SEBI aka Securities and Boards of India (SEBI) has recently approved well-informed investors from the category of wealth who will be allowed to invest in riskier products, which are usually allowed to individuals.
Termed accredited investors could be family trusts, individuals, proprietorships, etc. The regulator’s board also strict the norms for the independent directors. Also, it has been mentioned that the independent directors can be appointed only through a special resolution passed by the shareholders.
The resolution requires a total of 75% votes in favour to be passed. Furthermore, the regulator also has explained and strengthened the disclosure requirements for the skills required to be an independent director.
Moreover, the regulator said that the nomination and remuneration committee finally decides on the appointments and compensations that should have two-thirds independent directors compared to a majority now.
SEBI or the regulator also specify that all the related party transactions will be approved by only independent directors.
The board further said that the entire resignation letter of an independent director should be disclosed along with present directorships and membership of the board committee.
All the changes that have been mentioned above will take effect from January 2022.
As per the SEBI officials, they will set eligibility criteria for the investors who can get the accreditation from the top stock exchanges, subsidiaries of depositories and more.
The regulator had floated a consultation paper in February which had specified some of the criteria such as annual income that must be at least 2 Crore or minimum net worth of 7.5 Crore or minimum annual income of 1 Crore with a minimum net worth of Rs 1 Crore.
Authorized investors have the flexibility to invest the minimum amount mandated iN SEBI rules and subject to certain conditions from regulatory requirements.
SEBI also came up with a new idea in order to minimize insider trading. For instance, it has extended the maximum reward amount for an informant who gives the information on insider trading from Rs 10 Crore to 1 Crore. It has also extended the payment of rewards to informants.
The regulator has also approved several changes to its mutual fund regulations that require asset management companies to need more funds in riskier schemes so that they have more skin in the game.
As of now, AMC is required to invest only one per cent of the amount raised in an NFO that is Rs 50 lakhs.
Furthermore, the SEBI also allows debt issuers who have a less than 3-year track record so that they can raise more funds than they issue only on a private placement basis on an exchange bond bidding platform.
Definition of Independent Director
The first proposal is directly proportional to the definition of an independent director. As of now, the restrictions are set only to those who have been known to be the termed accredited investors, such as family trusts, proprietorships. Also, the restrictions for those who have had a direct relationship with the directors.
The cooling-off period for each was three and two years respectively. In order to maintain a balance, SEBI has proposed to introduce a single cooling-off period for three years.
This means, if any person belongs to Key Managerial Persons or its relatives that have had a relationship with the company, its subsidiaries, or promoters, can be appointed as an independent director in a listed entity only three years from the date.
Dual Approval Process for Appointment, Reappointment and Removal of Independent Directors
Under SEBI regulations, the directors are appointed and nominated by the company’s board and the approval needs to be taken by shareholders through an ordinary resolution.
- If we talk about the case of promoter led companies, the shareholder vote outcome would be decided by the majority. In order to give a non-promoter or public shareholder a strong authority, SEBI has decided on a dual approval process for appointment, re-appointment of independent directors from the board of a listed entity.
- Special care needs to be taken while appointing independent directors:
- Appointment, re-appointment would require the approval of shareholders and majority or minority of shareholders both.
- The shareholder’s vote would be counted through ordinary or special resolution as is the existing case appointments and reappointments.
- Both the votes can be done via a single process and meeting.
- Any candidate, if in any case fails to get dual approval can be proposed again for independent directorship through a second vote after a period of 90 days.
- The same process would apply for the removal of independent directors.
SEBI has given more detailed disclosures by the Nomination and Remuneration Committee regarding the selection of candidates for the post of independent director.
If there is a vacancy in the name of an independent director, the new candidate appointed by the board must need approval within 3 months.
Resignation of Independent Director
In order to strengthen the disclosure around the resignation of independent directors, Sebi has proposed the following:
The entire resignation letter needs to be disclosed to the shareholders along with a list of membership in the committees of the board.
The independent director who resigns from a board citing pre-occupation, personal commitments is subjected to a cooling period of 1 year before he/she join another board.
Audit Committee
As of now, two-thirds of the board’s committee needs to compromise independent directors. The decisions made by audit committees range from the finalization of accounts to related party transactions; SEBI has proposed the following:
2/3rds of the total strength of an audit committee need to be composed of independent directors, while the remaining must be non-executive directors who are not related to the promoter.
Independent Directors: Appointment Rules
SEBI board toughen norms for independent directors. It is said that the independent directors can be appointed through a special type of resolution passed by the shareholders.
Takeaway
SEBI now has sought the views of the ministry of corporate affairs on this issue as any change would first have to be applied in the company law before SEBI could follow suit.
The president and Chief Operating Officer of numerous advisory firms said the discussion paper provides the increasing expectations of investors from independent directors.
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What is Meant by Depository Participant (DP)In the share market, a Depository is an institution or firm that issues shares from the marketplace to be exchanged.
Depository Participant (DP) functions as the intermediary between a dealer and business.
A DP generally appears to be a financial organization including a bank, broker and financial establishment employed as an agent of the depository.
It is issued as a unique identification ID from the SEBI to function as a depository participant (DP).
This identification number is also known as DP-ID.
Till current approximately 950 DPs are enrolled with the Indian stock exchange.Transformation of DematThe conversion of physical records of investments into the digital format is regarded as " dematerializing" of these securities.
