On 22nd October 2019 Ministry of Corporate Affairs (MCA) issued the Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 regarding the creation and maintenance of databank of independent directors. These rules came into force on 1rst December 2019. Indian Institute of Corporate Affairs has been given the task to maintain the data bank. It will be a comprehensive repository of existing, as well as those eligible to be, independent directors. Every individual included in the data bank is required to pass an online proficiency self-assessment test conducted by the institute.
Background of the new requirement
Insubstantial number of companies in India, individuals who lack the necessary expertise and qualification are appointed as independent directors merely on the basis of a recommendation from a known person or as a favor of the majority shareholders. This is detrimental to the interests of the company as well as all the stakeholders. It is also observed that when independent directors are appointed solely on the basis of personal relationship and trust of owners, it defeats the very purpose of having independent directors. To tackle this, the Ministry of Corporate Affairs has lately introduced many measures to improve the efficiency and accountability of independent directors.
One significant measure was through the Companies (Accounts) Amendment Rules, 2019, issued on October 22, 2019. The amendment mandates that the Board report shall contain a statement regarding the opinion of the Board with regard to integrity, expertise, and experience (including the proficiency) of the independent directors appointed during the year.
The requirement for registration and qualification of proficiency test is the recent and radical step taken by MCA in the direction.
Time limit for registration and qualification
The final deadline for existing independent directors to register in the databank was fixed as 1st March 2019. However, as of 3rd March 2020, there were only 13537 independent directors registered in total on the databank out of which 2373 were women. Only 1204 companies were registered in total.
The deadline for filing application for registration was thereby extended from 1st March to 1st May. Every individual whose name so included in the data bank shall 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.
How to register in the databank
The persons already appointed as an Independent Director or intends to get appointed as an Independent Director in any company shall mandatorily register in the databank maintained by the databank of independent directors. An individual not having a DIN may also apply for the inclusion of his name in the Databank.
They can apply for inclusion of names in the databank for a period of one year, five years or lifetime paying the respective fees. The membership shall be renewed within 30 days from the date of expiry to continue in the databank and in the position of independent director in any company.
The registration can be done online through the MCA website. The MCA services – ID databank service- Individual registration option on the website provides the online registration service.
Through the individual registration option, the DIN/Pan number can be entered and the mobile number verification can be completed to create an account in the databank. The ID and password can be received on the mobile.
That ID and password shall be used to log in to the website Independentdirectorsdatabank.in. The registration shall be completed by entering the necessary details and paying the prescribed fees through the abovementioned website.
How to use the databank?
- To access the databank one can go to mca.gov.in or www.Independentdirectorsdatabank.in.
- The following is the data which will be available to the accessors about the prospective independent directors:
- Director Identification Number (DIN)
- Father’s Name
- Date of Birth
- Full address including PIN Code
- Phone number and email id
- The educational and professional qualifications
- Experience or expertise, if any
- Any pending criminal proceedings as specified in clause (d) of subsection (1) of section 164;
- The list of limited liability partnerships in which he is or was a designated partner along with:
- The name of limited liability partnership;
- The nature of the industry
- The duration with dates;
- The list of companies in which he is or was director along with-
- The name of the company;
- The nature of the industry;
- The nature of directorship- executive or non-executive or Managing Director or Independent Director or Nominee Director
- Duration – with dates
- Companies can access the databank once they pay reasonable fees to the institute. Only the companies which are required to have independent directors shall be eligible for it.
- The website always plays the disclaimer that companies should choose the director after sufficient due diligence.
- The institute charges both independent directors and companies for providing the information on independent directors available in the data bank.
Independent director proficiency test
All independent directors are required to conduct an online proficiency self-assessment test unless the individual has been a director or has been a key managerial personnel in a listed public company, unlisted public company having a paid-up share capital of rupees ten crores or more or body corporate listed on a recognized stock exchange for not less than 10 years.
For the purpose of the proficiency test, the following has to be noted:
- The following are the subjects in the test:
- Companies Law
- Securities Law
- Basic Accountancy
- Other areas relevant to the functioning of an individual acting as an independent director.
- The study material for this test is available on the website (duty of the institute), this material is in the form of online lessons, including audio-visuals for easy reference of individuals.
- The test is conducted by the Indian Institute of Corporate Affairs.
- The individuals taking the tests are also allowed to take advance tests in the subjects mentioned above.
- The candidate shall score 60% to pass the test
- The test has to be taken within 1 year of inclusion of name in a databank
Consequences of the new requirements
The databank provides elaborate data on all independent director candidates. This increases the choice for companies and prevents misrepresentations by candidates. The companies will also be able to choose a suitable candidate with better efficiency and can do its due diligence based on the background data given on the website. This ensures transparency in the procedure of appointment of IDs. Beforehand, the evaluation of independent directors was done by other co-directors. The databank makes the selection process speedier and easier.
The tests educate the independent directors to be more efficient in their course of working and more obligated towards the company. It also educates them on their legal responsibilities and liabilities. It can also be argued that the improvement in the expertise of IDs can increase their role in the administration of the company.
However, the low number of registrations reveals that there is a lack of awareness in the corporate field about the new requirements. Many candidates find the disclosure requirements burdensome.
Companies may also find it hard to find someone from an online test bank, especially group companies, family-owned businesses, etc., where key posts are filled on the criteria of personal relationship and trust above any other criteria. Due to such issues the test bank might have to struggle to create confidence in its users.
It is also opined that the position of independent directors is a less opted one in companies by experts as their powers and role are minimal in many companies. Increasing the qualifications required to be appointed as ID without improving their power and status can make the position more unfavorable to potential candidates.
Despite the allegation that the new requirements make the position of ID unpreferable, the candidates who registered on the website and qualified the online proficiency test have opined that the proficiency test serves as necessary training and screening for the potential candidates.
Lakshmi Subramanian, practicing company secretary, after qualifying the proficiency test, commented that –
“The test is completely centered on the study material provided by the institute. The test not only serves as a screening process for candidates for the post of independent directors, it also educates them about the role and liabilities of an independent director; a knowledge which even the experienced professionals in the field of corporate governance can find useful”
Speaking on the lower number of registered candidates who attended the test, she added that-
“Attending the proficiency test online is the only option provided by the institute. There is a general opinion that the comprehensive verification and invigilation for the online test does cause inconvenience to the candidates”
Clearly, some clarification and relaxation both in terms of time and requirements are needed. The recent extension in the time limit is the first step taken by MCA to make the new requirements more acceptable to users so as to increase compliance.
Author: Alby Stephan, Associate, LegalitySimplified LLP