Capital markets regulator Securities and Exchange Board of India (SEBI) on Tuesday proposed to end the permanent seats of board members in the listed companies as a measure to strengthen corporate governance. In its consultation paper, the market regulator proposed the approval of the board members should be subject to approval by the shareholders periodically once in five years.
"The shareholders of listed entities do not get an opportunity to evaluate the performance of such directors appointed in an aforesaid manner. This allows them to serve on the board of a listed entity as long as they desire, thereby enjoying “board permanency”, disregarding the intent of shareholders on the continuation of such directors on the board of a listed entity," SEBI said.
According to the market regulator, the proposal has been made after several media reports highlighted that few "promoters of the listed entities enjoyed permanency on the board thereby giving them an undue advantage, prejudicial to the interest of the public shareholders."
At present, the permanent seat on a board is generally secured via two ways—either by having a clause inserted in the Articles of Association (AoA) of a company enabling the appointment of a permanent director or by getting appointed on the board as a director not liable to ‘retirement by rotation’ and without any defined tenure.
"The rationale behind having the concept of ‘retirement by rotation’ is to limit the service lengths of board members and have them vacate their positions at the Annual General Meeting (AGM) unless such directors are proposed for re-appointment in the AGM. Therefore, this provision relating to ‘retirement by rotation’ and subsequent re-appointment only with shareholders’ approval, gives an opportunity to the shareholders to evaluate the performance of such directors and thereafter vote either in favor of or against their reappointment," the consultation paper said.
The market regulator said that not all directors serving on the board of a listed company would be subject to "retirement of rotation."
The market regulator has proposed that executive directors will have a tenure of five years on the board, and that the re-appointment can be done following approval by the board. "After completion of the tenure (maximum of 5 years), such a person can be re-appointed to the board subject to the approval of shareholders of the company. Further, such directors may also be subject to ‘retirement by rotation’ as determined by the company at the time of appointment or re-appointment," the consultation paper said.
However the concept of ‘retirement by rotation’ does not apply to independent directors, as their tenure to be appointed to the board is fixed for five years. “Though the concept of ‘retirement by rotation’ does not apply to Independent Directors, the tenure of such directors on the board is fixed (a term of maximum 5 years) and there is a mandatory requirement of shareholders’ approval for their re-appointment,” the consultation paper said.
"However, there is a possibility that those directors who are non-executive directors (NEDs), other than independent directors, may be appointed to the board of a company as a director not liable to ‘retirement by rotation’ and without any defined tenure. Therefore, such non-independent NEDs would not be subject to periodic shareholders’ approval, unlike other categories of directors," it added.
The market regulator has proposed to carry out the ‘retirement of rotation’ beginning March 31, 2024.
"As on March 31, 2024, if there is any director serving on the board of a listed entity without his / her appointment or re-appointment being subject to shareholders’ approval during the last 5 years i.e., from April 1, 2019, the listed entity shall take shareholders’ approval in the first general meeting to be held after April 1, 2024, for his / her continuation on the board of the listed entity," the market regulator said.