All independent directors will soon have to take an “online proficiency self-assessment test” before they are appointed to company boards, according to an amendment to the Companies Act notified by the Ministry of Corporate Affairs (MCA) on Tuesday. This rule will come into effect from December.
According to the MCA notification, the Indian Institute of Corporate Affairs (IICA) in Manesar, Harayana, will conduct this exam. It will also create and maintain a data bank with names, addresses and qualifications of people who are eligible to be appointed as independent directors for companies.
Boards of companies will have to disclose the results of these tests in their annual reports. The government inserted a new clause in the Companies (Accounts) Rules 2014, sub-rule 5; it will require companies to file such a statement.
Lawyers and sector observers were, however, sceptical how helpful these tests will be.
“When there is a dearth of independent directors, tests like these will certainly not aid the cause and create further challenge for a company board to find the right person. The larger question remains: Whether or not a test can really determine the proficiency of a person?” said Ankit Singhi, partner, Corporate Professionals.
The current law requires all listed companies to have a third of their board members as independent directors. Their role is to ensure the interests of minority shareholders are protected and act as overseers outside the influence of the firm.
Recent corporate scams have turned the heat on company directors, who, the government feels, failed to detect any signs of trouble.
Data indicates that the rate of resignation of independent directors from the boards of listed companies has increased significantly in comparison to previous years.
A total of 606 independent directors resigned from the National Stock Exchange-listed company boards in 2018. In comparison, 412 independent directors resigned between January 1 and July 22 this year.
“Independent directors perform functions that are critical to good corporate governance and having qualified and upright independent directors on company boards are crucial for the development of our capital markets. However, an examination of the liability framework governing such directors indicates that the liability-related risks faced by them seem disproportionate to their duties,” a recent report by Vidhi Centre for Legal Policy said.
The report also said that while the Companies Act seeks to limit the liability of independent and non-executive directors by providing for certain safe harbours designed specifically for them, they come to their rescue only after investigative or legal proceedings have been initiated against them.
The MCA notification
- Manesar-based Indian Institute of Corporate Affairs will conduct the exam
- It will create and maintain a data bank with names, addresses, and qualifications of people who are eligible to be appointed as independent directors for companies
- Boards of companies will have to disclose the results of these tests in their annual reports