SUMMARY OF THE BLOG
This blog examines the concept of ‘material pecuniary relationship’ while assessing a director’s independence under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”), and the Companies Act, 2013 (“Companies Act”). It highlights the regulatory differences in thresholds and look-back periods, and analyses key regulatory interpretations, committee reports, and market practices, including the recent informal guidance issued by SEBI.
BLOG
In the evolving landscape of corporate governance, the independence of directors serves as a cornerstone for ensuring objective oversight, transparency, and accountability in companies. The Companies Act and the SEBI LODR Regulations prescribe detailed criteria for the appointment of independent directors. Among these, the requirement that an independent director must not have any ‘material’ pecuniary relationship with the company, or its related entities is particularly significant, yet frequently subject to interpretational ambiguity.
The term “material pecuniary relationship” under Section 149(6)(c) of the Companies Act, provides a threshold, while the SEBI LODR Regulations only reference it for determining eligibility, without specifying a threshold for the board of directors (“Board”).
This divergence in approach — subjective under the SEBI LODR Regulations and quantitative under the Companies Act — has often led to questions on how Boards should interpret it while balancing regulatory compliance with real-world business considerations. It also brings into focus the role of the nomination and remuneration committee (“NRC”) in evaluating independence declarations and determining materiality.
INTERPLAY BETWEEN SEBI LODR REGULATIONS AND COMPANIES ACT
Section 149(6) of the Companies Act outlines the eligibility criteria for appointing an independent director. It states that the proposed individuals must not have a pecuniary relationship with the company/ group entities, except for remuneration as a director or transactions not exceeding 10% of their total income during the two immediately preceding financial years or the current financial year. In contrast, the SEBI LODR Regulations do not specify a numerical threshold.
One of the other notable distinctions between Regulation 16(1)(b)(iv) of the SEBI LODR Regulations and Section 149(6)(c) of the Companies Act pertains to the look-back period for evaluating a pecuniary relationship.
- Under Regulation 16(1)(b)(iv) of the SEBI LODR Regulations, an independent director must not have a material pecuniary relationship with the listed entity (or its related entities) during the immediately preceding three financial years or the current financial year.
- In contrast, Section 149(6)(c) of the Companies Act requires that an independent director must not have any pecuniary relationship (other than permissible remuneration) with the company (or its related entities) during the immediately preceding two financial years or the current year.
REGULATORY INTERPRETATION BY GOVERNMENT AUTHORITIES FOR CLARIFYING PECUNIARY RELATIONSHIP IN GOVERNANCE PRACTICE
Perspectives of Ministry of Corporate Affairs and various committees
The Ministry of Corporate Affairs (“MCA”), in the Report of the Committee to Review Offences under Companies Act, 2013[1] (“Offences Committee Report”), acknowledged the critical role ‘pecuniary relationships’ play in evaluating independence of directors. The Offences Committee Report emphasised that financial ties with a company are among the most influential factors affecting a director’s ability to remain unbiased and independent. The Committee also noted that excessive pecuniary relationships could erode a director’s autonomy and potentially make them susceptible to promoter influence. It acknowledged that the definition of “excessive” can vary among individuals, and hence proposed an income-based proportionality test to help determine independence more objectively. It was recommended that (a) sitting fees and Board-related reimbursements be excluded from the assessment of pecuniary relationships for independent directors; and (b) an independent director’s total pecuniary relationship — excluding sitting fees with the company, its group entities, or their promoters/ directors — should not exceed 20%of the independent director’s total income in a given financial year. Of this, any professional or consultancy services provided by an independent director (outside of Board-related duties) to the company, or its group entities should be capped at 10% of the independent director’s total income, as aligned with Section 149(6)(c) of the Companies Act. These suggestions were meant to harmonise practice across corporate governance frameworks. Further, MCA in its General Circular No. 14/2014, dated June 9, 2014[2] (“MCA Circular”), clarified that pecuniary relationship does not include receipt of remuneration by way of sitting fees, reimbursement of expenses for participation in the Board and other meetings and profit related commission approved by members, in accordance with the provisions of the Companies Act.
The Expert Committee on Company Law, constituted under the chairmanship of Dr. J.J. Irani[3] (“JJ Irani Committee”), provided clarity on the ambiguous concept of “material pecuniary relationship”, in the context of director independence under Indian law. According to the JJ Irani Committee, “materiality” must be viewed from the recipient’s perspective, i.e., whether the quantum of financial engagement is significant enough to impair the director’s ability to act independently. This is a crucial interpretative shift from focusing on the company’s size or revenue. Further, the Committee recommended that a pecuniary transaction is considered material if it constitutes 10% or more of the recipient’s total gross income or receipts in the preceding financial year, as this quantitative test offers a practical threshold to Boards and committees when assessing potential conflicts. Along with drawing emphasis on declarations from independent directors on their independence, and transparent disclosures in the directors’ report, with the Board explicitly stating that (in their judgment) no material pecuniary relationship exists or explain why a specific relationship is considered immaterial, the JJ Irani Committee also noted that transactions involving entities in which the director or their relatives hold more than 2% shareholding should be factored into the independent assessment, reflecting the need to guard against indirect influences.
SEBI move to remove ambiguity
The Securities Exchange Board of India (“SEBI”) issued an informal guidance letter on May 14, 2025, to InfoBeans Technologies Limited[4], on “material pecuniary relationship” under Regulation 16(1)(b)(iv) of the SEBI LODR Regulations. This interpretive response provides significant insight into how SEBI expects companies to assess relationships that may impact the independence of directors.
The circumstances pertain to an individual, appointed as an independent director of a public listed parent company in India. He/ she was subsequently proposed to be engaged as a consultant with its overseas subsidiary. The proposed consultancy role was strategic and advisory in nature, and the compensation was proposed to be within 10% of the director’s total annual income. SEBI, while not directly approving or disapproving the arrangement, reiterated the following key principles:
- Materiality is not defined numerically under SEBI LODR Regulations. There is no quantitative threshold prescribed by SEBI in Regulation 16(1)(b)(iv) of SEBI LODR Regulations.
- In terms of the eligibility criteria, the onus lies on the Board and NRC to consider and assess the declaration of independence submitted by the director.
- Importantly, SEBI acknowledged that Section 149(6)(c) of the Companies Act, which limits pecuniary relationships to not more than 10% of the director’s total income, is also relevant for listed entities.
- SEBI emphasised on due compliance with both the SEBI LODR Regulations and other applicable laws, reinforcing the importance of substance over form in evaluating independence.
CONCLUSION: STRIKING A BALANCE BETWEEN COMPLIANCE AND GOVERNANCE
The evolving jurisprudence and market practice around “material pecuniary relationship” reflects the growing emphasis on not just the letter of the law, but the spirit of corporate governance. As seen through the lens of multiple regulatory instruments — from Section 149(6)(c) of the Companies Act to Regulation 16(1)(b)(iv) of SEBI’s LODR Regulations, interpreted further through MCA circulars, SEBI’s informal guidance and committee reports, the central principle remains consistent: an independent director must be truly independent, both in substance and perception.
The informal guidance provided by SEBI to InfoBeans is a critical development in assessing ‘material pecuniary relationship’ of proposed independent directors by listed companies and guidance of this nature will foster governance.
For companies, the best approach would be to promote a culture of disclosure, rather than rely solely on compliance. Additionally, adopting a governance mindset that treats “independence” as a principle, and not merely a check-box exercise is advisable. This perspective is important as regulators continue to rely on the NRC and the Board to exercise discretion (both from an objective and subjective perspective), in determining an individual’s independence.
For further information, please contact:
Sindhushri Badarinath, Partner, Cyril Amarchand Mangaldas
indhushri.badarinath@cyrilshroff.com
[1] https://www.mca.gov.in/Ministry/pdf/ReportCommittee_28082018.pdf
[2] https://www.mca.gov.in/Ministry/pdf/General_Circular_14_2014.pdf
[3] https://www.icsi.edu/media/webmodules/Guidance_Note_on_IDs.pdf
[4] https://www.sebi.gov.in/sebi_data/commondocs/may-2025/15.05.2025_SEBI%20response%20Letter_May%2014,%202025_p.pdf
