LEGAL UPDATE | GOVERNMENT
PRESCRIBES FURTHER REQUIREMENTS FOR INDEPENDENT DIRECTORS
Introduction
Section 150 of the Companies Act, 2013 (CA) provides the manner
of selection of independent directors and the maintenance of databank of
independent directors. On 22 October 2019, the Central government in
three separate notifications provided further requirements in relation
to the (a) appointment; (b) qualifications and (c) maintenance of a
databank of independent directors. This update briefly summarises these
notifications.
Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019
These rules provide for the creation of a databank of independent
directors, duties of the Indian Institute of Corporate Affairs (Institute) notified under Section 150(1) of the CA and appointment of a panel to approve certain actions of the Institute.
Databank
Databank
The Institute is required to create and maintain a databank of persons
willing and eligible to be appointed as independent directors under the
CA. This databank is required to be available online on the website of
the Institute. The databank must contain 16 particulars of the
individuals who seek to be or are independent directors including DIN,
Income Tax PAN, name and surname in full, educational and professional
qualifications, details of criminal proceedings, if any, list of limited
liability partnerships where the individual is a designated partner and
the list of companies where the individual is a director. These details
will only be provided to companies required to appoint independent
directors on payment of a requisite fee.
Duties of the Institute
The Institute is required to (i) conduct an online proficiency self-assessment test (Test)
covering company law, securities law, basic accountancy and such other
areas relevant to the functioning of an individual acting as an
independent director; (ii) prepare basic study material, online lessons,
including audio-visuals for individuals taking the Test; (iii) provide
an option to individuals to take advanced tests on the areas mentioned
above in (i) and provide study material in this regard; (iv) inform the
Central Government on a daily basis of the cumulative list of
individuals (a) whose names are included in the databank along with the
date of inclusion and Income Tax PAN for Indian individuals and Passport
number for foreign directors (not required to have an Indian PAN); (b)
whose applications for inclusion have been rejected along with the
grounds and dates of rejection; (c) whose names have been removed from
the databank along with grounds and date of removal.
Companies (Appointment and Qualifications of Directors) Fifth Amendments Rules, 2019
These rules come into force with effect from 1 December 2019. Under these rules every individual (i) who has been appointed as an independent director in a company on the date of commencement of this rules must within a period of three months from such commencement; (ii) who intends to get appointed as an independent director in a company after such commencement must before such appointment, apply online to the Institute for inclusion of his name for a period of one year or five years or for his lifetime (Term) till he continues to hold the office of an independent director in any company. Such individual is also required to file an application for renewal for further periods of one year or five years or for his lifetime within a period of thirty days from the date of expiry of the Term failing which the name of the individual shall stand removed from the databank of the Institute.
Every individual whose name is so included in the databank must pass the Test conducted by the Institute within a period of one year from the date of his inclusion in the databank, failing which his name will be removed from the databank provided that an individual who has served for a period of not less than 10 years as on the date of his inclusion of his name in the databank, as director or a key managerial personnel in a listed public company or in an unlisted public company having a paid up share capital of Rs 10 crores or more is not required to pass the Test. To pass the Test the individual must score not less than 60% in the aggregate.
Companies (Accounts) Amendment Rules, 2019
These rules also come into effect on 1 December 2019. By the amendment the Board of Directors (Board) of a company is required to include a statement in the Board’s report regarding its opinion on the integrity, expertise and experience (including proficiency) of independent directors appointed during the relevant year. Proficiency refers to the performance of the independent director in the Test.
These rules come into force with effect from 1 December 2019. Under these rules every individual (i) who has been appointed as an independent director in a company on the date of commencement of this rules must within a period of three months from such commencement; (ii) who intends to get appointed as an independent director in a company after such commencement must before such appointment, apply online to the Institute for inclusion of his name for a period of one year or five years or for his lifetime (Term) till he continues to hold the office of an independent director in any company. Such individual is also required to file an application for renewal for further periods of one year or five years or for his lifetime within a period of thirty days from the date of expiry of the Term failing which the name of the individual shall stand removed from the databank of the Institute.
Every individual whose name is so included in the databank must pass the Test conducted by the Institute within a period of one year from the date of his inclusion in the databank, failing which his name will be removed from the databank provided that an individual who has served for a period of not less than 10 years as on the date of his inclusion of his name in the databank, as director or a key managerial personnel in a listed public company or in an unlisted public company having a paid up share capital of Rs 10 crores or more is not required to pass the Test. To pass the Test the individual must score not less than 60% in the aggregate.
Companies (Accounts) Amendment Rules, 2019
These rules also come into effect on 1 December 2019. By the amendment the Board of Directors (Board) of a company is required to include a statement in the Board’s report regarding its opinion on the integrity, expertise and experience (including proficiency) of independent directors appointed during the relevant year. Proficiency refers to the performance of the independent director in the Test.
MHCO COMMENT
In India there is a limited pool of independent directors. While
maintaining a databank and prescribing a proficiency requirement may
appear to be positive steps, there appears to be excessive interference
by the Government in areas which should be left to the discretion of a
company’s management and shareholders. The independent director
requirement applies to listed companies and unlisted public companies
who meet certain turnover thresholds. The CA and requirements of the
listing agreement already provide a long list of requirements for
independent directors. Their code of conduct and liability are also laid
down. In the circumstances, adding a proficiency test could be
cumbersome since the companies required to appoint independent directors
would in their own interest only appoint persons of standing to be
independent directors. It remains to be seen whether the databank would
have sufficient people qualified to be independent directors to meet the
requirements of companies required to have such directors.
The views expressed in this update are personal
and should not be construed as any legal advice. Please contact us directly on
+91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.
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