Recent Key Reforms Proposed by India’s Capital Markets Regulator

A. Reforms to the independent directors’ regime

 The modern business corporations are often shrouded with a perplexing issue – which stakeholder should perform the governance activity and what is the appropriate way that one must bestow risks and rewards on various stakeholders of the company? According to one school of thought, the corporate entity is a “legal fiction”[1] wherein the managers undertake various profit-making activities keeping in mind the interests of the shareholders of such entity. Whereas there is an opposing view which considers the corporate entity as a “social being”[2] i.e. it owes obligations towards not only shareholders, but also towards the employees and the society.

The Securities Exchange Board of India (SEBI) vide consultation paper dated 1-3-2021 (Consultation Paper), proposed a slew of measures to address the extant corporate governance scenario in India[3] and thereafter, SEBI at its board meeting of 29-6-2021 (Board Meeting), retracted certain proposals which were aimed at overhauling the Indian corporate governance framework, while duly approving several other proposals.[4]

In the Consultation Paper, SEBI noted that an independent director (ID) is a critical spoke in the entire wheel of corporate governance, especially in the case of safeguarding minority shareholders’ rights.[5]Subsequent to the corporate sector being confronted with two recent corporate governance failures viz. the dismissal of Nusli Wadia (ID at certain Tata group companies) for supporting the minority shareholder group in the Tata v. Mistry dispute[6] and PNB Bank – Nirav Modi scam[7], SEBI attempted to solve two pertinent issues (i.e. conflict of interest arising from proximity of ID with the promoter and insufficient protection of minority shareholders’ rights) by promoting the UK and Israel model of appointment/reappointment of IDs.[8]

Accordingly, in the Consultation Paper, SEBI proposed for appointment and reappointment of IDs through “dual approval” route i.e.

“(i) approval of shareholders;

(ii) approval by ‘majority of the minority’ (simple majority) shareholders.

The approval at point (i) above, shall be through ordinary resolution in case of appointment and special resolution in case of reappointment. If either of the approval thresholds are not met, the person would have failed to get appointed/re-appointed as ID.

Further, in such case, the listed entity may either:

(i) propose a new candidate for appointment/reappointment; or

(ii) propose the same person as an ID for a second vote of all shareholders (without a separate requirement of approval   by ‘majority of the minority’), after a cooling-off period of 90 days but within a period of 120 days. Such approval for appointment/reappointment shall be through special resolution and the notice to shareholders will include reasons for proposing the same person despite not getting approval of the shareholders in the first vote.”

Similarly, in the Consultation Paper, SEBI promoted for a dual approval system for removal of IDs as well. However, in its Board Meeting, SEBI disregarded this dual approval approach entirely and mentioned that any appointment, reappointment, and removal of IDs shall be carried out through a special resolution in the listed companies.[9] The amendments to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015[10], reflecting this approach will be effective from 1-1-2022. It is noteworthy that the SEBI Board of Directors also agreed to make a reference to the Ministry of Corporate Affairs, for giving greater flexibility to the companies while deciding the remuneration for all directors (including IDs), which may include profit-linked commissions, sitting fees, Employees Stock Ownership Plans (ESOPs), etc., within the overall prescribed limit specified under the Companies Act, 2013[11]. This would certainly enable companies to a great extent in securing qualified and competent directors.

However, these laudatory measures may not be adequate in distancing IDs from their alleged entwined relationship with the promoter group and thereby, lingering doubts remain regarding IDs being truly “independent” or not.

It is worthwhile to note that the Report of Kumar Mangalam Birla Committee on Corporate Governance in the year 2000 made a forward-looking statement that the corporate governance mechanism needs to be dynamic to cater to the needs of increased competition in the markets and rapidly evolving technological systems.[12] It is not all water under the bridge yet and the regulators could give more teeth to the relevant listing regulations so that the listed entities adhere to 3Cs approach (i.e. compliance, conduct and competence) while selecting, removing and setting out the roles and responsibilities of IDs.

B. Proposed reforms to the promoter regime

In a welcome move and in line with SEBI’s continuous efforts to adopt international best practices, SEBI had floated a consultation paper earlier this year in May 2021 proposing a shift from the concept of a “promoter” to a “person in control”.[13] This would be a most fundamental change, potentially impacting current regulations under the Indian companies’ law, restructuring & insolvency law, banking & insurance law and the merger-control regime, particularly in the context of “control”.

The proposed reform is an acknowledgement of the current scenario relating to ownership and control of a number of Indian companies, which is indeed shifting from the traditional family-owned, closely held structures, to widely dispersed shareholding, with institutional and private equity investments and often, nothaving a clearly identifiable “promoter” or “promoter group”, a concept which in itself is fairly unique to the Indian companies.

The Consultation Paper has even cited that:

The aggregate shareholdings of promoters in the top 500 listed entities in terms of market value, peaked at 58% in 2009 and is showing a downward trend. The promoters’ shareholding was approximately 50% in 2018. At the same time, the shareholding of institutional investors in the top 500 listed companies, in terms of market value, increased from approximately 25% in 2009 to 34% in 2018[14].

This is also a reflection of continuing control deals across sectors by private equity investors, and often tailored to unique situations in the Indian mergers & acquisitions and private equity regime.

One needs to be mindful about the fact that the “promoter” concept is deeply entrenched amongst Indian companies and the proposed reform will also require a mindset change, which the consultation paper has appropriately planned for by proposing that such reform is carried out over a period of 3 years.

On 6-8-2021, the SEBI Board of Directors gave its in-principle approval to “shifting from the concept of promoter to ‘person in control’ or ‘controlling shareholders’ in a smooth, progressive and holistic manner”[15].


*Partner at Quillon Partners (formerly Platinum Partners, Mumbai). Rohan’s LinkedIn profile can be accessed at https://in.linkedin.com/in/rohan-kumar-a53187a.

**Senior Legal Manager at SpiceJet Limited, an airline company in India. Shinjni’s LinkedIn profile can be accessed at https://in.linkedin.com/in/shinjnikharbanda.

The authors would like to clarify that the views mentioned in this article are the authors’ personal views and do not reflect the views of their respective organisations.

[1]Lynn S. Paine and Suraj Srinivasan, A Guide to the Big Ideas and Debates in Corporate Governance, Harvard Business Review (2019) <https://hbr.org/2019/10/a-guide-to-the-big-ideas-and-debates-in-corporate-governance>.

[2]Gerald F. Davis, Marina V.N. Whitman and Mayer N. Zald, The Responsibility Paradox, Stanford Social Innovation Review (Winter 2008) <https://ssir.org/articles/entry/the_responsibility_paradox>.

[3]SEBI, Consultation Paper on Review of Regulatory Provisions related to Independent Directors, SEBI Reports and Statistics (March 2021) <https://www.sebi.gov.in/reports-and-statistics/reports/mar-2021/consultation-paper-on-review-of-regulatory-provisions-related-to-independent-directors_49336.html>.

[4]SEBI, SEBI Board Meeting, SEBI Press Releases (June 2021) <https://www.sebi.gov.in/media/press-releases/jun-2021/sebi-board-meeting_50771.html>.

[5]SEBI, Consultation Paper on Review of Regulatory Provisions related to Independent Directors, SEBI Reports and Statistics (March 2021) <https://www.sebi.gov.in/reports-and-statistics/reports/mar-2021/consultation-paper-on-review-of-regulatory-provisions-related-to-independent-directors_49336.html>.

[6]UmakanthVarottil, SEBI’s Backtrack on Independent Directors, The Indian Express (July 2021) <https://indianexpress.com/article/opinion/columns/tata-mistry-corporate-dispute-nusli-wadia-sebi-appointment-removal-of-independent-directors-7403380/>.

[7] Param Pandya, Public Sector Banks in India: Revisiting Regulatory and Corporate Governance in the Light of the PNB Scam, South Asia @ LSE blog (30-5-2018) <https://blogs.lse.ac.uk/southasia/2018/05/30/public-sector-banks-in-india-revisiting-regulatory-and-corporate-governance-in-the-light-of-the-pnb-scam/>

[8]SEBI, Consultation Paper on Review of Regulatory Provisions related to Independent Directors, SEBI Reports and Statistics (March 2021) <https://www.sebi.gov.in/reports-and-statistics/reports/mar-2021/consultation-paper-on-review-of-regulatory-provisions-related-to-independent-directors_49336.html>.

[9]SEBI, Consultation Paper on Review of Regulatory Provisions related to Independent Directors, SEBI Reports and Statistics (March 2021) <https://www.sebi.gov.in/reports-and-statistics/reports/mar-2021/consultation-paper-on-review-of-regulatory-provisions-related-to-independent-directors_49336.html>.

[10]Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

[11]Companies Act, 2013.

[12]SEBI, Report of the Kumar Mangalam Birla Committee on Corporate Governance, SEBI Reports (2002) <https://www.sebi.gov.in/media/press-releases/oct-1999/corporate-governance_18186.html>.

[13]SEBI, Consultation Paper on Review of the regulatory framework of promoter, promoter group and group companies as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, SEBI Reports (11-5-2021) <https://www.sebi.gov.in/reports-and-statistics/reports/may-2021/consultation-paper-on-review-of-the-regulatory-framework-of-promoter-promoter-group-and-group-companies-as-per-securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-re-_50099.html>.

[14]SEBI, Consultation Paper on Review of the regulatory framework of promoter, promoter group and group companies as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, p. 6, SEBI Reports (11-5-2021) <https://www.sebi.gov.in/reports-and-statistics/reports/may-2021/consultation-paper-on-review-of-the-regulatory-framework-of-promoter-promoter-group-and-group-companies-as-per-securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-re-_50099.html>.

[15]SEBI, Minutes of SEBI Board Meeting, SEBI Press Releases (6-8-2021)

<https://www.sebi.gov.in/media/press-releases/aug-2021/sebi-board-meeting_51707.html>

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