PROFICIENT INDEPENDENT DIRECTORS

What else may be the name of the youngest profession on the block of Corporate India? The new test is here to hit test-taking taste bud of Indian professionals. Rule 4(a) of the Companies (Creation and Maintenance of database of Independent Directors) Rules, 2019 introduces silently the “proficiency self – assessment test”. Ministry of Corporate Affairs by notification G.S.R. 805(E) dated 22^nd October 2019 introduced these rules.

Prima facie, it looks like a new governmental revenue model than anything else. In the era of privatisation, the government virtually nationalised database management of professional skill set made available, maintained and sold by private players.

There is an already set definition of Independent Directors under Section 149(6) and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014 as amended. Present Rules does not disturb this presently well-settled qualification for being an independent director but it included proficiency as a condition by way of new Rule 6 (Compliances required by a person eligible and willing to be appointed as an independent director) of the Companies (Appointment and Qualification of Directors) Rules, 2014 as amended.

EFFECTIVE DATE

The Companies (Creation and Maintenance of database of Independent Directors) Rules, 2019 shall effectively come into effect with effect from 1^st day of December 2019. Though, provisions related to definition and course preparation penal come into effect from the date of publication of the notification in official gazette that is 22^nd October 2019.

INDIAN INSTITUTE OF CORPORATE AFFAIRS

The official think tank of the Ministry of Corporate Affairs will now have a formal role of conducting a formal test with legal backing. Presently this institute runs several “value-added courses and classes” catering Corporate Indians.

The definition of the Institute under Rule 2(b) identifies it as the ‘Indian Institute of Corporate Affairs’ notified under Section 150(1). The government notified this institute by Notification Number S.O. 3791(E) dated 22^nd October 2019.

DUTIES OF THE INSTITUTE

EXAMINATION DUTY

Rule 4(1) of these rules cast upon the institute following duties:

1. Conducting an online proficiency self-assessment test covering:
   1. companies law;
   2. securities laws;
   3. basic accounting; and
   4. such other area relevant to the functioning of an individual acting as an Independent director.
2. Preparing basic study material, online lessons, including audiovisuals for easy reference of individuals taking online proficiency self-assessment test;
3. Provide an option for individuals to take the advance test in the areas specified in clause (a) and preparing the necessary advanced study material in this respect.

There will not be a separate fee for these three services. Where is the original fee? It is mentioned in Rule 3(7) which we will discuss later in this post.

DAILY DATABASE UPDATE

The IICA shall share a cumulative list of individuals:

1. Included in the database with PAN of Indians or Passport number of foreigners;
2. Rejected for inclusion in the database along with ground and date of rejection; and
3. Removed from the list along with ground and date of rejection.

THE DATA BANK

 IICA shall create a data bank of persons willing and eligible to be appointed as independent directors online on its website under Rule 3(1).

The Databank shall have complete information legally required to be displayed under Rule 3(2) including experience and expertise.

However, a person may restrict his personal information to be disclosed in the databank. [Rule 3(4)] This is good for privacy protection particularly where a person not willing for further appointments.

The information from data bank shall be available on payment of a fee to companies required to appoint an independent director. [Rule 3(3)]

Every individual whose name is included in the databank shall update data within thirty days of any change. For this purpose, there shall be a web-based framework. [Rule 3(5)] This is not clear if it will be punishable to update data within this period.

DATABANK DISCLAIMER

There shall be consciously disclaimer on the website of IICA that the company must carry out its own due diligence before appointing a person from the databank.

DATABANK FEE

According to Rule 3(7), IICA shall fix a reasonable fee to be charged from :

1. Individuals for the inclusion of their name; and
2. Companies for providing information.

The most interesting but mysteriously dangerous announcement is in the proviso to Rule 4(1). This says, No separate fee shall be charged by the institute in respect of clause (a), (b) and (c) of Rule 4(1). This makes fee charges from individuals an all-inclusive fee for the whole package, without option not to avail one or two. Even if an individual has the best degree on the subject he will require to pay a fee at least, taking the test or not is secondary.

EXISTING INDEPENDENT DIRECTOR

According to explanation to Rule 3, all existing directors shall also require to have their name in this databank.

LEGAL PREMISES OF THESE RULES

These rules draw their power from Section 150(1) which by its own nature is a facilitating but not in any manner mandatory provision. However, there may be several possible interpretations. There is no law restricting a company from picking an independent director outside the database. However, this is not a position any more. The Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 gives teeth to the Companies (Creation and Maintenance of database of Independent Directors) Rules, 2019.

We will discuss this in the next post.