Fresh KYC norms will help bring in transparency in the boardroom: Experts

It started off as a move to check proliferation of shell companies and keep a tab on unscrupulous elements in the board who misuse the system. The Ministry of Corporate Affairs announced a fresh KYC process in July for verifying credentials of Director Identification Number (DIN) holders. 

However, in the closing stages of the two-month exercise, directors complain the medicine has been worse than the disease. “The KYC process was complex and chaotic, particularly in the last few weeks,” says Arun Duggal, a long-time board member in several companies. The hardship, he adds, was greater for foreign directors. Faced with pressure from industry, the ministry last week had to give an additional 15 days to directors to update their DINs.

All stakeholders agree that the exercise will improve compliance by corporates and monitoring by the regulators. However, many directors found meeting some of the eKYC obligations challenging. “Initiation of KYC process mandatorily requires every director to possess digital signatures. However, procurement of digital signature is time-consuming,” says Makarand Lele, president, Institute of Company Secretaries of India. The mandatory requirement of video verification made the process cumbersome, add experts.

In the case of foreign directors, the process of collection of various proofs and their attestation could run into several days, points out Lele. “Getting OTPs for foreign directors is also a genuine problem,” he adds. Many directors who travel a lot, especially entrepreneurs and industrialists, say they found it a hassle to get OTPs while on the move.

Experts, however, point out that the lack of reporting on part of many directors could be attributed to their attitude towards compliance, and also perhaps, ignorance. “Those companies which don't have robust compliance teams are likely to have missed the deadline,” says Kalpana Unadkat, partner, Khaitan & Co.

According to Sumit Naib, director, Nangia Advisors, those directors who are unwilling to get their important details such as PAN, Aadhaar, mobile number, email ID, and digital signatures linked with DIN will find the KYC process harsh and may not come ahead to re-verify their DIN details. The higher non-compliance could also be due to the stringent conditions contained in the rules with respect to surrender of DIN, he adds.

For companies having on board a director with an unverified DIN will not impact its functioning. “Non-filing of DIR 3 KYC (e-form) will only deactivate the DIN and will not disqualify the directors to continue in the existing companies,” says Naib.  The de-activated DIN can be reactivated after filling the e-form following the payment of additional fees prescribed under Companies (Registration Offices and Fees) Rules, 2014, points out Lucy Rana, managing associate at law firm SS Rana & Co. However, the recent crackdown and disqualification should deter directors from avoiding any lapse in the future. “The board of directors of all companies will be forced to take compliance seriously,” says Unadkat.

Legal experts say the KYC requirements imposed on directors are in line with global standards for checking on anti-laundering activities. Several countries, including Singapore and Australia, have imposed mandatory KYC requirements for directors. While Australia also made changes to its anti-money laundering laws, the requirement of the collection of KYC information from directors is optional, add experts.

Duggal, however, does not agree with this view. “I don’t know of any other international jurisdiction that has such complex KYC process for board members,” he says. His suggestion is that the government should set up a committee of professionals to refine and make a simpler and effective KYC system, which should not have to be repeated every year.

“In devising any new regulation, an important determinant must be: Will it deter honest, competent and highly suitable people from joining corporate boards and thus weaken the governance system,” he adds.

Despite the initial hiccups, most experts expect the current round of changes in the KYC requirements for directors will bring in transparency and accountability in the board system.“The true test would be how well government agencies manage to ensure implementation of the requirements,” says Lele.

How the govt cracked the whip

• There are 3.3 million directors registered with the Ministry of Corporate Affairs

• In July this year, the ministry amended the Companies (Appointment and Qualification of Directors) Rules, 2014

• Directors asked to provide details such as personal mobile number, e-mail address, Permanent Account Number (PAN) and Aadhaar number in the new form

Purpose of the amendment: Transparency; verification of credentials of the Director Identification Number (DIN) holders

Applicability: Every individual — not necessarily a director — allotted DIN, as of March 31, 2018, was required to submit e-form DIR-3 KYC before August 31, 2018. The ministry said it would de-activate the DIN of individuals who failed comply  

Result: Nearly 2.1 million directors failed to file KYC details and currently face the prospect of getting their DIN deactivated  

The way out: The government gaveanother 15 days to complete the KYC process, after paying a reduced fee of Rs 500