Independent Director Eligibility – Cousin of Promoter/Promoter Group Member is Eligible

 In a recent informal guidance letter, SEBI clarified whether a cousin of a Promoter Group member qualifies as a person ‘related to promoters or directors’ for the purposes of Independent Director eligibility under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) and concluded that such a relationship, standing alone, does not trigger disqualification.

Background

• The listed company proposed to appoint a candidate as an Independent Director basis her professional qualifications.
• The candidate was the cousin (specifically, the daughter of the paternal aunt) of a member of the Promoter Group of the company – a person who, while not on the main Board of the listed entity, held directorship in two subsidiaries and was a person acting in concert with the promoter.
• The Promoter Group member and his spouse together held approximately 18% of the share capital of the listed company.
• The question before SEBI was whether such a relationship i.e., being a cousin of a Promoter Group member/subsidiary director would disqualify the candidate from being appointed as an Independent Director.

SEBI's Analysis and Conclusion

• SEBI examined whether the term ‘related to promoters or directors’, as it appears in the relevant independence criteria under the LODR Regulations, extends to cousins.
• SEBI noted that the definition of ‘relative’ under the Companies Act, 2013 (and the corresponding provision under the LODR Regulations) does not include cousins – the statutory definition covers a defined and limited set of family relationships, within which cousins do not fall.
• SEBI further held that a broader explanatory provision on the phrase ‘related to any promoter’ appearing in a separate regulation governing board composition is specific to that provision and cannot be imported into the independence eligibility criteria.
• SEBI noted factually that Promoter Group member holds no Board position in the listed company itself, though he and his wife are Promoter Group members in the company.
• Accordingly, SEBI concluded that a cousin of a Promoter/Promoter Group member or Director is not, by virtue of that relationship alone, disqualified from being appointed as an Independent Director of the listed company.
• SEBI cautioned that the appointment must satisfy all other eligibility and independence conditions prescribed under the LODR Regulations and the Companies Act – including, requirement relating to holding of securities or interest in the listed entity.

Key Takeaway
As companies prepare for IPOs and strengthen board independence frameworks, this guidance provides meaningful clarity on the scope of the ‘related to promoter or director’ disqualification under the independence criteria. Listed companies and pre-listing issuers evaluating board composition should, however, ensure that all other independence requirements are assessed holistically and that no other disqualification under the applicable framework is attracted.