Recently on October 22, 2019 the Ministry of Corporate Affairs has came out with a much-awaited Notification Concerning Appointments and Qualification of Independent Directors.
The New norms sets out certain standards which a Person who is already acting as an Independent Director or wishes to be appointed as such of specified companies which falls under the category are required to adhere these norms.
A STEP TO CURB FAKE APPOINTMENTS
It is observed sometimes that certain unethical companies follows the practice of appointing person as their Independent Directors who actually don't deserves to be appointed as Such.
FIRST WE SHALL UNDERSTAND WHY DO COMPANIES RESORT TO SUCH PRACTICES?
The answer is explained below:
i) To Dominate Control- Most of the Companies in India are closely held and some promoters never wants an outsider to participate in the board.
ii) To maintain Secrecy- Some Companies do not wants that their business secrets be shared with an Independent Person who is not related to them.
iii) To Promote Non- Corporate Culture- It is a fact that if an educated and qualified person joins a Company then he will endeavor to bring a Corporate Culture to the board which some Promoter Directors never wants.
iv) Compliance Part-If a Company actually appoints an Independent Director then it has to follow all the required laws of the land in true letter and spirit because real Independent directors are well versed with applicable laws and they will insist the Promoter's to Comply with the relevant laws otherwise they may face severe liabilities of an Independent Directors not acting diligently.
v) Monetary Factor-If a Company appoints qualified person as Independent Directors then it has to pay them sitting fees and other reimbursements for attending the meetings which some promoters considers a wastage of money.
So mainly for these practical reasons, instead of appointing qualified person as an Independent Director on the board some Companies makes person closely associated with them at least not on paper but in reality and some other ineligible Person who are not qualified and experienced to become an Independent Director which demolishes the basic structure of Corporate Governance in an organization and results in to several scams and dishonest business practices.
It is harmful not only for the interest of stakeholders connected with the company but also to the economy as a whole.
PROVISIONS OF NEW RULES
Having been discussed about reasons behind appointment of ineligible person as independent directors now we shall discuss the Provisions of new rules:
The New rules introduces amendments to Companies (Appointment and Qualification of Directors) Rules,2014,Companies(Accounts)Rules, 2014 and introduction of Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019.
The Provisions in brief are as follows:
Amendment to Companies (Appointment and Qualification of Directors) Rules, 2014
i) Every individual,
• who has been appointed as an Independent Director in a Company shall within
a period of 3 (three) months from the commencement of the said Rules, or
• who intends to get appointed as an Independent Director in a company after 01/12/2019 shall before such appointment,
apply with such fees, as may be prescribed, to the 'Indian Institute of Corporate Affairs (IICA) for inclusion of his name in the data bank for a period of 1 (one) year or 5 (five) years or for his lifetime as the case may be,
apply with such fees, as may be prescribed, to the 'Indian Institute of Corporate Affairs (IICA) for inclusion of his name in the data bank for a period of 1 (one) year or 5 (five) years or for his lifetime as the case may be,
ii) Every person whose name has been included in the data bank shall make an application for renewal within 30 days of the expiry of the above period of 1 year, 5 years or lifetime as the case may be, else the name of individual shall stands removed from the data bank provided that Person who has paid lifetime fees for inclusion of his name in the data bank, need not submit application for renewal.
iii) Every Independent Director is required to submit declaration of above Compliance along with declaration u/s 149(7) every time to the Board.
iv) Every individual qualified in data bank of IICA shall also pass an online proficiency self-assessment test conducted by the institute within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute.
However there is no limit on number of attempt an individual may take to pass this online test within one year.
Exemption-This test is not applicable to an individual who has served for not less than ten years as directors or KMP in a listed public Company or unlisted Public Company having paid up share capital of Rs 10 Cr or more.
Companies (Creation and Maintenance of databank of Independent Directors Rules, 2019
These rules shall also come in to force w.e.f 01/12/2019 which basically deals with IICA to maintain a data bank of person eligible to act as Independent Directors and also to conduct online self assessment test. IICA will oversee and regulate the whole procedure as per the guidelines laid down under the rules.
Amendment to Companies (Accounts) Rules 2014
The changes introduced in these rules basically deals with matter to be included in board's report which now provides for 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.
An important point to note here is that the Proficiency of Independent Directors is quantified in terms of their performances in an online test.
60% MARKS REQUIRED TO PASS ONLINE TEST
The Government has made it mandatory to obtain at least 60% marks to pass the online self assessment proficiency test for an individual to act as an Independent Director. It will definitely help in curbing fake appointments made to play with the legal system.
CONCLUSION
These new provisions relating to eligibility of an Independent Director by the Central Government seems to be a very bright step in the right direction. The exam test criteria will make only such individuals qualify as Independent Directors on the Board of Companies who actually deserve rather than non-deserving candidates occupying the seats of Independent Directors leading to lapses in Corporate Governance Practices provided the rules are also implemented in the right manner.
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