Board interlock restrictions apply to existing IDs too

SEBI clarifies in recent informal guidance

Sundaram Finance (applicant company) on 28th August, 2018 requested SEBI to issue informal guidance for getting clarity/better understanding of the wording use in new Regulation 17 (1A) and Regulation 25 (1) both of which use the word “continue” which is absent in Reg.16(1)(b)(viii).

The below note give’s a summary  with regard to Informal Guidance issued by SEBI dated 15th October, 2018 which gives a better understanding/clarity with respect to the above regulations.

Discussion under Kotak Committee report[1]

Independent director function as an oversight body in monitoring the performance of the company and should raise red flags whenever suspicious occurs, and one of the  most  important elements being “independence”, the Kotak Committee felt that the evaluation of “independence” of an Independent director should  entail  both  objective  and  subjective  assessments  and  such  assessments  should  be  both continuing and genuine.

Another  trend  that  was  brought  to  the  attention  of  the  Committee  and  found  to  be  undesirable from a good governance standpoint, is “board interlocks” which may run a structural vulnerability of quid-pro-quo (a favor or advantage granted in return for something) which may harm the independence of an independent director.

Board interlocks can be good or bad depends on case-to-case basis. Some can use it in ethical manner and can be useful to bring business to companies and some might use them in a wrongly manner/misuse the power for their personal benefit and can cause harm to long-term interest of the company.

Requirement under SEBI (Listing Obligation and Disclosure Requirements), 2015[2]

SEBI has provided clarity in regards to the informal guidance issued to Sundaram Finance Private Limited based on three regulation provided under SEBI (Listing Obligation and Disclosure Requirement), 2015:

Regulation 16 (1)(b)(viii):

“Independent director means a non-executive director, other than a nominee director of the listed entity:

Who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director.”

Regulation 17 (1A):

“No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of seventy five years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.”

Regulation 25 (1):

“No person shall be appointed or continue as an alternate director for an independent director of a listed entity.”

Interpretation of Sundaram[3]

Sundaram Finance Limited requested for informal guidance to be issued for their clarity in regards to Regulation 16 (1)(b)(viii), Regulation 25 (1), Regulation 17 (1A) which are as follow:

  1. There were 12 directors on the board of the listed company, out of which 6 were independent directors. One of the independent directors is non-independent director on the board of another company. One of the directors of other company who is non-executive director is an independent director on the board of Sundaram Finance Limited.
  2. Regulation 16(1)(b)(viii) introduced with effect from 1st October 2018 does not apply to existing independent directors, whose term will expire as per the tenor approved by the shareholders. In the company’s view, the stance is further strengthened by the wordings of Regulation 17(1A) and Regulation 25(1) which use the word, “continue”, which is absent in Regulation 16(1)(b)(viii). Therefore, this provision should apply to directors to be appointed or re-appointed as independent directors only.

SEBI’s informal guidance for the same[4]

Regulation 16(1)(b)(viii) of the SEBI LODR Regulation (inserted by the SEBI Listing Obligations and Disclosure Requirements  Amendment ) Regulations, 2018 were notified on 9th May, 2018. The said amendment has come into effect from October 01, 2018. Hence all listed companies were given time till October 1, 2018 to comply with the said clause (viii) of Regulation 16(1)(b) of said amended regulations. The said regulations shall apply to both to existing directors and to new appointment/ re-appointment of directors with effect from October 1, 2018.

Analysis and conclusion

The rationale behind the above is that the independent directors is a critical instrument for ensuring good corporate governance and it is necessary that the functioning of the institution is critically analyzed and proper safeguards are made to ensure efficacy.

These types of interlocks have garnered significant regulatory and academic attention because they raise concerns about whether a director charged with overseeing an executive who is, in a different context, acting as one of his own directors, can be truly independent.

This will help in maintaining the “independence” of independent directors and will safeguard the interest of the company in long run.






SAST amendments brought by SEBI

-imposes a complete prohibition on a fugitive economic offender

By Munmi Phukon (

SEBI on 11th September, 2018 has notified the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2018[1]. The key changes are highlighted below:

Chapter I- Preliminary

[Reg. 2(1)]- Definitions

Clause (j)- Frequently traded shares

As per existing definition, the traded turnover of the shares (to be treated as frequently traded shares) was required to be determined during the period of 12 calendar months preceding the month in which public announcement is made.

Now, the period of 12 months will be calculated from the month preceding the month in which the public announcement was actually required to be made.  Therefore, even in case of failure to make an open offer, the 12 months shall be counted from the month in which the offer was required to be made.

Insertion of new clause (ja)- Definition of fugitive economic offender”

To mean an individual who is declared a fugitive economic offender under section 12 of the Fugitive Economic Offenders Act, 2018 (17 of 2018).

The insertion of the definition is in relation to the new Reg. 6B which is covered below.

Chapter II- Substantial Acquisition of Shares, Voting Rights or Control


Reg. 5A- Delisting offer

The existing proviso to the Regulation provides that an upfront declaration of the intention to delist the shares of the target company is required to be made at the time of publication of the detailed public statement. In order to bring more clarity, the said proviso has been amended to specifically provide that any subsequent declaration of delisting shall not suffice.

Insertion of new Reg. 6B- Prohibition applicable to fugitive economic offender

The new Reg. is different from Reg. 6A inserted vide SAST (Second Amendment) Regulations, 2016 which is applicable to a wilful defaulter. Reg. 6A prohibits a wilful defaulter to acquire shares or enter into any transaction that would attract the obligation to make a public announcement of an open offer for acquiring shares under these regulations. Evidently, the restriction is to acquire so much of shares or to enter into any transaction which in turn shall require making of a public offer. Further, a wilful defaulter has been made eligible to make a competing offer in accordance with the regulations.

On the other hand, fugitive economic offender has been completely prohibited from making a public announcement of an open offer or making a competing offer for acquiring shares or entering into any transaction, either directly or indirectly, for acquiring any shares or voting rights or control of a target company. Therefore, the prohibition is not only on making an open offer or competing offer but on any acquisition.

Reg. 7(2)- Offer size for voluntary offer

The existing Reg. provided the minimum offer size to be additional 10% of total shares of the target company. The same has now been linked to voting rights and accordingly, minimum offer size for voluntary offer shall be for additional 10% of the voting rights.

Reg. 10- General exemptions from making an open offer

Clause (a) of Reg. 10(1) provides exemption to inter se transfer between certain categories of persons including transfer among group companies being holding- subsidiary, fellow subsidiary etc. An explanation to the said clause has been inserted to bring clarity that the company as referred to in the clause shall include a body corporate.

CHAPTER – III- Open Offer Process


Reg. 17(3)- Form of escrow account

An explanation has been inserted under the Reg. explicitly mentioning that the cash component of the escrow account may be maintained in an interest bearing account, subject to the merchant banker ensuring that the funds are available at the time of making payment to the shareholders.

Reg. 18(2)- Mode of sending of letter of offer

An explanation has been inserted to provide electronic mode as the eligible mode of sending letter of offer to the shareholders. However, on receipt of a request, a physical copy shall have to be issued from any shareholder to receive a copy of the letter of offer in physical format, the same shall be provided. The letter if offer shall specifically mention the same.



SEBI ICDR Regulations, 2018– Snapshot on changes in rights, bonus, QIP and preferential issue

SEBI amends LODR in relation to listing of Security Receipts

By CS Vinita Nair (

Aligns with recent amendment made in SEBI regulations for listing of Securitised Debt Instruments

SEBI has notified amendments to LODR Regulations vide SEBI (Listing obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2018[1] (‘Present Amendment’) dated September 6, 2018 and has aligned the said regulations with the amendments made in SEBI (Public Offer and Listing of Securitised Debt Instruments) (Amendment) Regulations, 2018 dated June 26, 2018[2]. Read more