhna’s continuity as an ID on the Board of SFL gets affected due to new amended provisions under regulation 16 (1) (b) (viii) of SEBI (LODR) Regulation 2015?; or
2.2	Whether amended provision is applicable only on the Independent Directors to be appointed on or after October 1, 2018?

3. LEGAL PROVISION: REGULATION 16 (1) (b) (viii) (effective wef October 1, 2018):

16(1)(b)‘Independent Director” means a non-executive director, other than a nominee director of the listed entity:

(viii) “Who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director:”

As recommended by the Kotak Committee, this provision mandates an additional condition by excluding “board inter-locks” arising due to common non-independent directors on boards of listed entities (i.e. a non-independent director of a company on the board of which any non-independent director of the listed entity is an independent director, cannot be an independent director on the board of the listed entity). For instance, If Mr. A is an executive director on Co. A (being a listed entity) and is also an independent director on Co. B, then no non-independent director of Co. B can be an independent director on the board of Co. A.

4. SEBI’s Interpretation:

SEBI vide its Informal Guidance letter dated October 15, 2018 clarified that the said amendment is applicable on new appointments as well as Independent Directors already appointed before October 1, 2018. Therefore any independent Director who is not qualifying the criteria under regulation 16 (1) (b) (viii) even if he is appointed before the date of amendment, has to comply with the amended provisions to continue as the Independent Director in the listed entity.

5. CP’s Views:

Upon a plain and simple reading of the amended definition of Independent Directors, there did appear this little confusion as to whether the new provision would be applicable on newly appointed IDs or even the existing IDs need to comply with it. But a thorough reading, coupled with the reason behind this amendment clarified the position.

It was being observed by SEBI that board interlocks were a common phenomenon and was acting against the spirit of corporate governance. That is why, Uday Kotak Committee in its report dated October 5, 2017 suggested this change, which was brought into effect with effect from October 1, 2018.

In our view, limiting the applicability of these provisions to only newly appointed Directors would have defeated the Regulator’s objective and that ways, already appointed Directors, say on September 30, 2018 would have got the immunity till a period of 5 years therefrom, which is actually is not the intent of the Capital Market Regulator.

Anjali Aggarwal

Partner & Head-Capital Market Services

Corporate Professionals