Removing years of slack and frequent allegations of corruption, nepotism and mute spectators in corporate boardrooms, the appointment of independent directors is set for an overhaul from next month with Ministry of Corporate Affairs deciding to conduct examinations for such high-level appointments.
The change is in line with the amended Companies Act which comes into effect next month. Under the changed parameters, the government will also maintain a database of professionals qualifying in the test that can be used by companies looking to expand their board or making fresh appointments under the current regulations.
The Indian Institute of Corporate Affairs (IICA) under the MCA will hold the exam in December and to make the process stringent, a score of 60 per cent marks will be mandatory criteria for qualification.
This will be the first year when such practice will start. It is not just domain knowledge that will be put to test, the institute will conduct an online proficiency self-assessment test covering companies law, securities law, basic accountancy and such other areas relevant to the functioning of an individual acting as an independent director.
The rules are being made stringent as it was noticed that in many cases political appointees with standard financial background were also getting rehabilitated in several companies as independent directors. Officials said this method may help in bringing professionalism, alertness and more accountability leaving aside a usual passive role.
On October 22, the Ministry brought the notification on the appointment and qualification of independent directors. The amended rules Companies (Appointment and Qualification of Director) Fifth Amendment Rules, 2019, - Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 and - Companies (Accounts) Amendment Rules, 2019 and will come into force with effect from December 1. 2019. Independent directors role came into sharp attack following the crisis at the Infrastructure Leasing and Financial Services and in many credit rating agencies who liberally granted and downgraded the companies as per their wish and got away with it. Their reckless grading created much of the IL&FS crisis.
Advisories have been given by several think tanks that independent directors must not assume a passive role, merely reacting to ideas foreseen by the controlling shareholder or their appointees. They must be willing to upset the status quo in the interest of shareholders not play a risk-free mute spectator limiting to attending just number of board meetings.
In May this year at the peak of IL&FS crisis, independent directors came under corporate affairs ministry scanner for alleged lapses in carrying out their duties as financial problems continued to brew at the diversified group. The ministry was working on ways to further strengthen the framework for independent directors, who have an important role in ensuring good corporate governance practices at companies.
The Amendment to Companies (Appointment and Qualification of Directors) Rules, 2014 says every individual, who has been appointed as an Independent Director in a Company shall within a period of 3 (three) months from the commencement of the said Rules, or who intends to get appointed as an Independent Director in a company after 01/12/2019 shall before such appointment, apply to the 'Indian Institute of Corporate Affairs (IICA) for inclusion of his name in the data bank for a period of 1 (one) year or 5 (five) years or for his lifetime as the case may be.
It also says every person whose name has been included in the data bank shall make an application for renewal within 30 days of the expiry of the above period of 1 year, 5 years or lifetime as the case may be. Every individual whose name is included in the data bank shall pass an online proficiency self-assessment test conducted by the institute 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 databank of the institute.
The data bank shall contain certain details in respect of each person included in the data bank who are eligible and willing to be appointed to be independent director. The information available in the data bank shall be provided by the Institute only to the companies required to appoint independent directors. However, necessary due diligence has to be carried out by the Company before appointment of any such independent director.
A person whose name appears in the data bank may restrict his personal information to the institute, to be disclosed in the data bank and may change his particulars within 30 days from the date of any change . The appointment of independent director shall be approved by the company in general meeting and brought to the notice of the general meeting called to consider the said appointment shall indicate the justification for choosing the appointee for appointment as independent director.
Though there is no limit on the number of times a candidate can appear for this exam officials said there is a new beginning on accountability and eligibility and will curb promoters placing their own ineligible candidates and family members on the listed companies boards which have public money also invested in the company.