Tick-Box to Truth – SEBI’s 2025 Clarifications and the Crisis of Director Autonomy

BY HARSHITA DHINWA AND RAM SUNDAR SINGH AKELA, FOURTH- YEAR STUDENTS AT NUSRL, RANCHI

INTRODUCTION

The first six months of 2025 saw a historic culling of Independent Directors from Corporate boardrooms in India where more than 150 Independent directors voluntarily resigned from numerous listed companies, not in anticipation to join new ventures but as an ultimate defense against the unprecedented growth in regulatory scrutiny and personal liability. The prime mover in this instance is the Securities and Exchange Board of India’s (‘SEBI’) 2025 clarificatory note on “Material pecuniary relationship” with securities under Regulation 16(1)(b)(iv) of the Listing Obligations and Disclosure Requirements (‘LODR’) Regulations 2015. However, a deeper look into the high-profile cases such as InfoBeans Technologies 2025, Byju’s 2024-25, Paytm Payments Bank 2024, Dewan Housing Finance Corporation Limited 2021-23, and Punjab and Maharashtra Co-operative PMC Bank 2019 -20 show a systemic connection where in all of them, the directors identified promoter domination, limited information about the financial data, and the threat of retrospective legal action as the main drivers. The main motive is to strengthen such governance by rewiring what the concept of independence means, to go beyond formal financial bright-lines to examine the relative economic and social frameworks that CEOs and nominal IDs should be freed from.

SEBI’S 2025 CLARIFICATIONS: A SHIFT IN STANDARD OF INDEPENDENCE

SEBI’s informal guidance to InfoBeans Technologies on May 14. 2025, clarifying “material pecuniary relationship” under  Regulation 16(1)(b)(iv) of the LODR Regulations left a big shift in independent directorships as a mere formula compliance to its substantive decision-making by independent directors, which saw a significant shift from size and revenue-based materiality assessment.

Historically, Section 149(6) of the Companies Act, 2013, defined independence with the help of a quantifiable limit where pecuniary transactions not exceeding 10% of a director’s total income over two preceding final years would be considered independent.  SEBI’s clarification introduced a more wholesome evaluation of ongoing relationship, indirect economic ties and potential biasness to judgment, without numerical limits. Through InfoBeans, SEBI evaluated an Independent Director’s (‘ID’) proposed consultancy with an overseas subsidiary, compensated with 10% of their income, noting that materiality under LODR lacks a fixed ceiling, urging boards and Nomination and Remuneration Committee (NRC’s) to prioritize substance over form in its assessment of independence.

This aligns with the Ministry of Corporate Affairs’ (‘MCA’) General Circular No. 14/2014, which excluded sitting fees and reimbursement from assessment of pecuniary relationship while focusing on autonomy. Moreover, the J.J. Irani Committee Report (2005) recommended assessing materiality from the director’s or Recipient’s perspective, proposing a 10% income threshold for transactions, that is, the key consideration will be whether the scale of financial involvement is substantial enough to compromise the director’s involvement. According to ICAI’s “Technical Guide on the Provision of Independent Directors from Corporate Governance Perspective, 2021”, the method of fiscal compilation should be disregarded, while also citing MCA’s October MCA’s 2018 Offences Committee Report recommended a 20% cap (Excluding sitting fees) to curb the erosion of directors’ discretionary powers and to standardize the governance framework. Due Diligence Norms demand prime disclosures and retrospective inspections on “friendly” directors to prioritize independent directors’ bias-free judgements over formally induced compliance. This change challenges the board to rethink their appointment and oversight role, ensuring that IDs are free from any social and economic influence.

THE MASS DEPARTURE: CRISIS DISGUISED AS COMPLIANCE

SEBI’s clarification has nearly provoked a boardroom Exodus, with almost 549 IDs resigning in FY25, of which, 94% mid-term, most of which were serving on National Stock Exchange  comparable to 2019’s wave, where 1390+ IDs quit. Resignation is more seen in firms facing financial distress, regulatory sanction, or governance lapses, and where ID’s report promoter-driven opacity, restricted access to financial data and fear of personal liability is rampant. For instance, the IDs of Byju’s resigned stating promoter-controlled decision-making and lack of financial transparency, as reported in MCA filings. Paytm’s directors exited fearing personal liability when the Reserve bank of India imposed penalties for non-compliance, while PMC Bank’s directors were investigated for failing to detect loan irregularities. The IL&FS crisis, where IDs were liable for oversight failures despite limited access to information, sets a precedent. Further, a 2025 NSE report noted a 30% resignation spike post-clarification, showing a crisis masked as compliance. The InfoBeans guidance multiplied fears of retrospective liability, as SEBI’s overall scrutiny exposed IDs to risk for past decisions, even beyond what they have in control.

This “regulated retreat” arises from an inherent imbalance in structure where IDs face fiduciary and criminal liability under Section 149(8) of the Companies Act and SEBI’s review of regulatory provisions related to independent directors, but lack veto power, access to audit reports, or whistleblower protections. Unlike the system governing the U.S., where the Business Judgment Rule shields diligent directors, India’s framework leaves IDs in a much vulnerable position. It has been seen that IDs were penalized in  SAHARA India v. SEBI for promoter-driven judgments despite restricted authority. The legality was defeated in Chanda Kochhar V. SEBI, where IDs were examined for endorsing inequitable loans exposed under Section 149 as parental predominance over promoters. ID Nusli Wadia, who was revealed in the Tata-Mistry saga, also exposed parental superiority. This appears in the MCA’s 2018 Offences Committee Report, pointing ID liability concerns as one of the motives for quitting, which requests increased safeguarding of Section 149. The absence of being able to manage this risk without authority is what, in fact, leads good directors to quit high-risk companies, which in turn triggers the need for our IDs to be upgraded seamlessly, plus for the governance to re-establish its integrity

THE PAPER-THIN PROMISE OF INDEPENDENCE

Section 149(6) of the Companies Act, 2013, and Regulation 16 of LODR, create a mirage of independence by prioritizing formal disqualifications such as past financial ties, shareholding, or employment over functional autonomy.  In promoter-dominated firms, constituting 60% of listed entities, IDs are often selected by promoters, undermining their primary role as stakeholder guardians. The Kotak Committee Report (2017) criticized NRCs for acting as rubber stamps, failing to rigorously vet independence as evidenced in Dish TV India Ltd. (2021 BSE Filing), where minority shareholders challenged ID appointments for lacking autonomy and exposing promoter overreach. Similarly, in N. Narayan v. SEBI, IDs were penalized for governance lapses without direct involvement, highlighting judicial overreach that generally disregards Section 149(12)’s liability limits.

The absence of the safe harbor Doctrine and the Delaware–style “entire fairness” test, which protects directors by scrutinizing conflicted transactions, worsens the ID exodus. Originally a creature of U.S. corporate law, the Safe Harbor Doctrine protects directors from liability arising out of decisions made in good faith, with due care and in the best interests of its company, even though outcomes can come out adverse. In the state of Delaware, the theory is codified in the “Business Judgment rule” which presumes director are diligent unless proven otherwise. This sharply contrasts with Section 149(12), which limits ID liability to act with knowledge or consent, but is inconsistently enforced as seen in the Narayan v. SEBI case.

In addition, the U.K.’s Stewardship Code, issued by the Financial Reporting Council, mandates BODs and institutional investors to prioritize long-term value, transparency, and stakeholder interests, and requires annual disclosure of voting policies and dissent. Principle 7 emphasizes board independence, urging directors to challenge management constructively. In Royal Dutch Shell plc, the Code’s application compelled directors to disclose climate-related governance decisions, thereby enhancing accountability. India’s Regulation 25 mandates separate ID meetings, but these lack the Code’s rigor, as seen in the case study of Yes Bankfiasco , where IDs failed to curb risky lending due to promoter dominance and limited collective action.

REIMAGINING INDEPENDENCE – A BLUEPRINT FOR REFORMS

Halting the departure and regaining trust requires the implementation of reforms in India’s corporate governance. Firstly, since promoter dominance affects 60% of listed companies, it must be controlled by mandating independent third-party nomination panels as proposed per CII . These Panels will compromise minority shareholders, institutional investors and industry experts ensuring that ID appointments are based on expertise and autonomy. Secondly, in addition to the self-declaration under Section 149, promoters should explicitly state whether they have any prior economic, social, or historical relationships with ID candidates, either professionally or financially. This will be supported financially by NRCs and audited by external auditors, thus maintaining transparency and individual choice, preventing such promoter-led appointments. Thirdly, the implementation of the safe harbor doctrine for IDs who are on-record documents of dissent in board minutes. SEBI has recommended this in its consultation paper on directors’ protections, reducing the threat of multiple resignations due to IDS fearing punishment for not protecting the company.

 Fourth, flexibility and competitiveness in remuneration: SEBI in 2019 proposed capped stock options needing both shareholder and minority approval. Here, remuneration is competitive with attracting high-caliber talent but that does not compromise their independence. By the 2018 Report for MCA unlike high fees, which consider sitting fees insufficient, this alignment’s alternative ID incentives with the businessman’s interests; therefore, they should be retained. Fifthly, regular training on finance, risk, and compliance should be guaranteed and Formal evaluations of ID performance should be conducted. Sixthly, using Regulation 25 separate ID meetings to arrange red flags and Section 150’s databank and expertise tests for experienced IDs should be streamlined; these reforms would make ids empowered overseers, not ornamental figures.

CONCLUSION

Independence now feels like  escape, not strength. What was obtained to construct what SEBI 2025 will build has instead exposed the unwillingness of our setup to deny real power but equally demand responsibility. The interpretation of “material pecuniary relationship” under Section 149(6) (c) of the Companies Act and Regulation 16(1)(b)(iv) of SEBI’s LODR Regulations, certainly post-SEBI’s InfoBeans guidance, shows a stark shift from tick-the-box to substance. Independence can be assessed not just on paper but equally in spirit, making it free from past ties, undue influence or hidden loyalties. Independence must be both real and visible for effective governance.

To stem the prevalent exodus of IDs and reinstate confidence in corporate governance, Section 149(6), (12) of the Companies Act, and Regulations 16 and 25 of LODR should be amended to include a safe harbour doctrine for the protection of dissenting IDs, a guarantee for full access to audit data & whistleblower protection, and independent nomination panels without influence of promoters. Remuneration should be fixed with independence safeguards to balance autonomy and talent attraction in the industry, and a materiality threshold should be codified to ascertain pecuniary relationships.  These amendments will ensure independence, substantive rather than symbolic, and they will strengthen integrity in corporate governance.