“Ethics is knowing the difference between what you have a right to do and what is right to do.”

Increasing stakeholder’s activism has stimulated the role of Independent Directors. It has been decided in the case of Central Government vs Sterling Holiday Resorts (India) Ltd. and Orsthat “Independent Directors should be appointed to strengthen the Board”. The Satyam debacle and the Nimesh Kampani Saga in India are of great significance to take note of the position of the Independent directors.

The Bombay High Court in the Case of “Mrs Madhu Ashok Kapur And 3 Ors vs Mr Rana Kapoor And 8 Ors” has opined the meaning of Independent Director as “the expression “independent directors” means Directors who apart from receiving Director’s remuneration, do not have any other material pecuniary relationship or transactions with the Company, its promoters, its management or its subsidiaries which in judgment of the Board may affect independence of judgment of the Director.” The same definition of Independent directors was elucidated by the Kumara Mangalam Birla Committee in its report on Corporate Governance.

LEGISLATIVE AMENDMENTS:

1. Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019:

The Ministry of Corporate Affairs vide Notification no. G.S.R. 804(E) dated 22nd October 2019 has enacted new regulation to substitute the existing Rule 6 of Companies (Appointment and Qualification of Directors) Rules, 2014 which would be enforced and be effective from 1st December 2019.

As per the Rule 6 of the Companies (Appointment and Qualification of Directors) Rules, 2014 as amended by Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 effective 1st December 2019, every individual who is an Independent Director as on 1st December 2019 or who would be appointed as an Independent Director on or after 1st December 2019 would be required to comply with the following requirements as per the new enactment:

(i) The Independent Director of every company within 3 months of the enactment of the said new regulation would be required to apply to the Indian Institute of Corporate Affairs (“herein referred as the Institute”) for inclusion of his/her name in the databank of Independent directors for one year, five years or life time, till such person holds office as Independent Director. The said databank would be maintained by the said Indian Institute of Corporate Affairs.

(ii) The renewal application shall be made by the individual to the institute for a further period of one year or five years as the case maybe within 30 days of expiry of the original period of application to the Institute.

(iii) DISCLOSURE REQUIREMENT: Every Independent Director with effect from 1st December 2019, is required to submit a declaration of compliance pertaining to the application, maintenance and renewal of databank with the Institute to the Board of Directors along with the declaration required as per Section 149(7) of the Companies Act, 2013.

(iv) ONLINE PROFICIENCY EXAM: Within a period of one year from the inclusion of an individual’s name in the data bank maintained by the Institute, he/she is required to pass an online proficiency exam which would be conducted by the Indian Institute of Corporate Affairs. However if a person fails to clear the exam conducted, his/her name would be removed from the databank which would imply that such individual cannot continue as an Independent Director in the companies he or she is already designated and holding office as.

EXEMPTION FROM TAKING THE EXAM:

Individuals falling under the purview of the below-mentioned categories shall not be required to take the exam:

i. An individual as on the date of incorporation of his/her name in the databank, who has served as a director or key managerial personnel in a listed company for a period not less than 10 years.

ii. An individual as on the date of incorporation of his/her name in the databank, who has served as a director or key managerial personnel in an unlisted company which has paid up share capital of 10 crores or more for a period not less than 10 years.

For the purpose of calculating the period of 10 years, if a person has served as director or Key managerial personnel ‘at any period’ in “two or more companies simultaneously” as on the date of the inclusion of his or her name in the databank, the tenure of such services shall be counted as once and not twice.

EXAMPLE:

SITUATION 1:

If Mr A is holding office as a key managerial personnel in R Ltd. since 01st March 2015 and also a Non-Executive Director in S Ltd. since 01st March 2015 then in such situation, the period of service in both the companies would be counted once and not twice for the purpose of determining the exemption under the slab period of 10 years. Therefore Mr A’s service would be only 4 years and would be required to undertake the online proficiency exam to continue as an Independent Director.

SITUATION 2:

If Mr A is holding office as Non-executive director in R Ltd since 1st April 2000 and is appointed as Whole time director in S Ltd. since 1st April 2014, then the common period of service in both R Ltd. and S Ltd. would be counted as one complete stretch of 5 years i.e ( From 2014-2019). The period of holding office as Non-executive director in R Ltd. since 1st April 2000 would be taken into consideration as a separate period i.e (From 1st April 2000 to 31st March 2014) for the determination of period of service as a Director. The total period of service would be 19 years in this scenario. Therefore the period of service of Mr A exceeds 10 years and would not be required to take the online proficiency exam.

The word ‘Director’ for the purpose of calculating the threshold applicability of 10 years would include the position of both Executive and Non-executive Director.

POINTERS TO NOTE:

  • An individual would be deemed to pass the Online proficiency exam if such person has scored 60 percent or above in the test.
  • There shall be no limit on the number of attempts that could be taken by an individual for passing the exam.
  • Indian Institute of Corporate affairs, Manesar is designated as the institute for creation and maintenance of databank of Independent Directors.

2. Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019:

The Ministry of Corporate Affairs vide Notification no. G.S.R. 805(E) dated 22nd October 2019 has enacted Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 which would be enforced and be effective from 1st December 2019.

i. Under the purview of Rule 3, the databank of Independent directors would contain the following details:

(a) DIN (Director Identification Number), if applicable;

(b) Income Tax PAN;

(c) The name and surname in full;

(d) The father’s name;

(e) The date of Birth;

(f) Gender;

(g) The nationality;

(h) The occupation;

(i) Full Address with PIN Code (present and permanent);

(j) Phone number;

(k) E-mail id;

(l) The educational and professional qualifications;

(m) Experience or expertise, if any;

(n) Any pending criminal proceedings as specified in clause (d) of sub-section (1) of section 164;

(o) the list of limited liability partnerships in which he is or was a designated partner along with—

(i) The name of the limited liability partnership;

(ii) The nature of industry; and

(iii) The duration- with dates;

(p) The list of companies in which he is or was director along with—

(i) The name of the company;

(ii) The nature of industry;

(iii) The nature of directorship—Executive or Non-executive or Managing Director or Independent Director or Nominee Director; and

(iv) Duration – with dates.

ii. Where there would be any change in the particulars of the individuals, then such changes has to be incorporated within 30 days of such change through web based framework that would be made available by the Indian Institute of Corporate Affairs in this regard.

iii. By the virtue of Rule 4, it shall be the obligation of the Institute to conduct an online proficiency exam for independent directors. Such test would be conducted on the following areas of study:

Company Law, securities law, basic accountancy, and such other areas relevant to the functioning of an individual acting as an independent director.

iv. The Indian Institute of Corporate affairs shall also endeavour to prepare a basic study material, online lessons, including audio-visuals for easy reference of individuals taking the online proficiency self-assessment test.

3. Companies (Accounts) Amendment Rules, 2019:

The Ministry of Corporate Affairs vide Notification no. G.S.R. 803(E) dated 22nd October 2019 has enacted Companies (Accounts) Amendment Rules, 2019 which would be enforced and be effective from 1st December 2019.

The new legislation with effect from 1st December 2019 mandates that the board report of companies being prepared in conscience with Section 134 of the Companies Act, 2013 read with Rule 8 of Companies (Accounts) Rules, 2014 shall include a statement regarding the opinion of the Board of Directors with respect to the Integrity, expertise and experience of Independent Directors appointed during the year. The said statement would also include the proficiency test assessment results as ascertained by the Indian Institute of Corporate affairs.

CONCLUDING REMARKS:

The legislative intervention in the concept of Independent Directors is unquestionable. Independent Directors are crucial to the success of a company. They are appointed to bring in the rich expertise and diverse knowledge into an organization. Their role does not end there, independent directors are also responsible for effectively executing the knowledge that they bring in. Independent Directors elevate the corporate credibility and ensure effective corporate governance. Though their independence is put to question at several times, yet they are answerable to the stakeholders and are vital to the survival of any organization. There are countless companies that appoint Independent Directors who do not possess any qualification and are without any basic knowledge on the management of company.  New legislations continue to improve corporate literacy and to upload the fundamental aspect of the corporate sector – Corporate Governance!

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Location: Chennai, Tamil Nadu, IN
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