The role of independent directors has come under scrutiny after an avalanche of corporate frauds in Indian boardrooms. There have been question marks of their qualification, independence and efficiency in detecting non-adherence to corporate governance norms and unethical dealings mostly at the hands of promoters.
Taking a cue and to tackle some of these issues, the Ministry of Corporate Affairs, Government of India has recently notified the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 making it mandatory for all independent directors to take an online proficiency assessment test before their appointment to the Board of a company.
This move is introduced with a view to strengthen the corporate governance practices in India. Also, it would improve awareness and knowledge among independent directors with respect to their roles, duties and responsibilities.
The online proficiency test will be conducted by the Indian Institute of Corporate Affairs (IICA) which will also be responsible for maintaining the databank containing names, addresses and qualifications of the person eligible and act as independent directors for the use of the company.
Compliance Required by Whom
1. A person appointed as an Independent Director on the commencement of the Rules with a period of three months should apply to the institute for the inclusion of his name.
2. A person who intends to be appointed as the independent Director of the company after the commencement of these Rules shall apply to the institute before his appointment for the inclusion of his name.
Duration for Inclusion of Names
Names can be included in the database for a period of one year or five years or for the lifetime of such independent director.
Application for renewal of the name should be filed within 30 days of the expiry of the duration (one year/five years) of the name in the database.
Independent directors should submit the declaration of compliance of this rule while submitting a declaration under Section 149(7) of the Companies Act, 2013.
An individual who has served for more than ten years in a public listed company or in an unlisted company having paid-up share capital of rupees ten crores or more shall not be required to pass the online proficiency self-assessment test. The period during which the individual acting as director or as a key managerial person shall be counted as one.
Number of Attempts
The Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019 were also notified on 22-10-2019 which deal with the maintenance of databank of individuals who are willing and eligible to be appointed as independent Directors in an online manner by the IICA on its website.
There are prescribed fees for the inclusion of the name as well as for the companies if they wish to access such a database for the appointment of the independent director as would be fixed by the Indian Institute of Corporate Affairs with the prior approval of the Central Government.
The person whose name is listed on the databank can restrict his personal information to be disclosed in the databank.
It also provides the duties of the institute and the composition of the panel set-up for this purpose.
The Companies Accounts Amendment Rules, 2019 caste the duty on the Board of the Company to declare in its directors report that the independent directors have cleared the self-assessment test or are exempted from the same.
Reactions from Corporates
These requirements and compliances were put in place in the wake of corporate scandals that have come up in recent times. There are mixed opinions in regard to these notifications.
Some experts are of the view that these compliances would reduce the number of eligible directors thus adding more to the dearth of independent directors while some other contend that it would not have any effect in the way they run the business thus defeating the very purpose these compliances are introduced.
Some also contend that all businesses are different and the directors can have different skillsets based on the business requirement of the company. In light of this, having a uniform test can shrink the pool of directors.
Further, it should be kept in mind that a corporate literacy test cannot address the issue of accountability. A variety of corporates have not liked the idea of having a proficiency test due to the aforesaid reasons.
Practices in Other Jurisdictions
It is a common practice in India that most of the independent directors are chosen based on their personal relationships with or image in the eyes of the promoters rather that their qualification/experience. However, Indian corporates are now trying to adopt (or should we say being forced) some of the best practices prevalent in other jurisdictions with a view to improve the corporate governance in the country.
The global best practices of appointment and evaluation of independent directors on board are discussed in the table below:
|The Malaysian Directors Academy (Minda ) is mandated to establish a directors registry for Nomination Committees to select independent directors/board members. The directory has information about retired professionals and public officers from the Ministry of Finance (MoF) regarding their leadership experience, national and regional background.
|As per the Regulations on State-owned assets of enterprises, independent directors should have professional knowledge and competency. Also, “character” is an important aspect for appointment on Board.
|As per the Article 30 of the “Act on the Management of Public Institutions”, to be an independent director, good knowledge, experience, and competent ability is essential.
|As per the Moroccan Code of Good Governance Practices of the Public Enterprises and Establishments, the Board of Directors of State operating enterprises are appointed on the basis of their professional competency and expertise.
|The UK Corporate Governance Code allows setting up of a nomination committee, a majority of whose members should be independent non-executive directors, to select and appoint the independent director.
|The State Enterprise Policy Office (SEPO) is designated with developing a profile of board skills called “Skill Matrix” in order to identify skilled and potential members. The candidates with appropriate knowledge, competencies and expertise, as indicated by the questionnaire responses by Thai authority, are chosen. The authority uses age, educational qualifications, relevant work experience and Thai nationality as the qualification criteria for the pool.
|The Decree 97/2015/N?-CP dated 19-10-2015 and the Decree 106/2015/N?CP dated 23-10-2015 provide guidelines and regulations on the board nomination criteria and an official nomination and appointment procedure. Specialty and management skills are a prerequisite qualification for board member nomination and the Board is responsible for identifying its skill needs and communicating them to the relevant decision-makers. The Prime Minister decides and promulgates general qualification criteria and the line ministries and provincial committees issue a detailed instruction regarding State-owned enterprise (SOE) business characteristics.
*The above table has been extracted from the Research Report published by the Indian Institute of Corporate Affairs.
Appointment of the independent Directors in India has been highly compromised so far and hence the need to select the directors through a neutral database was felt and is introduced by way of these notifications.
Analysis and Suggestions
In light of the recent corporate scandals that have happened in India, it is pertinent to introduce the proposed measures, even if it causes some discomfort to the individuals or corporates. It is about time where those director appointments are taken seriously and done not based on recommendations but based on qualification.
Selection of independent directors from a pool of qualified people would facilitate in mapping the right expertise and competency for the Board. The move although criticised by the corporates would surely help in strengthening the corporate governance regime in India.
The absolute and arbitrary power of the board in the appointment of independent director has now been curtailed. We suggest that at some stage, some industry-specific tests may be introduced rather than being uniform across all industries. This would facilitate in catering to specific business requirements and would be more efficient for the selection of independent directors.
*Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at firstname.lastname@example.org. **Utkarsh Mishra is a Student Researcher with Corp Comm Legal (3rd year LLB student from Amity University, Noida)