SEBI issues Informal Guidance on “Material Pecuniary Relationship” under Regulation 16(1)(b)(iv) of LODR Regulations.

Infobeans Technologies Limited wanted to appoint one of its independent directors as a consultant to its U.S.-based subsidiary, InfoBeans Inc. Under this arrangement, the ID would receive compensation from InfoBeans Inc. for services rendered, which would not exceed 10% of the director’s total annual income.

Thus, Infobeans Technologies Limited sought clarification from SEBI regarding the interpretation of the term “material pecuniary relationship” under Regulation 16(1)(b)(iv) of the LODR Regulations. The said provision defines an independent director as a person who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters or directors.

As per the Company, Regulation 16(1)(b)(iv) of the LODR Regulations uses the term “material pecuniary relationship” but it does not prescribe any specific quantitative threshold to determine materiality. This stands in contrast to Section 149(6)(c) of the Companies Act, 2013, which provides that an ID shall not have any pecuniary relationship, other than director’s remuneration, exceeding 10% of his total income or such amount as may be prescribed.

Accordingly, company sought SEBI‘s guidance on whether the proposed consultancy arrangement being within the 10% threshold would be regarded as constituting a “material pecuniary relationship” under the LODR Regulations.

Clarification issued by SEBI vide the Informal Guidance:

1. No quantitative limits have been specified in the regulations for determining whether a pecuniary relationship between an independent director and listed entity, its holding, subsidiary or associate company, or their promoters, or directors is ‘material’ or not, however, Regulation 16(1)(b) has specified the various parameters to determine the independence of a director.

2. LODR Regulations mandate that every Independent Director is to submit a declaration meeting the criteria in Regulation 16(1)(b) and the Board of Directors is mandated to assess the veracity of the same.

3. As per the terms of Para A of Part D of Schedule II of the LODR Regulation, the NRC is mandated to formulate a criterion for determining the qualification, positive attributes and independence of a director and also to formulate criteria for evaluation of performance of independent directors.

4. SEBI has also stated that the provisions of Section 149(6) are also relevant and a listed entity shall ensure compliance with the provisions of LODR Regulations and other applicable laws including Section 149(6) in respect of independent directors.

A copy of the Informal Guidance is enclosed below. Readers are welcome to share their views with Regstreet Law Advisors on info@regstreetlaw.com.