SEBI revises norms to make corporate governance more transparent

The Securities and Exchange Board of India (SEBI) on Thursday approved proposals to amend the listing agreement with respect to corporate governance norms for listed companies.

SEBI said the decisions are aimed at increasing transparency in corporate governance, a move that will have far-reaching implications for management boards of corporates.

The regulator has made disclosures about the remuneration of senior executives mandatory and also asked companies to put in place a system of performance evaluation for independent directors and other board members.

The market regulator also made it mandatory for corporates to have at least one woman director on the board, as already mandated under the Companies Act.

The SEBI board also approved the proposal for a compulsory whistle-blower mechanism in every company and to expand the role of the audit committee.

It has also prohibited offering stock options to independent directors, and asked companies to have separate meetings of independent directors.

Under the new governance rules, a person can be an independent director in seven companies at the most and three in case he or she is already a whole-time member in a listed company. It also capped the total tenure of an independent director to two terms of five years each.

"However, if a person who has already served as an independent director for five years or more in a listed company as on the date on which (the amendment) becomes effective, he shall be eligible for appointment for one more term of five years only," SEBI stated in a release.

SEBI also mandated that all companies should have nomination and remuneration committees, with the chiefs of such committees being independent directors on the board of the companies.

The market regulator also put in place a stakeholders' relationship committee.

In addition, SEBI made regulations for related-party transactions stricter. It said that companies should seek prior approval of the audit committee for all material related-party transactions. Besides, they should also seek the nod of shareholders for all material related-party transactions through a vote on a special resolution in which all the related parties should not participate.

Highlights of the proposals:

  • Exclusion of nominee director from the definition of independent director
  • Compulsory whistle blower mechanism
  • Expanded role of audit committee
  • Prohibition of stock options to independent directors
  • Separate meeting of independent directors
  • Constitution of stakeholders relationship committee
  • Enhanced disclosure of remuneration policies
  • Performance evaluation of independent directors and the board of directors
  • Prior approval of audit committee for all material related party transactions (RPTs)
  • Approval of all material RPTs by shareholders through special resolution with related parties abstaining from voting
  • Mandatory constitution of nomination and remuneration committee (Chairman of the said committees shall be independent)
  • At least one woman director on the board of the company
  • It has been decided that the maximum number of boards an independent director can serve on listed companies be restricted to 7 and 3 in case the person is serving as a whole time director in a listed company
  • To restrict the total tenure of an independent director to 2 terms of 5 years. However, if a person who has already served as an independent director for 5 years or more in a listed company as on the date on which the amendment to listing agreement becomes effective, he shall be eligible for appointment for one more term of 5 years only.
  • The scope of the definition of RPT has been widened to include elements of Companies Act and accounting standards.

The amendments propose to align the provisions of listing agreement with the provisions of the newly enacted Companies Act 2013 and also provide additional requirements to strengthen the corporate governance framework for listed companies in India.

The amendments will be applicable to all listed companies with effect from 1 October 2014, SEBI said in its release.