Sebi overhauls norms for appointment, removal of independent directors

Move designed to reduce sway of promoters; regulator also prunes minimum application amount for REITs and InvITs to Rs 10,000-15,000.

The Securities and Exchange Board of India (Sebi) on Tuesday overhauled the norms pertaining to the appointment, removal, and remuneration of independent directors in order to curtail the sway of promoters over them.

The regulator also reduced the minimum application amount for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) to Rs 10,000-15,000 from Rs 55,000 at present, aligning them with equity initial public offerings (IPOs).

Sebi increased the minimum amount asset management companies (AMCs) have to put in their new fund offerings (NFOs) to ensure more skin in the game.

In another key decision, the Sebi board allowed banks, other than scheduled commercial banks, to act as investment bankers. To crack down on insider trading, Sebi increased the reward under the informant mechanism by tenfold to Rs 10 crore. The regulator also introduced the concept of accredited investors to provide greater flexibility to high networth individuals and professional investors.

Sebi also merged the Issue and Listing of Debt Securities Regulations, 2008, and the Non-Convertible Redeemable Preference Shares Regulations, 2013, into a single regulation known as the Issue and Listing of Non-Convertible Securities Regulations, 2021, in a bid to deepen the bond market.

Independent directors

Based on a discussion paper issued in March, the Sebi board made a number of changes. The regulator has said the appointment, re-appointment, and removal of independent directors shall be through a special resolution, which requires 75 per cent votes in support instead of 51 per cent, as in the case of an ordinary resolution.

Also, the nomination and remuneration committee (NRC), which selects candidates for appointment as independent directors, will be required to have two-thirds IDs, as against the existing requirement of a majority. Further, the NRC will have to disclose and justify the skill-sets while selecting a candidate. Key managerial personnel and their relatives or employees of the promoter group will have to observe a three-year cooling-off period before they get appointed as an independent director.

Sebi has also tightened rules related to the resignation of independent directors. The regulator has said the new framework will come into play from January 1. Sebi has said it will initiate discussions with the Ministry of Corporate Affairs (MCA) for giving greater flexibility to companies while deciding the remuneration for directors, including IDs.

“The nudge to the MCA to relook at compensation flexibility, including ESOPs, is much needed. While some of the changes to the eligibility criteria were expected, the move to disclose the resignation letters of IDs is likely to influence board dynamics and can have a far-reaching impact in contentious situations,” said Shruti Rajan, partner, Trilegal.

Boost for REITs and InvITs

In a move that will boost the appeal of REITs and InvITs, Sebi has lowered the minimum investment size and trading lot to as low as Rs 10,000 from Rs 55,000. Experts said this would improve retail participation and encourage more companies to list these instruments.

“This will not only lead to better liquidity and efficient price discovery, but also provide an attractive opportunity for retail investors to earn stable yields with growth potential,” said Harsh Shah, CEO, IndiGrid. The move comes at a time when certain state-owned infra firms are looking to launch InvITs.

MFs asked to show more skin in the game

Sebi has said AMCs will have to subscribe to their NFOs based on the risk associated with the scheme. Currently, they are required to apply for just one per cent of the amount raised in the NFO or Rs 50 lakh, whichever is less. Industry players said this would potentially mean that AMCs would have to put in a much greater amount.

Amid a boom in the equities market, AMCs have launched a slew of NFOs. In the past six months, the MF industry has mobilized Rs 27,000 crore through 60 NFOs.

10x reward for informants

The Sebi board approved the amendments to the Prohibition of Insider Trading (PIT) Regulations to increase the maximum reward under the informant mechanism from Rs 1 crore to Rs 10 crore. The regulator has said an interim reward of Rs 1 crore will be paid to the informant and the remaining reward amount “will be granted only upon receipt of the monetary sanctions amounting to at least twice the balance of the reward amount payable by Sebi.”

The regulator introduced the informant mechanism in 2019 to encourage and reward whistleblowers. The scheme, however, has not yet taken off in a big way.

Other decisions

The Sebi board allowed payment and small finance banks to register as a banker to an issue. The move will help broaden the reach of the capital markets. The regulator also introduced the concept of ‘accredited investors’, a class of investors who are well-informed and well-advised about investment products. Such investors will enjoy several benefits as those enjoyed by institutional investors.

To deepen the debt market, Sebi has introduced the Non-Convertible Securities Regulations, which experts said would encourage public issuances of debt securities and reduce the burden on the banking system. Sebi also streamlined rules for Indian fund managers to act as foreign portfolio investors.