“Heterogeneous Board of Directors with independent thinking enforce governance, and diversity strengthens creativity.”
– Pearl Zhu
The dramatic changes in the recent past in the regulatory environment in India on Corporate Governance with the enactment of the Companies Act, 2013 and the impending implementation of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, has enhanced the role of Independent Directors in corporate governance a few notches higher.
In October, 2019, to ensure that Independent Directors, who constitute such category of Directors who are expected to have impartial and objective judgment for the proper functioning of the company, are qualified for the task, Ministry of Corporate Affairs come out with the following notifications, proposing ‘Online Proficiency Self-Assessment Test for Independent Directors’ for better governance practices:
A. The Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019.
B. The Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019.
The detailed discussion of these provisions are as follows:
The Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019
Ministry had notified a separate set of rules for those who are willing and eligible to become Independent Directors named the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 (“the Amendment Rule”) to further amend the Companies (Appointment and Qualification of Directors) Rules, 2014. The approved provisions are to be effective from December 1, 2019.
The said rule shall substitute the earlier rule 6 of the Companies (Appointment and Qualification of Directors) Rules, 2014 with new rule, the detailed discussion of which are as follows:
Rule 6: Compliances required by a person eligible and willing to be appointed as an independent director
Sub-Rule 1: Application by Individual for empanelment
Every individual who has been appointed as an independent director in a company, on the date of commencement of the Rules, shall within a period of 3 months from such commencement or who intends to get appointed as an independent director in a company after such commencement, shall before such appointment, apply online to the institute for inclusion of his name in the data bank for a period of 1 year or 5 years or for his life-time, and from time to time take specified steps, till he continues to hold the office of an independent director in any company.
Voluntary Application by individuals who not hold DIN
However, proviso appended to the sub-rule provides that any individual, including an individual not having DIN, may voluntarily apply to the institute for inclusion of his name in the data bank.
Sub-Rule 2: Application for renewal of membership
Every individual whose name has been so included in the data bank shall file an application for renewal for a further period of 1 year or 5 years or for his life-time, within a period of 30 days from the date of expiry of the period upto which the name of the individual was applied for inclusion in the data bank, failing which, the name of such individual shall stand removed from the data bank of the institute.
No renewal in payment of life-time fees
Further proviso appended to sub-rule provides that no application for renewal shall be filed by an individual who has paid life-time fees for inclusion of his name in the data bank.
Sub-Rule 3: Submission of Declaration
Every independent director shall submit a declaration of compliance of sub-rule (1) and sub-rule (2) to the Board, each time he submits the declaration required under sub-section (7) of section 149 of the Act.
Declaration by Independent Director
As per sub-section (7) of the section 149, every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence.
Sub-Rule 4: Online Proficiency Self-Assessment Test
Every individual whose name is so included in the data bank above, shall pass an online proficiency self-assessment test conducted by the institute within a period of 1 year from the date of inclusion of his name in the data bank. If the person fails to do so, his name shall stand removed from the databank of the institute.
Exemption form passing Online Proficiency Self-Assessment Test
However, first proviso appended to the sub-rule provides the exemption from passing such Online Proficiency Self-Assessment Test to such Individuals who have already served a period of not less than ten years as on the date of inclusion of his name in the databank as director or key managerial personnel in a listed public company or in an unlisted public company having a paid-up share capital of rupees 10 crore or more.
Calculation of period of 10 years
Further, second proviso appended to the sub-rule provides that for the purpose of calculation of the period of 10 years referred to in the first proviso, any period during which an individual was acting as a director or as a key managerial personnel in two or more companies at the same time shall be counted only once.
Further there are some important explanations also provided by the new rule which are as under:
(A) Meaning of Institute: For the purpose of the Rule above, institute means the Indian Institute of Corporate Affairs at Manesar notified under sub-section (1) of section 150 of the Companies Act, 2013 as the institute for the creation and maintenance of data bank of Independent Directors. Which means that IICA has been authorized to maintain a list of candidate who are eligible and are willing to be hired as independent directors.
(B) Passing criteria for the test: An individual who has obtained a score of not less than 60% in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test.
(C) Maximum attempts allowed: There shall be no limit on the number of attempts an individual may take for passing the online proficiency self-assessment test.
The Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019
In addition to the Amendment rule provided above, Ministry had also notified a separate set of rules named the Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 which shall provide provisions related to creation and maintenance of data bank, duties of the Indian Institute of Corporate Affairs at Manesar and constitution of a penal for the purpose of approving the outline of the courses and study material prepared by the institute.
The IICA database will also capture the Permanent Account Number, Directors Identification Number and list of companies in which such individual is or was director along with name of the company, nature of industry, nature of directorship (Executive or Non-executive or Managing Director or Independent Director or Nominee Director and duration with dates.
Authority to the Indian Institute of Corporate Affairs at Manesar (Haryana)
Additionally, in exercise of the powers conferred by sub-section (1) of section 150 of the Companies Act, 2013, Ministry of Corporate Affairs also notified the Indian Institute of Corporate Affairs at Manesar (Haryana), as an institute to create and maintain a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, for the use of the company making the appointment of such directors. These approved provisions to be effective from December 1, 2019.
“A well balanced, inclusive approach, according to certain standard and ideals, is essential for the proper governance of any country”.
– Laisenia Qarase
The Companies Act, 2013 has bestowed greater empowerment upon the Independent Directors to ensure that the management and affairs of a company are run fairly and smoothly. At the same time, greater accountability has also been placed upon them.
However, an Independent Director may not be able to play an effective role in isolation despite his commitment to ethical practices. He may not be able to stop a decision that is detrimental to the members individually, but if the Independent Directors act collectively, then they can together make a difference. Independent Directors may not be in a position to stop fraud at the highest level, but with a high level of commitment and due-diligence, they may be well placed to identify signals that indicate that everything is not as it should be.
We hope that new provisions and efforts of government empowers the Independent Directors to actually have a definite ‘say’ in the management of a company, which would thereby immensely strengthen corporate governance.
Author: Anmol Shawlesha, Company Secretary and currently pursuing LLB.