Sebi issues guidance note for evaluation of companies' boards

To provide more clarity for stakeholders, Sebi today came out with a detailed guidance note for evaluation of boards of listed companies including the role of independent directors.

The guidance assumes significance against the backdrop of ongoing intense boardroom battle at Tata group.

However, the regulator has not mentioned about any particular instance or company.

The guidance note has been prepared to "guide listed entities by elaborating various aspects of board evaluation that may help them to improve the evaluation process, derive the best possible benefit and achieve the objective of the entire process".

Among others, Sebi has emphasised that the role and function of chairperson in board evaluation needs to be laid out clearly in advance in order to achieve maximum benefit of the process.

Responsibilities of various persons, including independent directors, and committees for carrying out evaluation of respective boards as well as the relevant disclosure requirements under corporate governance obligations have also been touched upon in the note.

Observing that the concept of board evaluation in India is at a nascent stage, Sebi said it has been brought to the notice by market participants that the number of listed entities in the country is very large, many of them may not have much clarity on the process of board evaluation and hence may need further guidance.

The Companies Act, 2013 and Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015 contain broad provisions on board evaluation.

The note has been prepared after studying the practices of board evaluation prevalent among listed entities in the county and taking into consideration views of industry associations, stock exchanges, market participants and international bodies.

In its guidance note, Sebi said the nomination and remuneration committee will have to formulate the criteria for evaluation of performance of independent directors and the board of directors. It would carry out evaluation of every director's performance.

It would determine whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.

In the meeting of independent directors of the company (without the attendance of non-independent directors and management), such directors would review the performance of non-independent directors and the board as a whole including chairperson.

The performance evaluation of independent directors would be done by the entire board, excluding the director being evaluated.

"A statement indicating the manner in which formal annual evaluation has been made by the board of its own performance and that of its committees and individual directors shall be included in the report by board of directors placed in the general meeting," it said.

The performance evaluation criteria for independent directors would be disclosed in the section on the corporate governance of the annual report.

The purpose of the guidance note is to educate the listed

entities and their board of directors about various aspects involved in the board evaluation process and improve their overall performance as well as corporate governance standards to benefit all stakeholders.

The independent directors of the listed entity shall hold a meeting at least once a year separately.

The note covers all major aspects of board evaluation like who is to be evaluated, process of evaluation including laying down of objectives and criteria to be adopted for evaluation of different persons, feedback to the persons being evaluated and action plan based on the results.

Also, the note includes disclosure to stakeholders on various aspects, frequency of such evaluation, responsibility of board evaluation and review of the entire evaluation process periodically.

The Securities and Exchange Board of India (Sebi) said that responsibility of board evaluation lies on different persons depending on the subject of evaluation.

"However, it is found that on a global basis, generally the primary role of steering the whole process of board evaluation and of ensuring its effectiveness in improving the board efficiency lies on the chairperson.

"Therefore, to achieve maximum benefit of the process, the role and function of chairperson in board evaluation needs to be laid out clearly in advance," it added.