COMPLIANCE BY INDEPENDENT DIRECTORS

In the last post PROFICIENT INDEPENDENT DIRECTORS, we discussed the introduction of “proficiency self – assessment test” by the Ministry of Corporate Affairs. 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, in this post, will discuss the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019. More power is given by the Companies (Accounts) Amendment Rules, 2019.

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 was no law restricting a company from picking an independent director outside the data bank. However, this is not a position any more. Newly substituted Rule 6 tries to change the position. The Ministry substituted it by Notification No. G.S.R.  804(E) dated 22^nd October 2019 with effect from 1^st December 2019.

Note: Except paragraph related to the Board’s Report, the term rule in this post refer to the Companies (Appointment and Qualification of Directors) Rules, 2014 as amended.

Proficiency to be Stated in the Board’s Report

Notification No. G.S.R.  803(E) dated 22^nd October 2019 amended the Companies (Accounts) Rules, 2014 with effect from 1^st December 2019.

All companies preparing their Board’s Report on or after that date should insert a statement regarding the opinion of the Board with regard to integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year.

The expression “proficiency” means the proficiency of the independent director as ascertained from the online proficiency self-assessment test conducted by the institute notified under sub-section (1) of section 150.

I strongly protest the date on which this provision shall come into effect. This adversely impacts the companies presently having an extension for holding the Annual General Meeting for the financial year 2018-19. Why should a company make a statement in its board’s report for the financial year 2018-19 during which this test was not available?

I request an amendment in the effective date of the Companies (Accounts) Amendment to 1^st January 2021 so that companies should not embarrass for year 2018-19 and Year 2019-20.

Proficiency without DIN

According to Section 152 of the Act, no person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154 or any other number as may be prescribed under section 153. However, a person may have a tag of “Proficient Independent Director” without DIN, without holding any position of director.

The proviso to Rule 6(1) any individual, including an individual not having DIN, may voluntarily apply to the institute for the inclusion of his name in the data bank.

No Independence Outside Data bank

There shall be no proficiency to have independent directorship unless an individual apply online to the institute for inclusion of his name in the data bank for a period of one year or five years or for his life-time, and from time to time take steps as specified in sub-rule (2), till he continues to hold the office of an independent director in any company.

According to Rule 6(1), one person may opt for the inclusion of his name only for one year or five years or for his lifetime. There is no point to apply for inclusion of your name for one year as any appointment shall be for a tenure of five years. In the case of lifetime inclusion, how shall the proficient director ensure his proficiency continuously? I am looking for a reply to this and other question arising in my mind.

According to Rule 6(1)(a), an individual with existing appointment as an independent director in a company, the date of commencement of the Fifth Amendment Rules, 2019, shall within a period of three months from the date of commencement of such Amendment Rules, 2019 shall apply online to the institute for inclusion of his name in the data bank

According to Rule 6(1)(a), an individual who intends to get appointed as an independent director in a company after the commencement of these Rules, before such appointment shall apply online to the institute for the inclusion of his name in the data bank.

Renewal of Proficiency of Independent Director

Every individual whose name has been so included in the data bank shall file an application for renewal for a further period of one year or five years or for his life-time, within a period of thirty days from the date of expiry of the period up to which the name of the individual was applied for inclusion in the data bank. [Rule 6(2)]

In case of failing to apply, the name of such individual shall stand removed from the data bank of the institute. [Rule 6(2)]

Interesting drafting of the Proviso to Rule 6(2) declares that no application for renewal shall be filed by an individual who has paid lifetime fees for the inclusion of his name in the data bank. There is an interesting interpretation of harmonious reading of an entire set of Rule 6(2) – lifetime inclusion may expire but may be renewed without application.

Declaration of Compliance

Every independent director shall submit a declaration of compliance of sub-rule (1) and sub-rule (2) to the Board, each time he submits the declaration required under sub-section (7) of section 149 of the Act.

Post Inclusion Test of Proficiency

Every individual whose name is so included in the data bank under sub-rule (1) shall pass an online proficiency self-assessment test conducted by the institute within a period of one year from the date of inclusion of his name in the data bank. On failure to pass an online proficiency self-assessment test, his name shall stand removed from the databank of the institute.

Exemption from Proficiency Test

The individual who has served for a period of not less than ten years as on the date of inclusion of his name in the databank as director or key managerial personnel in a listed public company or in an unlisted public company having a paid-up share capital of rupees ten crore or more shall not be required to pass the online proficiency self-assessment test. [First Proviso Rule 6(4)]

This means a significant number of the company secretaries and managing directors with 10-year experiences may be exempted from this proficiency test. All persons took responsibilities a Key Managerial Personnel got a reward for the risk taken on their shoulders.

This is a logical exemption.

Experience with private companies is not counted for the purpose of this exemption.

Counts the Period, not companies

For the purpose of the exemption, one should not multiply the duration of experience with a number of companies. Meaning thereby, if you become a managing director in two companies in the year 2014 does not make you experienced ten years.

For the purpose of calculation of the period of ten years, any period during which an individual was acting as a director or as key managerial personnel in two or more companies at the same time shall be counted only once.

 Passing Marks

Passing Marks are 60% as usual of the most single sitting test under MCA – Insolvency Professional, Registered Valuer and Proficient Independent Directors.

Explanation (b)to Rule 6 declares that an individual who has obtained a score of not less than sixty per cent in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test.

We should not care about the drafting of the explanation and deeming provision therein but the de-facto and de-jure position.

Unlimited Attempts

There shall be no limit on the number of attempts an individual may take for passing the online proficiency self-assessment test.

Welcome to the wonderful world of examination on each of your weekends. I will meet you there in the examination hall. Best Wishes.