Modern businesses face a perplexing issue – which stakeholder should perform governance and the appropriate way to bestow risks and rewards on various stakeholders?

A. Reforms to the Independent Directors’ Regime

Modern businesses face a perplexing issue – which stakeholder should perform governance and the appropriate way to bestow risks and rewards on various stakeholders? According to one school of thought, the corporate entity is a “legal fiction” [1] in which managers undertake various profit-making activities keeping in mind the interests of the shareholders. An opposing view considers the corporate entity as a “social being” [2] that owes obligations towards not only shareholders, but also the employees and wider society.

The Securities Exchange Board of India (SEBI) (see consultation paper dated March 1), proposed a slew of measures to address the corporate governance in India. [3] At the board meeting of June 29, SEBI retracted certain proposals 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 wheel of corporate governance, especially for safeguarding minority shareholders’ rights. [5] After two recent corporate governance failures (the dismissal of Tata group director Nusli Wadia for supporting the minority shareholder group in the Tata vs. Mistry dispute [6] and PNB Bank – Nirav Modi scam [7]), SEBI attempted to solve the conflict of interest from the proximity of ID with the promoter and insufficient protection of minority shareholders’ rights. It did this by promoting the UK and Israeli model of appointment/re-appointment of IDs. [8]

Accordingly, the Consultation Paper proposed for appointment and re-appointment of IDs through ‘dual approval’ route:

“(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 re-appointment.

“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/re-appointment; 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/re-appointment 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.”

The Consultation Paper also promoted a dual approval system for removal of IDs. However, in its board meeting, SEBI disregarded this approach and said any appointment, re-appointment or removal of IDs shall be carried out through a special resolution in the listed companies.[9] The amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, reflecting this approach will be effective from January 1, 2022.

It is noteworthy that the SEBI board of directors also agreed to reference the Ministry of Corporate Affairs for giving greater flexibility to companies while deciding the remuneration for all directors (including IDs), which may include profit-linked commissions, sitting fees, ESOPs, etc., within the overall prescribed limit under the Companies Act 2013. This would better enable companies to secure qualified and competent directors.

However, these laudatory measures may not help distance IDs from their alleged entwined relationship with the promoter group. Lingering doubts remain if IDs are truly independent.

It is worth noting that the 2000 report of Kumar Mangalam Birla Committee on Corporate Governance made a forward-looking statement that the corporate governance mechanism must dynamically cater to the needs of increased market competition and rapidly evolving technology. [10] It is not all water under the bridge yet and the regulators could give more teeth to the relevant listing regulations so listed entities can adhere to “3Cs” approach (Compliance, Conduct and Competence) while selecting, removing and setting out the roles and responsibilities of IDs.

B. Proposed Reforms to the Promoter Regime

In line with SEBI’s efforts to adopt international best practice, it floated a consultation paper earlier this year proposing a shift from the concept of a ‘promoter’ to a ‘person in control.’ [11] This fundamental change would impact current regulations under the Indian companies law, restructuring and insolvency law, banking and insurance law and the merger-control regime, particularly in the context of control.

The proposed reform acknowledges the current scenario relating to ownership and control of a number of Indian companies, which is a shift from the traditional family-owned, closely held structures, to widely dispersed shareholding, with institutional and private equity investments and, often, not having a clearly identifiable ‘promoter’ or ‘promoter group’, a concept which in itself is fairly unique to Indian companies.

The consultation paper 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.” [12] This reflects continuing control deals across sectors by private equity investors and is often tailored to unique situations in the Indian M&A and private equity regimes.

One must be mindful that the ‘promoter’ concept is deeply entrenched in Indian companies and the proposed reform will require a mindset change. The Consultation Paper planned for this change by proposing any reform should be carried out over a period of three years.

On August 6, 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.” [13]


[1] Lynn S. Paine and Suraj Srinivasan, A Guide to the Big Ideas and Debates in Corporate Governance, Harvard Business Review (2019)

[2] Gerald F. Davis, Marina V.N. Whitman, & Mayer N. Zald, The Responsibility Paradox, Stanford Social Innovation Review (Winter

[3] SEBI, Consultation Paper on Review of Regulatory Provisions related to Independent Directors, SEBI Reports and Statistics (March

[4] SEBI, Minutes of the SEBI Board Meeting, SEBI Press Releases (June 2021)

[5] Supra footnote 3.

[6] Umakanth Varottil, SEBI’s backtrack on independent directors, The Indian Express (July 2021)

[7] Param Pandya, Public Sector Banks in India: Revisiting regulatory and corporate governance in the light
of the PNB scam, South Asia @ LSE’ blog (May 30, 2018)

[8] Supra footnote 3.

[9] Supra footnote 3.

[10] SEBI, Report of the Kumar Mangalam Birla Committee on Corporate Governance, SEBI Reports (2002)

[11] 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 (May 11, 2021)

[12] Id at page 6.

[13] SEBI, Minutes of SEBI Board Meeting, SEBI Press Releases (August 6, 2021)


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 organizations.


Rohan Kumar

Rohan Kumar

Rohan Kumar is a Partner at Quillon Partners
(formerly Platinum Partners, Mumbai).

Shinjni Kharbanda

Shinjni Kharbanda

Shinjni Kharbanda is a Senior Legal Manager at
SpiceJet Limited, an airline company in India.


* This article was first published in the October 2021 issue of the IHC Magazine. You can read/download the magazine here.

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