India: Is Your Board A Perfect Ten? SEBI Issues Guidance To Evaluate Board Of Directors

Last Updated: 2 February 2017
Article by S.S. Rana & Co. Advocates

 The Securities Exchange Board of India (SEBI) on January 5, 2017 issued directions on evaluation of performance of their directors to safeguard independence and impartiality and amplify corporate governance in the company. Though the Circular1 issued by SEBI is intended to be treated as a guidance and does not constitute rules, this guidance has come forth in wake of the TATA-Mistry fiasco. The issue involving the Tata conglomerate, showed the defenselessness of independent directors in India when up against a dominant shareholder and for the first time, a chairman of several public listed companies was pursued to be evicted from a directorial position on grounds of no confidence.

Legal Scaffold vis a vis the Corporate Ambiance

The Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 contain expansive provisions on evaluation of the performance of the board as a whole, individual directors (including independent directors and Chairperson) and various committees of the board. These provisions also specify responsibilities of various persons / committees for conduct of such evaluation and certain disclosure requirements as a part of the listed entity's corporate governance obligations. Pursuant to Section 149 (8)2 Clause VIII of Schedule-IV provides for performance evaluation of independent directors. As per this clause, performance evaluation of independent directors shall be done by the entire board of directors, excluding the director being evaluated. It is on the basis of this report that the furtherance of an independent director's term is decided. Therefore, keeping this in mind, small shareholders of three listed TATA Companies had approached the Bombay High Court seeking the removal provision in Section 1693 to apply only for a removal pursuant to a poor performance evaluation by the board of an non-independent director; the reason being that an Independent director represents the welfare and interests of minority shareholders and therefore their removal should not be voted upon by promoter/ dominant shareholders.4

SEBI wants companies to ensure that deliberations within the board are healthy and free-flowing, critical and dissenting submissions are also heard and conflicts of interest are monitored and dealt with appropriately. The Guidance focuses on:

  • The subject of evaluation that involves evaluation on multiple levels. Such as the Board of directors as a whole, committees of the Board, Individual Directors, or the chairperson (including chairperson, CEO, Independent Directors, non-independent directors).
  • Process of evaluation involves identifying the objectives of the evaluation including laying down of objectives that may be standard for all board evaluations or specific objectives privy to a particular evaluation. The criteria of the evaluation adopted would depend on the position held by the persons concerned. Further, it should be taken note of, if the board takes a review of high risk issues that impact the organization regularly. Another important aspect of evaluation of the board is to ascertain if the board monitors and manages potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions. Assessments should be carried out both internally, and externally as provided under the relevant provisions of the Companies Act, 2013.
  • Feedback to the persons being evaluated is imperative to conducting a free flowing evaluation procedure. Feedback to the individual directors, the Board and the Committees
  • is crucial for success of Board Evaluation. Such feedback can be given by the chairman either orally or in written to the members and other persons concerned.
  • An Action plan should be formulated by the board based on the results of the evaluation process. The action plan must focus on areas of improvement, including training and skill building g objectives. The action plan should also list the list of required actions. Further, these actions should be reviewed from time to time.
  • Disclosure to stakeholders on various aspects under SEBI LODR and Companies Act, 2013 requires disclosure of manner of formal annual evaluation of the Board, its committees and individual directors and of performance evaluation criteria for independent directors to the shareholders on an annual basis. Additionally, for more transparency, many entities worldwide voluntarily provide additional disclosures including the results of the Board evaluation, action taken on the basis of the evaluation, current status, etc. to various stakeholders. The same may be added to the list of disclosures prepared.
  • Frequency of board evaluation, the Board Evaluation is required to be done once a year. The entity, if it so desires, may also conduct such evaluation more frequently. Since Board evaluation is a continuous process, it is felt that feedback provided to the members during meetings and otherwise, whether oral or written, is more effective for continuous improvement and ideally complements the annual evaluation process.
  • Responsibility of board evaluation, the responsibility of Board evaluation lies on different persons depending on the subject of evaluation under relevant statutes. Globally, the role of directing the process of Board evaluation and of ensuring its usefulness in improving the Board efficiency lies on the Chairperson. Hence, to achieve maximum advantage of the course, the role and purpose of Chairperson in Board Evaluation necessitates to be laid out clearly in advance.
  • Review requirements highlight that Board evaluation requires periodical review for improvement. The responsibility of such review of the evaluation process lies with the Board of Directors under applicable laws.

Comment

The principal role of the board of directors is to oversee the function of the organization and ensure that it continues to operate in the best interests of all stakeholders. Given the complexity of today's organizations, that is no simple or straightforward task. Today, board effectiveness is a key performance driver of the Indian companies. Though the guidelines issued by the key regulator are not binding upon the listed companies to adhere to, but highlights that the thrust of SEBI is tiling towards board management and board well-being to ensure that the interests of the stakeholders are not thwarted by scuffles within the board or conflicting interests of directors.

Footnotes

 1 SEBI/HO/CFD/CMD/CIR/P/2017/004

2 This section highlights that The company and independent directors shall abide by the provisions specified in Schedule IV. 

3 This section mentions the right of shareholders to remove a director in the general meeting through ordinary resolution is a legal Right that cannot be damaged or taken away by MoA, AoA or any other documents or agreement.

4 K. Vijayraghavan & Reena Vacharia, Tata Shareholders Move High Court Against Rule on Removing Independent Directors, The Economic Times (December 14, 2016) http://economictimes.indiatimes.com/news/company/corporate-trends/tata-shareholders-move-high-court-against-rule-on-removing-independent-directors/articleshow/55969004.cms

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
S.S. Rana & Co. Advocates
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions