EXISTS | Q2 OF FY 2021-22



  • Tightened norms on independent directors
  • Guidelines on valuation of securities with multiple put options
  • Amendment to AIF regulations
  • Tweaks to mutual funds compensation
  • Relaxation to superior voting rights


On June 29, 2021, Securities Exchange Board of India (SEBI) made several crucial decisions regarding independent directors on boards of listed companies.

An independent director being a non-executive director aids the company in revamping the governance standards and corporate credibility. The concept of independent directors was added in The Companies Act, 2013 (Act) after the need was felt of having an autonomous voice to speak on behalf of minority shareholders. Section 149 of the Act (to be read along with Rule 4 and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014), showcases the provisions for appointment of directors, including the code of conduct to be adhered by them. The provision of the Act mandates the requirement of one- third of the total directors to be independent in all the listed public companies.

A consultation paper (Consultation Paper on Review of Regulatory Provisions related to Independent Directors) was released by SEBI on March 1, 2021 to review the provisions with respect to the independent directors. Considering the same, major amendments have been done in the rules governing the appointment, removal, re-appointment, resignation of the independent directors.

Key amendment announced by SEBI

  • Appointment of directors: Applicable for all entities, a special resolution with 75% of votes in support must be passed for the appointment, reappointment, and removal of the independent directors. Furthermore, instead of the existing requirement of a majority, there will be a Nomination Committee and a Remuneration Committee having 2/3rd independent directors. The selection of the candidate as an independent director will be done by this committee only, which shall also disclose the skillset of the candidate, thereby justifying the selection.
  • Cooling-off period: Key managerial personnel and their relatives or the promoter group's employees will have to necessarily undergo a three-year cooling off period before getting appointed as an independent director. Similarly, an independent director transitioning into a full-time director in the same company/subsidiary/any company that belongs to the promoter group, will have to observe a cooling period of one year.
  • Resignation of independent directors: If an independent director resigns from the board, the company must disclose the complete resignation letter, including a list of his/her present membership and directorship in the board committees.
  • Audit Committee: The Audit Committee should have 2/3rd members as independent directors. It is further stipulated that approval regarding every related party transaction must be given by the independent directors on the Audit Committee.

Independent directors play a crucial role in taking an unambiguous and independent stand to check and balance the minority shareholders and thereby reduce the exposure of unwanted risks. The regulator has defined the role and responsibilities of an independent director quite elaborately, including the requirement that the person, apart from receiving director's remuneration should not have any pecuniary or financial relations of any kind with the company for two preceding financial years. The changes, which will be applicable from January 1, 2022 will certainly boost the independence of independent directors and ensure transparency on a more holistic level. The changes shall.


On July 9, 2021 SEBI announced a new set of regulations for valuation of securities with multiple put options, held by mutual funds. The circular will come into effect from October 1, 2021.

Salient aspects

  • Valuation of securities: In respect of valuation of securities with multiple put options present ab initio, wherein put option is factored into valuation of the security by the valuation agency, the following will be decided based on the recommendation of Mutual Fund Advisory Committee:
    • If the put option is not exercised by a Mutual Fund, while exercising the put option would have been in favor of the scheme, a justification for not exercising the put option shall be provided by the Mutual Fund to the Valuation Agencies, Board of AMC and Trustees on or before the last date of the notice period.
    • The Valuation Agencies shall not consider the remaining put options for the purpose of valuation of the security.
  • Yield of valuation: The put option shall be considered as 'in favor of the scheme' if the yield of the valuation price, ignoring the put option under evaluation, is more than the contractual yield/coupon rate by 30 basis points.
  • Protection of investor interest: This Circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interest of investors in securities and to promote the development of the securities market.

These amendments, effective from June 18, 2021 have been hailed as a progressive change in recognizing the expanding scale of companies in India. The newly updated norms will prove significantly beneficial in allowing companies with substantial market capitalizations to successfully conduct IPOs and fulfill MPO requirements without the burden of making a huge offer for newly listed companies.


On August 3, 2021 SEBI declared amendments for Alternative Investment Fund (AIFs) in the form of the SEBI Alternative Investment Funds (Third Amendment) Regulations, 2021 (AIF Amendment Regulations), pursuant to suggestions received from several stakeholder groups including AIFs (domestic and global) and regulatory bodies. The changes are meant to ease compliance for AIFs, provide investment flexibility and streamline regulatory processes. This is likely to go a long way in bringing India at par with the global finance and securities market.

Key aspects

  • The term 'Accredited Investor' (AI) was not previously defined. The current amendment has created a framework for certain investors to be identified as AI. An AI denotes a person who is granted a certificate of accreditation by an accreditation agency who, is an individual, Hindu Undivided Family, Family Trust, or a sole proprietor.
  • Flexibility for IMs to take investment decisions, which were restricted or limited to various extents.
  • In May 2021, the SEBI AIF Second Amendment Regulations was notified, which focused on determining the scope of the term 'start - up' by providing a comprehensive definition. It defined a code of conduct which laid down principles on accountability of AIFs and allowing AIFs to invest in units of other AIFs - subject to fulfilment of certain requisites and expanding the scope of 'Venture Capital Undertaking' through removal of its negative list.
  • AIFs can now issue partly paid - up units to investors to represent the portion of committed capital invested.
  • AIFs will have to file private placement memorandum with SEBI through registered merchant bankers.

As per SEBI data, AIFs saw commitments worth INR 82,228 crores in FY21 from Institutions, family offices and high net-worth individuals. On August 13, 2021 SEBI announced further amendments (Fourth Amendment) focusing on 'Debt Funds which invest primarily in debts securities of listed and unlisted investee companies.'


In 2019, SEBI had introduced the concept of Superior Voting Rights (SR) framework. In a move that is likely to further aid the listing of startups in India, SEBI on September 29, 2021 revised certain regulations pertaining to superior voting rights shareholders in companies.

The current framework allows issuance of superior voting rights shares to promoters or founders holding an executive position in the company desirous of listing on the Main Board. However, a sub-section of the framework was being seen as restrictive and onerous to comply with for founders who had diluted their holding but held superior voting rights shares.

Under the current framework, a superior voting rights shareholder could not be part of the promoter group at the time of listing if the collective net worth of the promoter group exceeded INR 500 crores. SEBI eased this restriction by mandating that the superior voting rights shareholder's net worth should not exceed INR 1,000 crores at the time of the proposed listing of the company.

The minimum gap between issuance of superior voting rights shares and filing of Red Herring Prospectus has also been reduced to three months from the existing requirement of six months.

In July this year, SEBI had sought market feedback on the existing framework for SR rights in order to provide flexibility to startup founders seeking to list publicly. The framework allows founders to retain more votes in the company even after the public listing and allows them to protect their SR shares for up to five years after listing.


SEBI has recently modified the circular that mandated paying a fifth of compensation to key employees of asset management companies (AMCs) in the form of mutual fund (MF) units, ahead of its implementation date on October 1, 2021. The regulator said 'junior employees' below 35 years would have to invest only 10% of their compensation in MF units of the fund house in the first year, and 15% in the second year from October 1, 2022 as against 20% for the other employees. However, CEO, Head of Department and Fund Managers, even if below 35 years of age, will not get this benefit.

Key changes

  • The term 'key employees' changed to 'designated employees'
  • Initial investment threshold 10% for those below 35 years
  • Investment in units of the scheme shall be made on the day of payment of salary
  • Superannuation benefits and gratuity paid at the time of death/retirement, shall not be included in the CTC
  • The value of interest on loan availed of by the designated employees against the units from the AMC will not be included in the CTC
  • Existing investments allowed to set off against fresh investments. In the case of liquid schemes, the units would get redeemed on expiry of the mandatory three-year lock-in period. While in open-ended schemes, employees can redeem their units in open-ended schemes twice in a financial year after the expiry of the mandatory lock-in period.
  • The investment will be 'growth' of the MF schemes, and where this option is not available, they will invest in 'reinvestment of income distribution cum capital withdrawal option.

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