All you need to know about the new Rules for Independent Directors.
Overview on the Independent Directors Rules
The new rules for the Independent Directors essentially provide for setting up an online database of Independent Directors and the Independent Directors are required to pass an online proficiency self-assessment test to be conducted by Indian Institute of Corporate Affairs ("IICA"). Considering that the Independent Directors are viewed upon as watchdogs and mascots of corporate governance who are expected to ensure board impartiality, the new regime is at the outset praiseworthy. Some may read too much into the 'online test' though there are certain exemptions. This new regime for Independent Directors is could be keenly watched and talked about and whether this influences the dynamics of corporate governance, albeit positively, remains to be seen.
What are the new rules?
The Ministry of Corporate Affairs ("MCA") on October 22, 2019 introduced the Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 and the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 [collectively hereinafter referred to as "Independent Directors Rules"], both being effective from December 01, 2019.
Additional Disclosure in Director's Report
The MCA has also introduced the Companies (Accounts) Amendment Rules, 2019 [effective from December 01, 2019] which now requires additional disclosure to be made in the Directors' Report of a company. Accordingly, a company, as part of its Directors' Report, is now required to provide a statement regarding opinion of the Board with regard to integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year.
How to ascertain proficiency?
The expression "proficiency" means the proficiency of the independent director as ascertained from the online proficiency self-assessment test conducted by the institute notified under sub-section (1) of Section 150 of the Companies Act, 2013 i.e. IICA.
SO WHAT EXACTLY THE NEW RULES FOR INDEPENDENT DIRECTORS TALK ABOUT?
Online application for inclusion of name in databank
Under the Independent Directors Rules, any person who is willing to be appointed (or is already an) Independent Director, must apply online to the IICA for inclusion of his/her name in the data bank of independent directors, ensure compliances as required and most importantly pass an online proficiency self-assessment test.
When the online application needs to be made?
It is essential to note that any person who wishes to be appointed as an Independent Director (i.e. who is not already an Independent Director) is required to make such online application before his appointment as an Independent Director.
Periodicity of name inclusion in the databank
The inclusion of name in the data bank can be done for a period of one year or five years or for lifetime by payment of prescribed fees. The Independent Directors Rules also provides for renewal of such name inclusion in the data base, unless the individual has paid life-time fees for inclusion of his name in the data bank.
Who conducts the online proficiency self-assessment test and what are the passing marks?
The online proficiency self-assessment test would be conducted by IICA and the passing marks for such test are sixty percent (60 percent).
What does the online test actual intend to 'test'?
The online proficiency self-assessment test is intended to cover companies law, securities law, basic accountancy and such other areas relevant to the functioning of an individual acting as an independent director.
By when to clear the online proficiency self-assessment test
The online proficiency self-assessment test is required to be cleared by the individual, conducted by the IICA, within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the data bank of the IICA.
Exemption from online proficiency self-assessment test
The MCA has granted exemption from the requirement of clearing the said online proficiency self-assessment test in case of individuals who has served for a period of not less than ten years, as on the date of inclusion of his name in the data bank, as a Director or Key Managerial Personnel ("KMP") in a listed company or in an unlisted public company having paid-up share capital of Rupees ten crores or more. It is clarified that for the purpose of calculation of the period of ten years, any period during which an individual was acting as Director or as KMP in two or more companies at the same time shall be counted only once.
Availability of information from the databank
The information available in the data bank shall be provided only to companies required to appoint independent director after paying a reasonable fee to the IICA.
Why is the online proficiency self-assessment test considered necessary?
The Independent Directors are expected to protect the interests of minority shareholders and act as watchdog for the purpose of ensuring corporate governance, the necessity of the online proficiency self-assessment test will ensure qualified Independent Directors are appointed on the Board of the companies. This move is supposed to distil those Independent Directors or individuals occupying position of Independent Directors just for the namesake or for the purpose of mere compliance. One can expect to have individuals, with diverse skill sets, to serve as Independent Directors of Companies and to infuse some rationale decision making in the conduct of the activities of the Board of Director essentially to uphold highest standards of corporate governance.
How will the new rules for independent directors help?
It can be safely estimated that the need for introduction of the Independent Directors Rules is the result of various corporate governance lapses and fiascos. This is likely to weed out the practice of appointing (distant) relatives and (at times) friends and domestic help as independent directors. This is expected to infuse some sanity in the entire process and the uphold the very objective of having independent directors in the first place.
Any concern with the new rules for independent directors?
Most of the companies opt for the independent directors on the basis of their skill and competencies in the sector in which such company operates, market credibility and required experience in such sector. Apart from this, the companies would also now have to find an additional attribute (i.e. clearing the online proficiency self-assessment test) in the prospective Independent Director, which may prove to be a steep target.
Online test, whether required at all?
The exemptions under the Independent Directors Rules for the online test provides for a breather and may be seen as some respite. The online proficiency self-assessment test may be perceived as an additional burden by the Companies as well as the prospective Independent Directors in the entire process and add to that the high clearing benchmark of 60 percent grades in such online proficiency self-assessment test. Add to this the fact that generally independent directors are prominent personalities having rich experience in relevant fields along with good reputation. For them, the online test may appear altogether a needless exercise and needless to add a step to discourage bringing on board highly competent independent directors – probably a retrograde step.
Difficult times add more difficulty to find competent independent directors
Due to recent actions initiated not only against errant promoter-directors, executive directors and KMPs, and auditors, independent directors; several prominent independent directors have stepped down or are reluctant to take up directorship. Most of them are now willing to come on board as advisors or consultants. The situation becomes onerous in case of companies under financial stress or subjected to any regulatory/statutory investigations/inquiry where such companies eventually end up on the wrong side of the law especially on the compliances front. This endangers the directors as the default on part of such companies causes the directors to incur disqualification and affects their directorships elsewhere.
Considering the various recent corporate indiscretions, not many may be keen to act as independent directors, especially considering many of the existing ones already stepping down. The situation may prove to be daunting with the requirement of the online proficiency self-assessment test.
Is there any scope for relaxation of the rules for independent directors?
Other than the exemptions as discussed above, the MCA may perhaps also consider granting further exemptions to professionals such as CA, CS, Advocates, Engineers, MBAs, etc. Apart from such proposed additional exemption criteria, it may also be pertinent to provide for some kind of training programmes or refresher workshops as that may prove to be practically relevant as compared to clearing an online 'test', for which interestingly there is no restriction on the number of attempts for passing the online proficiency self-assessment test.
Some thoughts on the rules for independent directors
Although, the intention appears to be clear and at the same time noble and virtuous to have some kind of 'test' for having independent directors, being viewed as guardians of corporate governance, only time will indicate whether this formal 'test' proves to be an all-encompassing panacea to address the several corporate governance misadventures or ends up as one more addition to the already bulging rule book.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.