Summary: SEBI’s recent informal guidance on the appointment of an independent director related to a promoter group member has reignited the debate on the meaning of “independence” in corporate governance. While the guidance adopts a strict interpretation of the statutory definition of “relative” under the Companies Act, 2013, it raises broader questions about whether formal legal criteria adequately capture concerns of influence and objectivity. This article examines the guidance note in the context of the legislative framework governing independent directors and compares it with the views expressed by key committees on corporate governance. It argues that the effectiveness of independent directors depends not only on compliance with prescribed objective eligibility requirements but also on preserving the substantive spirit of independence that underpins the institution.
The significance of Independent Directors (“IDs”) and the scrutiny surrounding their appointment, roles and responsibilities under the Companies Act, 2013 (“Act”), emerged in response to fraud and financial irregularities reported in the Satyam Scam in 2009.[1] The incident raised concerns regarding the adequacy of existing corporate governance frameworks and their effectiveness in fulfilling responsibilities. Consequently, this inter alia led to the introduction of specific eligibility criteria for Independent Directors under Section 149(6) of the Act, defined appointment procedures under Sections 149 and 150, and a comprehensive code of conduct under Schedule IV of the Act.
The eligibility criteria under both the Act and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”), seek to secure the “independence” of IDs by targeting pecuniary and personal relationships that could influence the performance of their duties. One such criterion, which has come into focus — due to the Informal Guidance Note dated March 2, 2026 (“Note”),[2] issued by the Securities and Exchange Board of India (“SEBI”) — is under Regulation 16(1)(b)(iii) of the SEBI LODR, which corresponds to Section 149(6)(b)(ii) of the Act.[3]
Informal Guidance Note
The Note was issued in response to an informal guidance request filed by a listed company operating in the steel and metal sector (“Company”) on December 26, 2025. The inquiry pertained to the eligibility of appointing the cousin of a member of the Company’s promoter group, who also served as a director of two subsidiary companies, as an ID of the Company.[4] The cousin in question was the daughter of such promoter group member’s father’s sister.[5]
The Company contended that since Section 2(1)(zd) of the SEBI LODR, read with Section 2(77) of the Act and Rule 4 of the Companies (Specification of Definitions and Details) Rules, 2014 (“Rules”), do not categorise such a relation as “relative”, her appointment was not barred.[6]
Section 2(77) of the Act defines ‘relative’, with reference to a person, as anyone who is related to another, if they are members of a Hindu Undivided Family, or are husband and wife, or are related in the manner prescribed under Rule 4 of the Rules, which enumerates specific relationships, i.e., father, mother, son, son’s wife, daughter, daughter’s husband, brother, sister, step brother and step sister.
It was further argued that the explanation of the expression “related to any promoter” in Regulation 17(1)(b) of the SEBI LODR is restricted to that specific regulation and does not apply to Regulation 16(1)(b)(iii).[7]
SEBI accepted the Company’s arguments, and held that a cousin does not fall within the definition of “relative” under the Act and the SEBI LODR.[8] Accordingly, it was held that the cousin maybe appointed as an ID of the Company, subject to her satisfying all other qualification and eligibility criteria under the SEBI LODR, the Act and the Rules made thereunder, including restrictions on holding securities or interest in the listed entity under Regulation 16(1)(b)(iv) of the SEBI LODR.[9]
Committee Reports
Against this backdrop, it is useful to evaluate the Note against the touchstone of how various committees have understood the idea of ‘independence’ in the functioning of IDs.
The Kotak Committee, in its Report of the Committee on Corporate Governance (“Kotak Committee”) of 2017, found that the appointment of persons who were relatives of the promoters as IDs undermined the “spirit of independence” and called for appropriate widening of the net of exclusions to counter the same.[10] This view aligns with the findings presented in the 2016 Report of The Companies Law Committee (“CLC”).
The CLC also recognised the influence of relatives on the working of IDs. It declined to restrict the scope of Section 149(6)(e)(i) of the Act, which bars an individual from appointment if his relative is or was a key managerial personnel or employee in the concerned company, to only relatives who held significant positions. It observed that “it would be possible to influence an Independent Director in case his relative is also working in the company, irrespective of the position he holds”.[11]
Concerns about the influence of relatives, expressed by the Kotak Committee and the CLC, may appear to be at variance with the position adopted by SEBI in the Note.
The Standing Committee on Finance’s Report on The Companies Bill, 2009, in its analysis of IDs, stated that “the institution of Independent Directors is a critical instrument for ensuring good corporate governance” and proper safeguards must be put in place to ensure its efficacious functioning.[12] It further stated that the appointment of IDs “should not be a case of mere technical compliance reduced to the letter of the law”, and that IDs must play their “designated role to nurture the financial health of the company and to protect the interests of various stakeholders, particularly minority shareholders”.[13]
Implications of SEBI’s Position
The picture that emerges is, thus, complex. The committees that contributed to the present framework were consistent in their emphasis on the role of IDs as custodians of minority interests, and their importance in securing objectivity in the corporate governance process. They underscored the importance of ensuring independence in not just form, but also substance.
Consider a situation in which an executive director of a listed entity, who is also a member of the promoter group, has his cousin appointed as an ID of the company. The cousin ID also serves on the Nomination and Remuneration Committee (“NRC”). When the NRC takes up a proposal relating to the remuneration of the said executive director, the cousin ID, not being a “relative” within the meaning of the Act, faces no statutory impediment to participating in and voting on such deliberations. Conversely, when the same matter is placed before the Board of Directors for approval, the executive director would be expected to recuse himself on account of his personal interest in the resolution.
The result is a striking asymmetry – the very person whose familial proximity to the executive director could compromise objectivity is permitted to determine his remuneration at the committee level, while the executive director himself is excluded from the Board-level decision on grounds of conflict. This reveals a gap between how the Act defines relationships and the independence that the institution of IDs is meant to protect.
The Note should be viewed as operating within the existing framework, while reiterating the significance of satisfying all other eligibility criteria before the proposed appointment can be validly made. Its implications depend, therefore, less on how relationships are formally classified and more on how independence is assessed and ensured in practice. The interplay between functional independence and formal criteria continues to inform the understanding of the role of IDs, and the Note serves as a reminder that the letter of the law, while necessary, must be complemented by a genuine commitment to the spirit of independence that the institution was designed to embody.
[1] Standing Committee on Finance (2009-2010), ‘The Companies Bill, 2009’, para [25], accessible here.
[2] SEBI, ‘Informal Guidance Note – Interpretive Letter dated March 2, 2026’, accessible here.
[3] Regulation 16(1)(b) of the SEBI LODR lists out the eligibility criteria for appointment as an ID, and sub-clause (iii) in particular requires that an eligible appointee not be “related to promoters or directors in the listed entity, its holding, subsidiary company”. Section 149(6)(b)(ii) of the Act lists a similar requirement.
[4] ‘Request for informal guidance by way of an “Interpretive Letter” dated December 26, 2025’, point (H), accessible here
[5] ibid point (F).
[6] ibid, point (G).
[7] ibid, point (G); Regulation 17(1)(b) of the SEBI LODR focuses on the proportion of IDs in the composition of the board of directors. The explanation to this advances an interpretation of the expression “related to any promoter” but qualifies it by stating that it is only “for the purposes of this clause”.
[8] SEBI, ‘Informal Guidance Note – Interpretive Letter dated March 2, 2026’, para [4.4], accessible here.
[9] ibid paras [4.5] and [4.6].
[10] ‘Report of the Committee on Corporate Governance’ (2017), p 25, accessible here.
[11] ‘Report of the Companies Law Committee’ (2016), para [11.5], accessible here.
[12] Standing Committee on Finance (2009-2010), ‘The Companies Bill, 2009’, para [29], accessible here.
[13] ibid para [29].