SEBI Clarifies Cousin Of Promoter Eligible To Become An Independent Director

In an informal guidance note, the Securities and Exchange Board of India (SEBI) has made clear that a cousin of the promoter or director is not automatically ineligible for the position of independent director of a listed company under the SEBI (Listing Obligations and Disclosure Requirements) Regulations.

This clarification was issued in the wake of a query raised by Maithan Alloys Ltd. The matter related to the proposed appointment of an academic professional as an independent director. The individual is a cousin of Siddhartha Shankar Agarwalla, a member of the promoter group of Maithan Alloys and a director in two of its subsidiary companies.

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Interpretation Of ‘Relative’ Under Existing Rules

According to the application submitted by the company, the proposed appointee is the daughter of the father’s sister of Siddhartha Shankar Agarwalla.

Maithan Alloys argued that although the individual is related to a promoter group member, the relationship does not fall within the definition of “relative” under the Companies Act, 2013, and the SEBI Listing Regulations.

After examining the applicable provisions, SEBI observed that a cousin is not included within the prescribed definition of a relative under the Companies (Specification of Definitions Details) Rules and the relevant provisions of the Companies Act and LODR Regulations.

According to the regulator, based on the details provided, the proposed person would qualify as an independent director candidate as the relationship in question is outside the ambit of Regulation 16(1)(b)(iii) of the LODR guidelines.

Other Conditions Need Fulfilment As Well

As clarified by the SEBI, the ruling pertains to the specific case in question and should not be construed as a general exemption to other criteria of qualification.

It was made clear by the regulator that listed entities will have to comply with the relevant criteria as per the Companies Act and other SEBI guidelines. These include requirements relating to financial relationships, shareholding thresholds, business connections and other independence criteria prescribed under law.

The market regulator also clarified that the guidance was issued solely on the basis of the facts and representations made by the applicant.

Guidance To Aid Governance Decisions

Guidance given by SEBI in an informal way explains the meaning of regulations, but it cannot be termed as an official order from the Board. The regulatory authority made it clear that a situation may arise whereby another conclusion would be made due to the presence of other facts and circumstances.

This clarification will offer further insight into the process followed when making board appointments in listed firms especially where the relationship is one of extended family members, which is not defined by statute as being a relation.

It also demonstrates the need to consider independence requirements based on a statutory meaning of relationships for appointments to the boards of listed firms.