The Securities and Exchange Board of India’s (SEBI) recent clarification on independent directors has caught many stakeholders, particularly corporate governance and taxation experts, by surprise.
In response to an informal guidance request from Maithan Alloys regarding the appointment of a promoter’s cousin as an independent director, SEBI observed that the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, do not prohibit such an appointment.
Maithan Alloys proposed appointing an academic professional as an independent director. The proposed appointee, who holds advanced management qualifications and serves as an Assistant Professor at a business school, is a cousin of Siddhartha Shankar Agarwalla, a member of the company’s promoter group and a director in two of its subsidiaries.
Who qualifies as a relative?
According to the application, the proposed director is the daughter of Agarwalla’s father’s sister. Maithan Alloys argued that Section 2(1)(zd) of the SEBI LODR Regulations does not classify a cousin as a “relative”.
Under Section 2(77) of the Companies Act, “relative” includes members of a Hindu Undivided Family, husband and wife, father, mother, son, son’s wife, daughter, daughter’s husband, brother, sister, stepbrother and stepsister.
SEBI accepted the company’s interpretation and concluded that the proposed appointee could be appointed as an independent director, subject to meeting all other eligibility requirements, since a cousin does not fall within the definition of “relative” under either the Companies Act or the SEBI LODR Regulations.
The broad expectation is that an independent director is a non-executive board member who enhances corporate credibility and governance standards by exercising objective and unbiased judgment. Such a director is expected to be free from relationships that could compromise independence.
Among the key responsibilities of independent directors are bringing objective judgment to board deliberations on strategy, performance, risk management and governance; evaluating management performance; balancing stakeholder interests; safeguarding minority shareholders; and playing a crucial role in determining executive remuneration and key management appointments.
Keeping these principles in mind, the SEBI-appointed Uday Kotak Committee on Corporate Governance had observed in 2017 that there were instances of relatives of promoters being appointed as independent directors. The committee recommended broadening the exclusions to prevent the appointment of “family associates” as independent directors.
“It was therefore concluded that the net of exclusions be appropriately expanded to avoid the appointment of family associates as independent directors,” the committee had noted.
Debate Rekindled
The issue assumes greater significance in light of recent corporate governance concerns.
Just days after SEBI’s clarification, the regulator, in an interim order against Rajesh Exports, alleged that the company had prima facie overstated nearly ₹15.15 lakh crore of revenues attributable to its subsidiaries during FY21-FY25. According to SEBI, the alleged misstatement accounted for around 99.8 per cent of the revenues attributed to the company’s overseas subsidiaries and step-down subsidiaries, creating what it described as an “inflated and misleading picture” of operations.
The interim order sent shockwaves through the investment community and reignited questions about the effectiveness of board oversight and the role of independent directors.
SEBI Chairman Tuhin Kanta Pandey recently remarked at the CII Corporate Governance Summit that, in many cases, independence exists only in form and does not translate into action.
Against this backdrop, it may be time to revisit the Kotak Committee’s recommendations.