New rules mandate company boards to explain independent directors’ suitability

New Delhi: Come December, boards of directors of companies will have to provide shareholders details on the integrity, expertise and experience of independent directors hired during the year, according to new rules the Centre has introduced.

Independent directors should also have passed a self-assessment test conducted by the Indian Institute of Corporate Affairs (IICA), attached to the Ministry of Corporate Affairs, according to the Companies (Accounts) Amendment rules 2019 notified by the ministry on Tuesday.

The idea is to ensure that independent directors, expected to protect the interests of minority shareholders and keep an eye on the governance of the company, are qualified for the task.

The online proficiency self-assessment test to be conducted by the IICA will evaluate the candidate’s knowledge of the Companies Act, securities law, basic accountancy and of other subjects that are required for the individual to perform as an independent director. The new rules are effective 1 December.

IICA has also been authorised to maintain a list of candidates who are eligible and are willing to be hired as independent directors.

A separate set of rules, also notified on Tuesday, called the Companies (Appointment and Qualification of Directors) Fifth Amendment rules, 2019, said those who were willing and eligible to become independent directors should within three months of the new rules coming into force or before getting hired, apply for inclusion of their names in the list of eligible persons to be maintained by IICA.

They have to pass the proficiency self-assessment test within one year of inclusion of their name in IICA’s database. Individuals who have already served ten years as director or as a key managerial person in a listed or unlisted public company with ₹10 crore or more paid up capital are not required to take the test.

Independent directors are considered gate keepers of governance in companies and play a crucial role in decision making process of the board of directors.

Listed companies are required to reserve at least one third of directorships on the board to independent directors if the chairman of the board is a non-executive director. If the chairman is an executive director, at least half of the directorships should be reserved for independent directors, as per the listing agreements that companies sign with stock exchanges.

Independent directors, also expected not to be related parties to the companies they are serving, play a key role in governance as it is a common practice for shareholders in Indian companies to also serve in management roles. Large unlisted public limited companies too should have specified number of independent directors on the board.

The IICA database will also capture the Permanent Account Number, Director Identification Number and past directorships of the individuals eligible to become independent directors. It will also capture if the person faced any criminal proceedings in the past.