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

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.
 

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. 

This update was released on 12 Nov 2019.

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.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
T: +91 22 40565252
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