The recent amendment to empower retail investors in the appointment of Independence Directors may not achieve the desired result as institutional investors account for the majority of retail investors in most large companies.

M Damodaran, former chairman, SEBI, and Chairman, Excellence Enablers, said there is a tendency to equate minority shareholders with retail investors, but in reality, institutional investors, both foreign and Indian, constitute a large majority of the minority shareholders in many companies.

Any attempt to empower minority shareholders will result in empowering institutional shareholders who normally go by the advice of proxy advisory firms when it comes to supporting or opposing resolutions, he added.

In a bid to factor in the voice of the majority of the minority, SEBI has recently made it mandatory to seek shareholder approval through a special resolution for independent directors' appointment from January.

As of now, a special resolution is required only for the appointment of a director who is above 75 years.

Distrust in business

In most cases, the resolution for the appointment of independent directors is passed with over 90 per cent support, and in quite a few cases, it is as high as 98-99 per cent. Clearly, therefore, minority shareholders have so far not demonstrated unhappiness with the candidates whose appointments have been proposed.

“It is a sobering thought that in India’s 75th year of independence, we continue to believe that there is no independence in India’s boardrooms,” said Damodaran.

Business in India is carried out in an atmosphere of deep distrust. For several decades, businessmen have not been trusted to act in a bonafide manner. Over time, the distrust was transferred from the businessmen to the independent directors, with the default option being that the IDs will not act independently, especially when the interests of the majority shareholders are involved, he said.

What is clearly missing is the recognition that boardrooms require behavioural attributes, rather than an understanding of legal and regulatory provisions.

A possible solution would be to categorise independent directors as Non-Promoter Directors and pray that their good conscience will persuade them to act independently, said Damodaran.