12 December, 2019
The Ministry of Corporate Affairs, India (“MCA”) with a view to further boost the corporate governance norms has recently issued multiple notifications introducing compliances for persons currently acting as independent director of Indian companies or who intends to get appointed as an independent director. The notifications would also have an impact on the Indian companies that have either appointed or proposes to appoint independent directors.
The term “independent director” has been defined under section 149(6) of the (Indian) Companies Act, 2013 (“Act”), which also lays down the eligibility criteria for a person to be appointed as an independent director. In broader terms, independent directors are basically directors who do not have any material pecuniary relationship or transaction with the company, its promoters, its management, or its subsidiary. As per the provisions of section 149 of the Act, every listed company and every other public company having prescribed share capital, turnover or loans/ debentures/ deposits are required to appoint independent directors.
The MCA on October 22, 2019 has notified the following three rules which would affect the compliances with respect to independent directors. It is to be noted that all the three below mentioned rules would come into effect from December 1, 2019, thus giving reasonable time to stakeholders to understand and comply with the new set of rules.
(i) The Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 (“ID Databank Rule”);
(ii) The Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 (“Qualification Rule”); and
(iii) The Companies (Accounts) Amendment Rules, 2019 (“Accounts Rule”).
Databank and Proficiency Test
MCA by way of the ID Databank Rule has entrusted the Indian Institute of Corporate Affairs (“IICA”) with the powers to create and maintain an online databank of persons willing and eligible to be appointed as independent directors. The databank would comprise of the prescribed details of independent directors such as their director identification number, permanent account number, contact details, details regarding any pending criminal proceedings and disclosure regarding interest in other companies and limited liability partnerships. The information in the databank would be accessible only to such companies which are required to appoint independent directors, upon payment of a reasonable fee. In order to allow independent directors to have the right to control the disclosure of their personal information, the ID Databank Rule provides that an independent director may restrict his personal information to the IICA to be disclosed in the databank.
The Appointment Rule require every individual who is as an independent director of an Indian company to apply online to IICA for inclusion of his/ her name in the databank within a period of 3 (three) months from the date of commencement of the Appointment Rule (i.e.. December 1, 2019). Further, every person who is to be appointment as an independent director of the company post December 1, 2019 shall prior to such appointment apply to IICA for inclusion of his/ her name in the databank. The name can be included in the databank for a period of 1 (one) year, 5 (five) years or for life-term. Renewal application for inclusion of the name in the databank is to be filed within a period of 30 (thirty) days from the expiry of the period upto which the name was included in the databank.
As per the ID Databank Rule, IICA shall 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. Every individual whose name has been included in the databank shall be required to pass the online proficiency self-assessment test (with not less than 60% in aggregate) conducted by the IICA within a period of 1 (one) year from the date of inclusion of his/ her name in the databank, failing which his/ her name shall stand removed from the databank. However, individual who has served for a period of not less than 10 (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 INR 100 Million or more shall not be required to pass the online proficiency self-assessment test.
Disclosures
The Appointment Rule require every independent director to submit a declaration to Board regarding compliances of the Appointment Rule, each time he/ she submits a declaration that he meets the criteria of independence as required under section 149 of the Act.
Further, as per the Accounts Rule, every company is required to provide in its boards' report a statement regarding opinion of the board with regard to integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year.
Quick View
The recent notifications of the MCA regarding independent directors can be seen as a confidence building measure, which has come in the backdrop of several corporate crisis recently witnessed in India. The J.J. Irani Committee on Company Law (2005) which was one of the basis for inclusion of the concept of independent director in the Act, described in its report that the role of independent directors would be to bring an element of objectivity to the board process in the general interests of the company and thereby to the benefit of minority interests and smaller shareholders. Considering that the effectiveness of independent directors on the board of companies has recently come under attack, the recent notifications may help to bring in more professionalism, independence and accountability in the functioning of independent directors.
For further information, please contact:
Neetika Ahuja, Associate Partner, Clasis Law
neetika.ahuja@clasislaw.com
