For years, Independent Directors were appointed in the Company had required only one qualification that they should not be related to Promoters as per the definition is given in the Act/SEBI Rules etc. However, it means most of the time promoters ask their friends to be a Director on the Board who will be appointed as an Independent Director. This does not mean all the companies were adopting this practice, but many companies have started finding a way around the compulsory provision of appointing Independent Director. Most of the time, Independent Directors came under firing line when something goes wrong.
Ministry of Corporate Affairs (MCA) has made an attempt to remove years of slack and frequent allegations of corruption, nepotism and mute spectators in corporate boardrooms, by overhauling the process for appointment of independent directors from next month and appointed IICA to hold exams for Independent Directors and only candidate who passes with minimum 60% of marks will be eligible to be Independent Directors.
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 the qualification.
It is not just domain knowledge that will be put to test, the institute will conduct an online proficiency self-assessment test covering company law, securities law, basic accountancy and such other areas relevant to the functioning of an individual acting as an independent director.
On October 22, 2019, the MCA has issued notifications to amend the Companies (Appointment and Qualification of Directors) Rules, 2014 (Amendment Rules) and also issued the Companies (Creation of Maintenance of Directors Databank of Independent Director) Rules, 2019.
The Role of Independent directors came into sharp attack following the crisis at the Infrastructure Leasing and Financial Services (ILFS) 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.
The Amendment Rules 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 December 1, 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. Though there is no limit on the number of times a candidate can appear for this exam.
However, the Rules provided an exemption from appearing in the online proficiency self-assessment test to the Individuals who has served for 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 ten crore or more.
Though not sure how these exams will help or improve the position of Independent Director or play what role in improving overall position of Corporate Governance in India but one thing is sure that Ministry is aware that Independent Directors are not bringing on table what was expected from them and they are constantly working on improving the effectiveness of Independent Directors on Board of Indian Companies.