Sebi strengthens corporate governance norms, ends practice of permanent board seats at listed cos

Sebi Chairperson Madhabi Puri Buch on Wednesday announced steps to strengthen corporate governance norms, ending practice of individuals having permanent seats at boards of listed companies.

The Sebi board approved amendments to the LODR Regulations to strengthen corporate governance at listed entities by enhancing disclosure and empowering shareholders through various mechanisms. They included periodic shareholders’ approval for any special right granted to a shareholder of a listed entity to address the issue of perpetuity of special rights. Besides, there would now be periodic shareholders’ approval for any director serving on the board of a listed entity to do away with practice of permanent board seats.

Sebi has also strengthened the extant mechanism of sale, lease or disposal of an undertaking of a listed entity outside the ‘Scheme of Arrangement’ framework.

Earlier in February, it was proposed that if there is any director serving on the board of a listed entity without his/her appointment or re-appointment being subject to shareholders’ approval during the last 5 years i.e., from April 1, 2019, the listed entity shall take shareholders’ approval in the first general meeting to be held after April 1, 2024, for his/her continuation on the board of the listed entity.

Besides, it was proposed that from April 1, 2024, subject to the other applicable provisions of law, the listed entity should ensure that the directorship of all directors serving on the board or appointed to the board is put up to shareholders for approval at least once in every 5 years.

To be sure, permanent seat on a board is generally secured through two ways: By having a clause inserted in the Articles of Association (AoA) of a company enabling appointment of a permanent director, and or by getting appointed on the board as a director not liable to ‘retirement by rotation’ and without any defined tenure.

Recently, the issue of few promoters of listed entities enjoying permanency on the board thereby giving them an undue advantage, prejudicial to the interest of the public shareholders, was highlighted.

It was argued that permanent seat on the company’s board can be detrimental to investor interest. When the companies’ performance deteriorates, promoters hang on to their seats making it harder for investors to effect management change, and arrest value destruction, Sebi noted in a February 21 while floating a consultation paper.

Other instances of promoter-directors continuing on the board even after substantial dilution of their stake and after ceding the control of the company, were also reported, Sebi had pointed out.

Sebi had noted that it was clear that not all directors serving on the board of a listed entity were subject to ‘retirement by rotation’, and there can be a director on the board of a company, who will not be liable to ‘retirement by rotation’ or subject to shareholders’ approval after his / her initial appointment.