Independent director’s position is one of the key managerial personnel in the functionality and administration of any company. The primary responsibility of the independent director is to ensure the business operations and administration of any company is conducted in a legitimate manner without leaving any latitude for discrepancies in business administration.
As per the existing practice in the corporate regime, in a majority of the companies’, the professionals assuming the independent director post are the relatives or friends / close circle of the promoters or top management.
As a consequence, they either end up as lame ducks / mute spectators or work as a loyal person to their appointors instead of working sincerely for the development of the company and being vigilant about corporate governance.
Due to these factors, the institution of independent directors has not served the real purpose (ensuring good corporate governance and shielding the economic/business interest of the company). Further, many of the independent directors (loyal to promoters/management and not to the company) have turned a blind eye to wrongdoings. When a company is caught for its misdeeds or busts, these directors make a beeline to resign citing personal reasons.
The debacle of Infrastructure Leasing & Financial Services Limited (IL & FS) is a classic illustration reflecting the existing state of affairs associated with the functionality of independent directors.
IL&FS debacle was partly the result of the inability of independent directors and mindless grant of credit grades by the credit rating agencies at their will which was far from reality. Due to the occurrence of IL&FS crisis, the functionality of independent director had once again become the talk of the town and came under the scanner of the MCA.
One can make out from the IL&FS cases that in the existing corporate regime the functionality of independent directors is in passive mode as a consequence independent director fraternity is ending up as a risk free mute spectator in the majority cases.
With the intent to put an end to the existing monopoly practice of employing people (kin/relatives/friends who are close to the promoters or management officials) as independent directors and to bring in more transparency and accountability in the functionality of independent director, the Ministry of Corporate Affairs (MCA) is establishing an exam pattern (first of its kind in India) for the selection of independent director on merit basis rather than based on the association amid the management officials and their allied people.
As part of streamlining the independent director fraternity – A qualification exam will be conducted by the Indian Institute of Corporate Affairs (IICA – an Institute which works under the leadership of MCA) in December 2019 for prospective professionals who are aspiring to work as an independent director.
Crossing the mark of 60% in the qualification test will be mandatory for the aspirants to assume the office of an independent director. The exam pattern will include an online proficiency self-assessment test to gauge the eligibility of the prospective candidates.
The curriculum will not be limited to mere domain knowledge – Proficiency test will cover various subjects (i.e Companies law, securities law, basic accountancy and all other areas associated with the business/administration).
This qualification test will pave the way for the recruitment of independent directors based on their professional merits and eligibility.
Amended rules ((Appointment and Qualification of Director) Fifth Amendment Rules, 2019, Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 and Companies (Accounts) Amendment Rules, 2019) in relation to qualification test/eligibility of independent directors come into effect from December 01, 2019.
Proper implementation and monitoring of the qualification test will certainly condense the magnitude of the side effects occurring due to the aforesaid pattern and facilitate the companies to bring on board qualified/dynamic professionals as independent directors (who will work in the best interest of company).
Crux of the amended rules in relation to employment of Independent Directors:
- All existing independent directors and professionals (who are aspiring to become an independent director) have to submit an application to IICA for the inclusion of such applicant name in the database of independent directors for the duration (i.e one year/five years/lifetime).
- One year period from the inclusion date in the database is established as a timeline for candidates to qualify the independent director online proficiency self-assessment test.
- Inability of a candidate to pass the online proficiency self-assessment test will result in the deletion of such candidate name from the independent director database.
- In order to renew the existing tenure of any independent director – Professionals working as independent directors has to submit a renewal application within 30 days prior to the expiry of existing tenure.
- Database will serve as an independent director library for the companies (who are in hunt of independent directors) as the database contains information related to qualified professionals who are willing to act as independent directors.
- Such information will be shared with the companies who are in actual need of employment of independent directors. However, it is the responsibility of the company to make prior due diligence about the prospective candidates without blindly relying on the information furnished in the database.
- Candidates (who are part of the database) may limit the access to their personal information to the institute only.
- If any modifications are to be made in the personal information of a candidate then such candidates is under the obligation to update their modified personal information in the database within 30 days from the modification date.
- Each company will be under the obligation to notify the IICA of the information related to appointment of independent director (with the consent of shareholders in the general meeting) along with listing the reasons justifying the appointment.
- For the time being there is no limitation imposed on the number of times a candidate can appear for the online proficiency test to qualify for the position of independent director.
It is the right time to fix the jinx in the independent directors’ fraternity with sweeping modifications in their engagement and functionality terms. Introduction of the online proficiency test is a step forward in this process.
Enforcement of online proficiency test pattern as the basis for the selection of independent director will certainly break the existing prototype that is being followed by the companies over the years and will script a new beginning in the independent director regime.
The beauty of the development of database of independent directors is that it will provide the companies with the opportunity of selecting qualified/dynamic candidates from the pool of skilled professionals.
However, the central government must develop a system to monitor the working of professionals registered in the database on periodic basis and has to ensure that the results of online proficiency test won’t be tampered.
If appropriate monitoring system is not in place, then there are chances of diluting the essence of amended rules. As a result, the same old prototype work style of the independent directors will continue, and the amended rules won’t serve the purpose and of no use.