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Informal guidance on Independent Directors – Sundaram Finance

Finsec Law Advisors

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On October 15, 2018, SEBI issued an informal guidance to Sundaram Finance Ltd. (“Company”) clarifying the applicability of the amended definition of independent directors in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”).

Regulation 16(1)(b) of the LODR Regulations defines an ‘independent director’ and lays down criteria for persons who may be considered eligible to be appointed as independent directors of listed companies. This sub-regulation was amended on May 09, 2018 by introducing a new sub-clause (viii) which stated that an independent director of a listed company should not be a non-independent director of another company, on the board of which any non-independent director of the listed company is an independent director. This amendment came into effect on October 01, 2018 and was made pursuant to the Uday Kotak Committee Report on Corporate Governance (“Kotak Committee”) which recommended, inter alia, revising the eligibility criteria of independent directors to avoid ‘board inter-locks’ arising out of common non-independent directors on boards of listed entities.

The Company was of the view that the above-mentioned amendment should not apply to existing independent directors, but should be applicable only for any appointments/renewals of independent directors after October 01, 2018. This understanding was substantiated by the fact that while in case of other amendments, being Regulation 17(1A) and Regulation 25(1), SEBI has specifically prohibited the ‘continuation’ of directorships in certain situations, no such prohibition was provided in case of Regulation 16(1)(b)(viii). Disagreeing with the Company’s contention, SEBI stated that listed companies were given time till October 01, 2018 to comply with Regulation 16(1)(b)(viii), and hence this provision would apply both to existing directors and new appointments/renewals of directors.

The Kotak Committee sought to provide structure to the nebulous nature of determining ‘independence’ of directors and ensure the ‘spirit of independence’ of independent directors. The informal guidance is in line with this intention and provides clarity to listed companies on the applicability of the amended LODR Regulations.