What Companies and Independent Directors should know about MCA’s new compliances for the appointment of Independent Directors

The Ministry of Corporate Affairs (“MCA”) has issued multiple notifications (“Amendment Notifications”) introducing new compliances for companies that have appointed or intend to appoint independent directors.

Who are independent directors?

As the name suggests, independent directors are directors who are expected to be independent in their functions. They are pivotal in maintaining good corporate governance standards and ensuring a transparent working environment in a company. While Section 149(4) of the Companies Act, 2013 (“Act”) stipulates that only listed public companies are required to appoint independent directors, certain private companies also appoint independent directors so as to maintain the corporate governance standards in the organization.

Section 149(6) of the Act, lays down the eligibility criteria for a person to be appointed as an independent director. With a view to increase transparency in relation to such appointments, the Amendment Notifications stipulate further conditions to be satisfied before a person can be appointed as an independent director, or for a person already appointed as such to continue to remain in office.

Data Bank

The MCA notified the Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 (“Data Bank Rules”), and entrusted the Indian Institute of Corporate Affairs, Manesar (“IICA”) with the creation and maintenance of an online data bank (“Data Bank”) of persons willing and eligible (as per the requirements stipulated in Section 149 of the Act) to be an independent director. This Data Bank can be accessed upon payment of a fee by companies.

Details available in the Data Bank

Rule 3 of the Data Bank Rules stipulates that the following details of all independent directors should be uploaded on the Data Bank: (a) Director Identification Number (if applicable), (b) Permanent Account Number, (c) personal details such as full name, father’s name, date of birth etc., (d) educational qualifications, (e) details of experience, (f) pendency of criminal proceedings against the candidate, (g) directorship in other companies, and (h) partnership in other limited liability partnerships.

Online Proficiency Self-Assessment Test

The IICA shall conduct an online proficiency self-assessment test (“Test”) to determine the proficiency of the IDs. The IICA shall provide daily updates regarding inclusion into and deletion from the Data Bank to the Central Government. Further, as per Rule 6(4) of Appointment Rules (as defined below), directors’ names can be removed from the Data Bank if they fail to secure at least 60% in the Test, within 1 year of being included in the Data Bank

Exemption from qualifying the Test

Persons who have already served as a director or key managerial personnel at:

  1. a listed public company, or
  2. an unlisted public company having paid up share capital of Rs 10,00,00,000 (Rupees Ten Crore only),

for a minimum period of 10 years, shall not be required to qualify this Test to be in compliance with these Appointment Rules (as defined below).

Application for Inclusion in the Data Bank

The existing Companies (Appointment and Qualification of Directors) Rules, 2014 (“Appointment Rules”) have also been amended to bring them in line with the Amendment Notifications. Persons willing and eligible (under Section 149 of the Act) to become independent directors should, within 3 months of December 1, 2019 (“Effective Date”) or, if they seek to be appointed after the Effective Date, apply for inclusion of their names in the list of eligible persons to be maintained by IICA (Rule6(1) of Appointment Rules). Application for inclusion in such list may be for a period of 1 year, 5 years or for the lifetime of the ID (“Term”). Unless the independent director has applied for a lifetime inclusion in the Data Bank, he or she will have to apply for renewal of such inclusion within 30 days of the expiry of the period applied for earlier, to remain compliant with these provisions. (Rule 6(2) of Appointment Rules) 

Report of ID to the Board to confirm compliance

In the declaration submitted to the Board by the independent director, as required under Section 149(7) of the Act, the independent director has to include a statement confirming compliance with Rules 6(1) and 6(2) of Appointment Rules.

Annual Board Report

As per the amended Rule 8 of the Companies (Accounts) Amendment Rules, 2019, a company, in its annual board report, is required to include an additional statement confirming the expertise, experience, proficiency and the integrity of the independent directors appointed by the Board during the previous year. The opinion regarding the independent directors’ proficiency shall be determined on the basis of the results of the Test undertaken by the independent director. 

Quick View

The Amendment Notifications are effective from December 1, 2019. They have been introduced to increase accountability of companies in regard to their appointment of independent directors and to ensure that these independent directors are qualified to perform their function effectively. Corporate governance is a framework of rules and practices that seek to keep companies in check while ensuring a balance of stakeholders’ interests. Independent directors were intended to be flag bearers of corporate governance, though in practice this has not always been the case. Companies have often faced the problem of independent directors merely being independent on paper, but in practice acting as nominees of the majority shareholder(s) or of senior management. This has been seen time and again where despite the presence of independent directors, there have been several major corporate scandals such as Satyam.

Though the new provisions do not limit the pool of candidates to be appointed as independent directors to those listed in the Data Bank, they do lay down mandatory compliances for independent directors who have been appointed to get themselves listed on the Data Bank within prescribed period and to clear the Test. These provisions are clearly intended to ensure that there is transparency in the process of appointing independent directors and to make sure that they are qualified for the job. However, while taking steps to ensure the competency of independent directors, the Amendment Notifications do little in order to ensure the independence of IDs. Therefore, only time will tell if the Amendment Notifications are sufficient or if the MCA should take more steps to ensure the independence of independent directors.

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Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.



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