Background:
Government plans to have examinations for individuals who want to become
independent directors (‘IDs’) as part of bolstering the corporate governance
framework, according to Union Minister P P Chaudhary. While there are stringent
provisions under the Companies Act, 2013 to ensure good governance standards,
the roles of IDs has come under the scanner in certain instances of corporate
misdoings. Also, at a time when the Government is making efforts to make its
role minimal in the affairs of corporates, the role of IDs is more vital. Asserting
that the Government is committed to improve the fabric of corporate governance
in the country, Chaudhary said strengthening the role of IDs in the affairs of
companies is one of the steps in that direction. “The requirement with respect
to IDs to have minimum reasonable qualifications and a certification course/
exam are also being considered,” Chaudhary told in an interview. [Key excerpts from ET
News story].
Provisions under Companies Act, 2013 & SEBI Listing
Regulations: Presently, there is no
provision in the Companies Act and SEBI Listing Regulations of an examination for
individuals who want to become independent directors.
Databank of independent directors: Section 150 of the Companies Act relates to ‘Manner
of selection of IDs and maintenance of databank of IDs’ [effective from April
1, 2014 but not practically implemented]. Pursuant to the provisions, ID may be
selected from a data bank containing names, addresses and qualifications of
persons who are eligible and willing to act as IDs, maintained by any body,
institute or association, as may be notified by the Central Government, having
expertise in creation and maintenance of such data bank and put on their
website for the use by the company making the appointment of such directors.
The responsibility of exercising due diligence before selecting a person from
the data bank referred to above, as an ID shall lie with the company making
such appointment.
Recommendation of the Kotak Committee on Corporate
Governance: The Kotak Committee
noted that the Companies Act provides general clauses pertaining to training,
induction, etc. of directors and SEBI Listing Regulations requires
familiarization of IDs relating to certain specified matters. However, specific
provisions on induction training and periodicity of continuous updation are
lacking. Based on this background, Kotak Committee recommended: (i) A formal
induction should be mandatory for every new ID appointed to the board; and (ii)
Formal training, whether external/internal, especially with respect to
governance aspects, should be required for every ID once every 5 years, the
onus of which shall be on the director. However, such recommendation was not
accepted by the SEBI.
Moot question is whether examination for aspiring
Independent Directors serves any logical purpose? Considering the examination for aspiring
Independent Directors, in my view, the entire thrust is on ‘examination’ and
not ‘training’. The outcome of this would be ‘well-qualified IDs’ but not ‘well-trained
IDs’ or ‘capable IDs’. The examination would be in MCQ format covering general
syllabus relating to law, finance, accounts and management (just guessing, based on on-going trend).
However, in practice, an ID has to confront the challenges w.r.t. disclosures,
compliances, fiduciary duties, approval process w.r.t related party transactions,
appointment of auditors, approval of financial statements, etc.
Considering the
dynamic changes in law (Companies Act, Securities Law, IBC, Foreign Exchange
Laws, GST, etc.) one-time examination would not serve the real purpose in the long
run. The IDs need ‘training’ and not ‘examinations’. The trainings should be
from the perspective of the industry specific laws, company’s practice, company’s
implementation process, regulatory updates, recent case laws (India and
abroad), global practices, peer-practices etc. All these practical and relevant
aspects will not be part of the examination which is proposed by the
Government.
The Government, in my view, shall re-consider this proposal. The
Kotak Committee on Corporate Governance has made some important and relevant
recommendations which should be considered by SEBI and MCA.
