In the case of an Executive Chairman, what is the minimum percentage of Independent Directors required on the Board?

Correct option is B

As per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Clause 49 of the Listing Agreement, the composition of the Board of Directors must ensure a fair representation of independent directors to maintain transparency and protect shareholder interests.

When a company has an Executive Chairman, the governance rules require that at least 50% (half) of the Board must comprise Independent Directors. This regulation is designed to ensure that decision-making is not solely influenced by executive management and that independent voices help in maintaining corporate integrity and accountability.

Key reasons for this requirement:

1. Checks and Balances: Independent directors act as a neutral party, preventing excessive control by executives.

2. Good Governance: It aligns with corporate governance principles and international best practices.

3. Protection of Minority Shareholders: Ensures that decisions favor all stakeholders and not just the promoters.

4. Regulatory Compliance: Many corporate laws worldwide, including SEBI norms in India, mandate this structure.

5. Transparency: Reduces conflicts of interest and improves investor confidence.

Thus, when a company has an Executive Chairman, at least 50% of its Board members must be Independent Directors.

Information Booster:

• Independent Directors are individuals who do not have any material or pecuniary relationship with the company, ensuring their impartiality in decision-making.

• As per SEBI guidelines, if the Chairman is a Non-Executive Director, then at least one-third of the Board should be independent. However, if the Chairman is an Executive Director, then at least half of the Board should be independent.

• This regulation is part of corporate governance reforms aimed at preventing mismanagement and fraudulent activities.

• The Companies Act, 2013, and SEBI guidelines emphasize the importance of independent directors in committees like the Audit Committee, Nomination and Remuneration Committee, and Risk Management Committee.

• Independent Directors serve as watchdogs to ensure that the management operates in the best interest of shareholders.

Additional Knowledge:

1. At least one-third (Option 1):

   • This rule applies only when the company has aNon-Executive Chairman.

   • If the Chairman is not involved in day-to-day operations, fewer independent directors are required.

   • This is relevant for companies with aseparation of powers between the Board and management.

2. At least one-fourth (Option 3):

   • This percentage is too low and does not align with corporate governance standards.

   • It would not be sufficient to ensure independent oversight over executive decisions.

   • Most regulatory frameworks, including SEBI and international norms, require at least one-third or one-half.

3. At least two-thirds (Option 4):

   • There is no such regulatory mandate requiring two-thirds of the Board to be independent directors.

   • While having more independent directors can enhance governance, it is not a legal requirement in standard corporate governance practices.

   • In certain special cases, like government enterprises or high-risk industries, a larger proportion of independent directors may be suggested but not mandated.​