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.






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