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Contributed on November 11, 2020

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MCA: Submission requesting for amendment in provisions requiring Independent Directors to pass online proficiency self-assessment test

Blog: NASSCOM Official Blog

As per Rule 6(1) of Companies (Appointment and Qualifications 0f Directors) Rules, 2004 (Rules) as amended by Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 (Amendment Rules), every individual appointed as an independent director in a company on the date of commencement of Amendment Rules or who intends to get appointed as an independent director is required to apply online to the Indian Institute of Corporate Affairs (IICA) for inclusion of his name in the data bank. Further, as per Rule 6(4), such individual is also required to pass an online proficiency self-assessment test conducted by the institute within a prescribed period, failing which, his name will be removed from the databank.

We appreciate the spirit and intent of Ministry of Corporate Affairs (MCA) to prescribe a minimum level of qualifications and skill-set for Independent Directors to adhere to corporate governance requirements in India. However, the following issues may arise as a result of the amendment:

1. The qualification criteria for independence of directors has been well laid down in section 149 of Companies Act, 2013 (Companies Act) and rules thereunder. Further, Securities Exchange Board of India (SEBI) has also provided detailed guidelines for a director to qualify as an Independent Director under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR Regulations). Accordingly, there are sufficient requirements and disclosures prescribed under extant laws for independent directors.
2. Independent Directors play a major role in achieving good corporate governance. The amended rules under Companies Act are prescriptive in nature. Prior to introduction of the amendment, the law allowed flexibility to companies to choose their Independent Directors provided the framework of independence is complied with.
3. The online test is designed to familiarise independent directors with basics of accounting, securities, corporate law and other such areas relevant to the functioning of an individual as an independent director. However, it does not impart practical training to independent directors nor provide them an option to keep themselves abreast with changing regulations and expectations from the market. Thus, making Independent Directors subject to passing a common exam may not really serve the purpose behind its introduction.
4. Further, the online proficiency test and other e-learning courses developed by IICA are overlapping with familiarisation programmes required to be conducted by companies under Regulation 25(7) of SEBI LODR Regulations and Schedule IV of Companies Act which familiarises independent directors with their roles & responsibilities, senior management/leadership team, nature of industry, policies operations, business model, strategy, etc. Hence, this proficiency test serves as an additional eligibility criterion for being appointed as an independent director, rather than making an impact on the independent directors’ contribution on building a strong board.
5. It is also important to note that developed countries like USA, UK do not have a similar qualification requirement for Independent Directors. Prescribing such a qualification requirement in India will dissuade foreign directors with considerable global expertise to join Indian companies.

In order to ensure efficacy, we have requested MCA to conduct training programs for independent directors on a periodic basis which will help them to keep informed about regulatory changes, rather than conducting proficiency test.

The suggested training structure could have a credit hour system which will require independent directors to obtain certain credit hours upon successful completion of the course in a year. Independent directors can also be mandated to provide confirmation regarding completion of requisite credit hours of training program as part of their declaration to be submitted under Section 149(7) of the Companies Act. In turn, companies should be mandated to disclose these details in their Boards’ report. This will go a long way in promoting corporate governance.

We will pursue this with MCA and will keep you posted on further developments in this regard.

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