SEBI (LODR) (Third Amendment) Regulations, 2021

Introduction

SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2021 amend the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. SEBI, in a notification dated August 3, 2021, amended the SEBI (LODR) Regulations, 2015, with effect from January 1, 2022.

The amendments are made concerning the following:

• Enhanced independence criteria for Independent Directors
• Timeline for obtaining Shareholders’ Approval for appointment of Every Director including IDs
• Additional Information requirement in terms of Regulation 36(3) during Appointment and Resignation
• Composition of Nomination and Remuneration Committee
• Approval of RPTs only by IDs of Audit Committee

Enhanced independence criteria for Independent Directors

The new amendments to Regulation 16(1)(b) have improved the independence criteria for Independent Directors (ID). According to Regulation 25(8), whenever there is a change in circumstances that may affect an Independent Director’s status, he must make a declaration that he meets the independence criteria outlined in Regulation 16(1)(b).

The new amendments necessitate determining the criteria for independence for existing IDs. As a result, the listed entity will be required to obtain a revised declaration from the existing IDs confirming their independence before January 1st, 2022, as noted in the following Board Meeting.

Furthermore, the Corporate Governance Report required by Regulation 27 requires confirmation of the Board’s composition in accordance with the SEBI (LODR) Regulation, 2015. Compliance with the revised independence criteria will be reflected in the Corporate Governance Report for the quarter ended March 31, 2022.

Shareholder approval via Special Resolution in a variety of circumstances

The appointment, re-appointment, and removal of ID will require Shareholder approval via Special Resolution. Ordinary Resolution was previously required for the appointment of ID for the first term of their appointment.

Removal and Resignation

An ID who resigns or is removed from the Board must be replaced by a new ID as soon as possible but no later than three months after the date of the vacancy. Previously, the ID was to be replaced either at the next Board Meeting or three months after the vacancy occurred, whichever came first.

If the Board’s composition is proper according to the SEBI (LODR) Regulations, 2015, even after an ID vacancy, the ID vacancy is not required to be filled.

D&O insurance for IDs

With effect from 1st January 2022, the top 1000 listed entities by market capitalization calculated as of 31st March of the preceding fiscal year must obtain Directors and Officers insurance (‘D and O insurance’) for each independent director in the amount and for the risks determined by the Board of Directors.

ID’s appointment as WTD/ED following his resignation as ID

No ID who resigns from a listed entity may be appointed as a Whole Time Director/Executive Director on the board of the listed entity, its holding, subsidiary, or associate company, or on the board of a company in its promoter group, unless one year has passed since the date of resignation as an ID.

Timeline for obtaining Shareholder Approval for Each Director’s Appointment, including IDs

Regulation 17 now includes a new clause (1C), which reads as follows:

“The listed entity shall ensure that shareholder approval for the appointment of a person on the Board of Directors is obtained at the next general meeting or within three months of such appointment on the Board, whichever is earlier.”

Previously, after a Director was appointed by the Board, Shareholder approval could be obtained at the next AGM, which was often held after 11 months or so. The above-mentioned timeline for obtaining Shareholder approval will also apply to re-appointment and casual vacancy filling. As a result, it can be concluded that the Shareholders’ Approval must be taken at the next general meeting or within three months of the date of such approval.

Additional Information requirement in terms of Regulation 36(3) during Appointment and Resignation

The new amendment to Regulation 36(3) requires the following additional information to be provided to Shareholders when a new Director is appointed or a Director is re-appointed:

• The names of the listed entities from which the individual has resigned in the last three years.
• In the case of ID, the skills and capabilities required for the role, as well as how the proposed candidate meets such requirements.

Furthermore, as amended in clause (7B) of para A of part A of Schedule III, the following additional disclosures must be made to stock exchanges at the time of an ID’s resignation:

• A letter of resignation from ID, along with detailed reasons for the resignation
• The names of the listed entities in which the resigning director has directorships, along with the category of directorship and membership.

Composition of Nomination and Remuneration Committee

The new amendments require at least two-thirds of Committee members to be IDs. Previously, it was at least 50% of the members. As a result, if the company’s NRC does not meet the prescribed requirements, the committee must be reconstituted on or before January 1, 2022.

Only IDs of the Audit Committee can approve Related Party Transactions (RPTs).

Approval of RPTs only by IDs of Audit Committee

Regulation 23(2) now includes the following new proviso:

“Provided, however, that only audit committee members who are independent directors shall approve related party transactions.”

As a result, members who are not IDs may express their opposition to the aforementioned transactions, but they cannot approve them. The requirement of ID approval is applicable prospectively. So, any new RPTs or modifications to existing RPTs that require approval after the effective date of the amendment, i.e. January 1st, 2022, will be required to be approved by the IDs only.

Conclusion

SEBI, in its Notification dated 3rd August 2021, made significant changes to the LODR Regulations, which became effective on that date. Later, on August 6, 2021, SEBI issued a corrigendum stating that the amendments would take effect on January 1, 2022, allowing listed entities more time to adjust to the significant changes.

Even though the intent of these amendments is laudable and the goal appears to be to raise the bar of corporate governance, delving deeply into these amendments will reveal the time-consuming procedures and processes that must be implemented by listed companies to ensure compliance. Listed companies must be prepared to meet these challenges.