Insight

How Independent are Boards in India?

Efforts to bring more Independent Directors (IDs) on to Indian Boards, which began as an exercise in compliance, have gradually evolved into a self-motivated drive to improve the quality of governance. Clause 49 of SEBI’s listing rules requires firms with an Executive Chairman to have an ID share of at least 50% on the Board but for those with a Non-Executive Chairman, the required ratio falls to 33%. However, an IMA India analysis, drawn from our recently-published 2021 Executive and Board Remuneration report, which analyses Board compensation and non-compensation parameters for over 2,800 companies and 25,583 directors, finds that many companies still fall short of the regulatory norms on this count.

The average listed company in India has a 31% ID share on the Board

The SEBI norms: A bridge too far?

In FY21, on average, IDs made up 31% of the Board in private-sector listed companies. This ratio has dropped marginally from 33% five years ago, suggesting that companies are not finding it easy to bring in more IDs. ID ratios are correlated with company size, exceeding 40% among large-caps but dropping to 4% among unlisted companies. Further, being ‘independent’ in name is no guarantee of independence, even if it may be sufficient to tick the regulatory check-box. High levels of Board independence should be matched with sufficiently knowledgeable and engaged directors who can hold the management responsible for their actions. This is hard to ascertain from numerical analysis.

Companies that are led by an Executive Chairman on average fail to meet the SEBI’ prescribed ID ratio

As Chart 1 shows, across groups – whether categorised by ownership or market cap – companies led by an Executive Chairman on average fail to meet the 50% norm.


Mid- and small-caps achieve an average of 43-44%, while foreign MNCs and Indian pure-plays are currently at 37% and 42%, respectively. Given these realities, it would appear that most companies are unlikely to meet SEBI’s prescribed 50% threshold by the fast-approaching, April 2022 deadline. In comparison, companies with a Non-Executive Chair comfortably meet the 33% requirement. Possibly, this is seen as an easier method to ‘tick the box’ on ID compliance.

In FY21, NEDs on average earned 81% of their income from ID roles

Income from ID roles: Another telling indicator

A related issue is the income Directors earn from independent Board positions. In FY21, the average ‘specialist’ Non-Executive Director (those holding no known executive positions within the studied sample of companies) earned 81% of his/her total income from ID roles (the balance 19% coming from non-independent, non-executive roles). In comparison, Non-Executive Chairmen (who could hold executive positions in other firms) earned 44% of their income from ID roles last year (see Chart 2).


This could suggest that independence is getting compromised – but conversely, it might be an early indication of a new breed of professional IDs

It may be argued that having more of one’s income coming from ID roles is indicative of the rise of independent directorships as a specialist profession. But such individuals should be considered truly independent only if such income stemmed from multiple roles, thereby reducing the ID’s financial reliance on any one Board. However, the fact is, the majority of ‘specialist NEDs’ in our very extensive sample earned most of their known income from a single ID role. These numbers do raise concerns over the ‘financial independence’ of the average ID. Still, it does suggest the emergence of a new breed of professional IDs and that is an encouraging trend.

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