Independent directors

25 August 2005

Companies that fail to comply with SEBI's revised 'clause 49' to ensure that independent directors constitute at least one-third of their boards will be delisted.

To ensure corporate governance the securities and Exchange Board of India (SEBI) has stipulated that effective from January 2006 at least one-third of the directors on the board of a company should comprise "independent directors". Known as 'revised clause 49', SEBI has made it clear that all listed entities would have to comply with this directive by December 31, 2005.

The revised clause 49 stipulates that in companies which have executive chairmen, at least 50 per cent of the board is required to have independent directors. For companies with non-executive chairmen one-third of the board must comprise independent directors.

Non-compliance with the provisions of corporate governance in clause 49 would invite penalties such as suspension of trading and delisting from the stock exchange.
While SEBI can delist a company for non-compliance, even individual stock exchanges have been empowered to suspend the trading of shares of defaulting companies.

The onus of complying with this provision will not be restricted to companies listed on the stock exchanges; the JJ Irani Committee has recommended that the provisions apply to all "large" companies and has left it to the government to define the term "large." However, this provision also applies to even subsidiaries of publicly-listed companies and indications suggest that it may be extended to deemed public companies and, perhaps, even closely-held large private companies.