Independent directors will have to give reasons to quit

Independent directors will soon have to provide "detailed reasons" for their resignations from boards of listed companies and the same would need to be made public under new norms being finalised by regulator Sebi.

In case of an independent director only citing "personal reasons" for his or her resignation from a company board, the individual may be required to explain the logic behind staying on boards of other companies.

The proposed move is part of new norms being finalised by the Securities and Exchange Board of India (Sebi) for a new set of corporate governance norms for listed companies that are going to come into force beginning October, 2014.

Under existing Sebi norms, there is no provision that require mandatory disclosure of reasons for an independent director's resignation from a listed company's board.

It has been felt that resignation of non-executive directors might be due to their disagreement with the management in certain matters, while there have been many instances where independent directors have quit without shareholders getting to know exact reasons.

In some cases, independent directors have quit after coming across irregularities in the company's affairs, but their silent departure has failed to serve the purpose of such directors being guardians of good corporate governance.

As per a Sebi proposal, detailed disclosures for resigning as an independent director need to be made public along with the resignation letter through the stock exchanges.

While independent directors may not be barred from attributing "personal reasons" for their resignation, it has been proposed that anyone using the "personal reasons" excuse may be required to explain in the same announcement why these "personal reasons" do not make it necessary to resign from other positions too, if there are any other directorships held by that person.

The new companies law also requires directors to forward the resignation letter along with detailed reasons to the concerned Registrar of Companies (RoC). However, there is no provision of the same being made public.

While Sebi mostly received favourable comments to a proposal in this regard, it was also told that such a provision can be misused to attract media attention.

Interestingly, Sebi's Primary Market Advisory Committee (PMAC) was of the view that independent directors' disclosing reasons for their departure might not serve any purpose and such a requirement could put "unnecessary burden of disclosure on the resigning independent director".

Under existing Sebi norms, an independent director who resigns or is removed from the board need to be replaced by a new independent director within 180 days from the day of such resignation or removal.