SEBI’s Take on Independent Directors: On Paper or in Fact?

Since the introduction of the construct of ‘independent directors’, the objective from a corporate governance perspective has been clear, i.e. ensuring impartial judgement during Board deliberations, especially on issues of strategy, performance, management of conflicts and standards of conduct.[1] However, the manner in which ‘independence’ was initially defined was only by way of a limited list of negative factors, i.e. absence of ‘material pecuniary relationships’ or not being related to the promoter(s) of the company.[2]

Under the current regulatory framework (Section 149(6) of the Companies Act, 2013 (“Companies Act”), and Regulation 16(1)(b) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”))the negative list has been expanded substantially. It now excludes non-independent directors of another company where any non-independent director of the listed entity is an independent director; and material supplier, service provider or customer or a lessor or lessee of the listed entity or their respective relatives.

The positive list for independent director qualifications includes certain subjective criteria, such as being a person of integrity and possessing relevant expertise and experience in the opinion of the Board of the company, possessing appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.[3]

From the introduction of independent directors in 2000 to now, the requirements prescribed for independent directors have become more detailed and prescriptive. However, in the absence of any bright-line rules prescribed by SEBI, a pertinent question remains: is evaluating independence on a formulaic basis, i.e. fulfilling requirements on paper sufficient or should there be a more substantive examination to ensure genuine independence?

SEBI’s Expectation of ‘Independence’ – Holistic and not Formulaic

In a recent informal guidance in InfoBeans Technologies (May 2025)[4]SEBI evaluated whether an independent director of a listed company is permitted to assume a consultant role in a subsidiary of the listed entity. The applicant’s argument was that the director’s remuneration, payable in his capacity as a consultant, would not exceed the threshold set out under the Companies Act as a disqualifier for independence, i.e. 10% of the director’s total annual income. SEBI did not explicitly accept such a qualitative threshold and clarified that the Companies Act provisions are applicable in addition to the LODR Regulations. The LODR Regulations require the independent director to submit a declaration to the effect that “he is not aware of any circumstance or situation, which exist or may be reasonably anticipated, that could impair or impact his ability to discharge his duties with an objective independent judgment and without any external influence”, which must be accepted by the listed company’s Board after undertaking due assessment of the veracity of the same.

In effect, while the LODR Regulations set out an exhaustive negative list, the informal guidance suggests that the same is not exhaustive as ‘independence’ needs to be assessed holistically, both by the independent director as well as the Board of the listed company.

This approach echoes SEBI’s position in its past orders as well (Maxheights Infrastructure Limited (June 2024))[5]where SEBI was assessing the independence of a director on the board of a listed company, who was (a) prior to his appointment, working with the listed company on a part-time basis; and (b) subsequent to his appointment, working on an ad-hoc basis with a promoter group entity (but was not a permanent employee in either case).

The listed company argued that the definition of ‘independent directors’ under the LODR Regulations only excludes previous ‘employees’ of the listed company or ‘employees’ of the promoter entities, but not part time workers. It was also argued that the independent director drew a nominal amount of INR 22,000 for his part time employment and the amount paid by the promoter group entity was also not substantial and, therefore, it did not qualify as ‘material pecuniary relationship’.

However, SEBI noted that the test for pecuniary relationships is whether such relationships influence the independence of the directors’ judgement, and deemed the relationship in question as material. SEBI also rejected the narrow/ literal reading of the LODR Regulations and held that part time workers of promoters/ ex-part time workers of the listed company are also ineligible to be independent directors.

Focus on Functional Independence

The requirements under the Companies Act and the LODR Regulations when it comes to qualifications of an independent director are limited – for instance, an independent director on the audit committee is only required to be financially literate (i.e., have the ability to read and understand basic financial statements).[6]

However, in Fortis Healthcare Ltd. (May 2022)[7]two directors on the audit committee pleaded ignorance of the financial irregularities in the company on the grounds that they had limited/ basic knowledge of finance and hence had relied on the reporting received from other audit committee members or company officials. SEBI noted that such independent directors on audit committees are expected to understand and reasonably perform the task(s) assigned specifically to the audit committee under law, and hence, should possess the wherewithal to discharge the assigned functions, such as reviewing and monitoring auditor’s independence and performance and effectiveness of the audit process; examination of the financial statement and auditor’s report and approval of related party transactions.

SEBI upheld this principle even in Manpasand Beverages Ltd. (April 2024)[8], where it held that when independent directors, who are part of the audit committee, functioned by relying on the explanations of the financial results from the managing director, rather than independently evaluating financial statements, it clearly indicated that the committee (and therefore the directors) was functioning under influence.

Compliance and Governance Takeaways

SEBI’s orders/ observations make it clear that identifying independent directors cannot only be on the basis of a tick-box approach to comply with the requirements set out in the regulatory framework. It should be on a ‘first principles basis’, to ensure absence of ties/ conflicts that can impact independence and ensure ability and expertise to fulfil the responsibilities assigned to them under law.

Companies (their Boards/ NRC) and independent directors may consider the following aspects to ensure true independence and good governance:

From the Company’s perspective:

• Vet financial relationships of proposed independent directors for the past three years;
• Consider potential conflicts beyond immediate financial relationships;
• Document rationale behind establishing independence clearly in resolutions and appointment letters;
• Monitor changes in independent directors’ annual declarations, business or familial interests continuously;
• Provide training or orientation on responsibilities under law, as well as risk areas;
• Create an environment where challenging questions are welcomed;
• Encourage independent directors to document their concerns and dissent in minutes.

From the Director’s Perspective:

• Disclose all information that may be relevant to assess absence of ties/ conflict with the company;
• Seek independent advice in case of complex structuring or financial matters;
• Document challenges to management assertions;
• Maintain email records showing queries raised on key financial decisions.

With SEBI’s increased scrutiny on related party transactions and financial transactions in the recent past, the role of independent directors has come under spotlight now more than ever. Considering the recent enforcement trends and in the absence of any bright-line rules prescribed by SEBI, extra care must be taken while appointing independent directors: for instance, companies need to carefully assess “materiality” in case of pecuniary relationships between the independent director and the company. Further, there is a need to appoint qualified independent directors, who are capable of undertaking their responsibilities. Companies now need to shift from focusing solely on technical criteria of independence to assessing substantively the role played by independent directors in safeguarding corporate governance.

[1] Report of the Committee Appointed by the SEBI on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Birla (2000) available at https://www.sebi.gov.in/sebi_data/commondocs/corpgov1_p.pdf

[2] Clause 49(I)(A) of the Listing Agreement

[3] Rule 5(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014

[4] SEBI | Informal guidance application received from InfoBeans Technologies Limited seeking interpretation of Regulation 16(1)(b)(iv) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

[5] SEBI | Adjudication Order in the matter of Maxheights Infrastructure Limited

[6] Per Reg. 18 of the LODR, at least one member should have accounting or related financial management expertise but this could also be a non-independent member.

[7] SEBI | Adjudication Order in the matter of Fortis Healthcare Ltd

[8] SEBI | Order in the matter of Manpasand Beverages Limited