BACKGROUNDIndependent Directors are meant to be the pillar of corporate governance many of whose tenets are now mandatory in specified large / listed companies. In principle, every Director is expected to exercise a level of independence and even act akin to a trustee while discharging his duties. This is expected even from a Promoter or a Working Director. However, there are conflicts of interest, the reality of which cannot be denied. A Promoter Director or a Working Director cannot, in all fairness, be expected to be able to exercise the level of independence than one who is not so. Hence, a category of Directors was needed who had no connection or conflict that could impinge on their independence. Independent Directors, thus, have to pass through a series of negative conditions to ensure that there is no conflict of interest.
However, merely being independent is not sufficient for a person to discharge the onerous responsibility of acting as a Director when the Board of which he is a member has to oversee at a very senior level. Hence, apart from prescribing a series of disqualifications, the law also lays down that he should have certain knowledge that would enable him to discharge his responsibilities. To be precise, it is passing a certain online self-assessment Test in certain areas that are relevant to his functioning as an Independent Director. He is also required to register his details with a databank in a prescribed manner. The provisions relating to such a Test and for the databank have undergone amendments, including one most recently on 19th August, 2021 which gives exemption from the Test for professionals, including Chartered Accountants of certain standing. We discuss this subject in detail in this article.
OVERVIEW OF QUALIFICATIONS AND DISQUALIFICATIONS OF AN INDEPENDENT DIRECTOR
There are more disqualifications that make a person ineligible to become an Independent Director than there are qualifications that make him eligible! Being connected with the company or the Promoters in a variety of specified ways makes a person disqualified to be an Independent Director. However, the qualifications / qualities laid down are largely generic and even vague, thus making most people eligible and qualified. Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014 (‘the Rules’) provide that an Independent Director ‘shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.’ However, it is up to the Board to assess whether the proposed Independent Director has the required expertise / knowledge. Section 149(6) of the Companies Act, 2013 requires that the Board should assess whether in its opinion he ‘is a person of integrity and possesses relevant expertise and experience.’
However, there is also a specific requirement whereby the Independent Director has to pass an online Test which tests his knowledge on a variety of regulatory and related areas which are relevant for him to perform his functions as a Director.
BROAD SCHEME OF THE REQUIREMENT RELATING TO MAINTENANCE OF DATABANK AND PASSING OF ONLINE TEST
There are two sets of requirements linked to each other that an Independent Director has to comply with. Firstly, he has to ensure that his name is entered into a databank maintained in the prescribed manner by the specified Institute. Secondly, he has to pass the specified online self-assessment Test.
Some of these requirements came into force when the provisions relating to Independent Directors were already on the statute. Hence, these provisions had to be introduced giving a transition period for Independent Directors already existing in office. Those aside, the broad scheme is as follows: A person desiring to be appointed as an Independent Director shall, before such appointment, apply to the Institute for inclusion of his name in the databank maintained by it. He may apply even if there is no immediate proposal of his being appointed as such. He also needs to pass the specified online Test within two years of inclusion of his name in such databank. If he does not pass, his name would be removed from the databank. There are categories of persons who are exempted from passing such a Test. Recently, by an amendment made to the Rules on 19th August, 2021, more categories of exempted persons have been added. The overall scheme for this purpose, partly by non-application of mind and partly by a series of amendments, is a little clumsy and also leaves several ambiguous areas.
Note that the requirement of appointment of an Independent Director under the Act applies not only to listed companies but also other categories of public companies, such as those with paid-up capital of at least Rs. 10 crores, turnover of at least Rs. 100 crores, etc.
Requirement of passing Test for being eligible to be appointed as an Independent Director
Rule 6(4) of the Rules requires an Independent Director to pass the specified ‘online proficiency self-assessment Test’ (‘the Test’). This Test has to be passed within two years of inclusion of his name in the databank maintained by the specified Institute. If he does not pass, his name will be removed from the databank.
The Institute in this case is the ‘Indian Institute of Corporate Affairs at Manesar’ as notified under section 150 of the Act.
He has to obtain a score of at least 50% in the aggregate in the Test. He can appear as many times as he wants for the Test, though he should pass it within the time limit of two years from the date on which his name is included in the databank.
Requirement of passing the Test applicable only to Independent Directors
Curiously, the requirement of passing such a Test and even of entering the name in the databank is required only for an Independent Director. Other Directors, who may form half or more of the Board, are not required to pass such Test.
Categories of Independent Directors who are exempt from passing the online Test
While the Test is not exceptionally difficult to pass, it still means that many otherwise highly qualified and / or experienced people would need to take this Test. There may be persons who may be specialists for years or even decades in their respective fields and yet would have to pass the Test. Recognising this, the Rules have been progressively amended and several categories of persons are now exempt from passing it. However, no exemption has been provided from the requirement of entering the name and details in the databank.
The categories that are exempt from passing the Test are described below.
Persons who have been Directors or key managerial personnel of certain types of entities for at least three years are exempted. These entities include listed companies, unlisted public companies with a paid-up capital of at least Rs. 10 crores, bodies corporate incorporated outside India with a paid-up capital of at least US$ 2 million, etc. This exemption will be particularly helpful for Promoters, Working Directors and even key managerial personnel, etc., who have already been associated with listed companies and who would otherwise have been required to take the Test.
Then there are persons who have worked at a senior level with the Government. Those persons who have acted at such a senior level for a period of three years in the pay scale of Director or equivalent or above in any Ministry or Department of the Central or State Government and having experience in specified areas such as commerce, corporate affairs, etc., are exempted from passing the Test.
Similarly exempted are persons who have acted for three years in the payscale of Chief General Manager or above with regulators like SEBI, Reserve Bank of India, the Pension Fund Regulatory and Development Authority, etc., and having experience in handling matters relating to corporate laws, securities laws or economic laws.
Further, persons who have been, for at least ten years, advocates of a high court or in practice as a Chartered Accountant / Company Secretary / Cost Accountant, do not need to pass the Test. This will be helpful to professionals who by virtue of their long standing have adequate knowledge and experience in fields that would be relevant entities requiring the appointment of Independent Directors.
WHAT IF THE DIRECTOR DOES NOT PASS SUCH TEST WITHIN THE SPECIFIED TIME?
The law requires a person to appear for and pass the Test within the specified time. However, what would happen if he does not bother to appear or he appears and does not pass within the prescribed time? Rule 4 says that ‘his name shall stand removed from the databank of the institute’. The intention of the law seems to be that only those persons who have passed such Test or who pass the Test in the specified time should be appointed as Independent Directors.
However, the clauses are not happily worded. There are no clear answers to questions such as (i) Will it make such person ineligible to be appointed as an Independent Director? (ii) Will he immediately vacate his office as Independent Director? (iii) Will he have to pay any penalty for continuing to act as an Independent Director despite not passing the Test? (iv) What is the role of the company in this regard and whether it is required to remove such Director?
CONCLUSION
By these recent amendments, the law now rightly exempts more categories of persons who have long experience and good knowledge of their respective fields but would still be required to pass the online Test. However, it must be said that the governance of the Board and the regulatory requirements relating to them have over the years become quite complex and elaborate. The exempted categories are generally those having experience / knowledge of specialised areas while governance of the Board can require different skills, knowledge and exposure. Thus, knowledge of various laws and procedures would be helpful and it would be advisable to study the relevant laws. Further, it is necessary to appear for the Test and to pass it to confirm his knowledge. Clearly, the Test is one-time and at present there is no requirement to periodically re-appear for it or undergo some refresher course. But here, too, it may be advisable that even those who have passed the Test earlier may keep updating themselves and even voluntarily appear for it again.
