Database of Independent Directors

IICA – Indian Institute of Corporate Affairs to create a Database of Independent Directors.

MCA vide notification G.S.R 805(E) notified new Rules by exercising powers conferred upon it by Section 150 and Section 469 of the Companies Act, 2013 named as “Companies (Creation and Maintenance of databank on Independent Directors) Rules, 2019” on 22^nd October, 2019 also alongside new rules on databank of Independent Directors, MCA also notified “INDIAN INSTITUTE OF CORPORATE AFFAIRS” located at Manesar, Gurugram (Haryana) as an “institute having expertise in creation and maintenance of such databank” vide notification S.O. 371(E) dated 22^nd October, 2019.

Also, MCA amended Rule 6 of Companies (Appointment and Qualifications of Directors) Rules, 2014 vide notification G.S.R. 804(E) dated 22^nd October, 2019. All the notifications to be made effective with effect from 1^st December, 2019.

An attempt has been made to simplify the harmonious interpretations of these 3 very important notifications affecting the process of appointments of Independent Directors on the Board of Indian Companies who is required to appoint Independent Directors in accordance with Section 149(4) of the Companies Act, 2013 and Rule 4 of the Companies (Appointment and Qualifications of Directors) Rules, 2014.

Going as per text of Section 150(1) which is as follows:

150. (1) Subject to the provisions contained in sub-section (5) of section 149, an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by any body, institute or association, as may be notified by the Central Government*, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors:

Provided that responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director shall lie with the company making such appointment.

*IICA, Manesar has been notified by the MCA on 22^nd October, 2019 to be the “body or institute” as an institution having expertise in creation and maintenance of such databank.

INTERPRETATIONAL NOTE:

When the Companies Act, 2013 was notified, Section 150 was kept inactive by the simple reason that absence of a body/institution who can create and maintain the databank. Alongside this companies falling under Section 149(4) and listed companies mandatorily needed to appoint Independent Directors. In the due course, in which the companies who are appointing/re-appointing were not affected by Section 150 provided such appointments and re-appointments are made in terms of Section 149(6) and provisions of SEBI (LODR) Regulations, 2015 (as amended from time to time), the Central Government was in process of creating the database of Independent Directors.

The interpretation of the expression “an independent director may be selected from a databank….” Stands changed. The word “may” was interpreted in its literal meaning that any independent director appointed on the Board of any Indian Company may not be selected from the database as there was no database. Now, the interpretation has been affected by the amended Rule 6(1) of Companies (Appointment and Qualifications of Directors) Rules, 2014 and Rules 3 and 4 of Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019.

We can differentiate our study in two different aspects for simplification purposes, first would be effect of the new rules on already appointed Independent Directors and second would be on proposed appointments.

First aspect – Effect on already appointed Independent Directors.

Rule 6(1)(a) of Companies (Appointment and Qualifications of Directors) Rules, 2014 read with Rule 4 of Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 helps us understanding the effect on already appointed Independent Directors;

Text of Rule 6(1)(a) of Companies (Appointment and Qualifications of Directors) Rules, 2014:

(1) Every individual –

(a) who has been appointed as an independent director in a company, on the date of commencement of the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019, SHALL within a period of three months from such commencement;

[clause (b) has been skipped intentionally for differentiating the aspects]

apply online to the institute for inclusion of his name in the data bank for a period of one year or five years or for his life-time, and from time to time take steps as specified in sub-rule (2), till he continues to hold the office of an independent director in any company.

Text of Rule 4 of Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019:

4. Duties of the institute.─

(1) The institute shall comply with the following, in respect of individuals referred to in sub rule (1) of rule 6 of the Companies (Appointment and Qualification of Directors) Rules, 2014 , namely:—

(a) 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;

(b) prepare a basic study material, online lessons, including audio-visuals for easy reference of individuals taking the online proficiency self-assessment test;

(c) provide an option for individuals to take advanced tests in the areas specified in clause (a) and prepare the necessary advanced study material in this respect:

Provided that no separate fees shall be charged by the institute in respect of clauses (a), (b) and (c).

The aforesaid provisions, clearly states that, any individual already serving as an Independent Director on the Board of any company should apply to IICA within 3 months till 28^th February, 2020 to get his name included in the database. The word used “SHALL” obligates the Independent Director for inclusion of his name in the database. The effective date of the rules is 1^st December, 2019. Also, Rule 4(1) of Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 also refers that any individual falling under Rule 6(1) should apply for inclusion of his name after passing an online proficiency test to be conducted by IICA, Manesar and only on passing of such test his name shall be included in the database.

The time limit for applying for inclusion of names shall be 29^th February, 2020, as any individual falling under Rule 6(1)(a) shall apply within 3 months from the date of commencement of the new Rule 6 i.e. 1^st December, 2019.

Second aspect – Effect on proposed appointments of Independent Directors.

Text of Rule 6(1)(b) of Companies (Appointment and Qualifications of Directors) Rules, 2014 helps us understanding this aspect.

Text of Rule 6(1)(b) of Companies (Appointment and Qualifications of Directors) Rules, 2014:

(b) 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 one year or five years or for his life-time, and from time to time take steps as specified in sub-rule (2), till he continues to hold the office of an independent director in any company:

This part of Rule 6, deals with proposed appointments of Independent Directors. Again, similarly in the previous aspect, obligates the individual who has been proposed to be appointed as an Independent Director on the Board of any company who is required to appoint such directors, provided in terms of Rule 4 of Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 after qualifying the online proficiency test to be conducted by IICA with effect from 1^st December, 2019.

Hence, the interpretation of the word “may” occurring in Section 150(1) used in the first sentence slightly affected, as any Independent Director whether proposed or already appointed has to undergo process for inclusion of their names into database.

IICA has also been empowered to reject the applications received for inclusions of names in the database or remove any name already included on case to case merit in terms of sub-rule (2) of Rule 4 of Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019.

Following are the other aspects of new Rule 6 of Companies (Appointment and Qualifications of Directors) Rules, 2014 and Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019:

1. Every Independent Director, alongside filing declaration with the Board of the company where he has been appointed as such, declaring his independence in terms of Section 149(7), additional declaration for compliance with sub rules (1) of (2) of Rule 6 of Companies (Appointment and Qualifications of Directors) Rules, 2014.

2. Minimum score require to pass the online proficiency test has been kept at 60%.

3. No maximum number of limits has been imposed for attempting the proficiency test.

4. Every person whose name has been so included in the database, shall give another test within one year from the date on which his name has been included, failing which his name shall be removed.

5. The IICA has been empowered to charge fees for applications by individuals willing to include their name in the database and from the Companies using the database.

Conclusion Remarks:

The new Rules has made it mandatory for all companies to appoint individuals as Independent Directors on its Board subject to the Section 150 and enable them to appoint persons having expertise and knowledge. The new notified rules makes an attempt, all such companies who is required to have Independent Directors to appoint “Independent Directors” in the real spirit of the concept of “Directors with Indpendence” which was missing in the regulatory framework of the Country.

There may be chances of errors for any omission or inclusion any material fact unintentionally occurred, hence, your views, suggestions and objections are welcomed.

Disclaimer:

The views expressed in this write-up are personal and not that of the ICSI/IICA/MCA. Readers are advised to refer the relevant provisions before taking any action. The author takes no responsibility in respect of any action being taken on the basis of views expressed here.