Central Government introduces qualifying proficiency exams for Independent Directors

The Centre has introduced a proficiency test to be passed by the Independent Directors. The test shall be conducted by the Indian Institute of Corporate Affairs (IICA), attached to the Ministry of Corporate Affairs, according to the Companies (Accounts) Amendment rules 2019. Starting December 2019, Independent directors of companies will have to take up the online proficiency self-assessment test, if they are to get into or retain their Board positions.

The Indian Institute of Corporate Affairs (IICA), Haryana, is to hold the exam starting in December and 60% is the qualifying mark. Further, all listed companies have been asked to disclose each independent director’s test result in their annual reports.

The idea is to ensure that Independent Directors, expected to protect the interests of minority shareholders and keep an eye on the governance of the company, are qualified for the task.

A database shall be maintained by the Ministry of Corporate Affairs (MCA). Till now, companies weren’t required to choose Independent Directors from the databank. However, going forward, it is required that all those chosen for the post will have to be registered with the databank and should have cleared the IICA test.

There’s no bar on how many times the exam can be taken. The norm applies to listed companies and unlisted ones with more than Rs. 10 crore of paid-up capital.

The new requirements were put in place in the wake of corporate governance scandals that have been unearthed in the past few years. This period has also seen a rise in the resignation of independent directors.

A separate set of rules, called the Companies (Appointment and Qualification of Directors) Fifth Amendment rules, 2019, notified that those who were willing and eligible to become Independent Directors should within three months of the new rules coming into force or before getting hired, apply for inclusion of their names in the list of eligible persons to be maintained by IICA.

Such persons have to pass the proficiency self-assessment test within one year of inclusion of their name in IICA’s database. Individuals who have already served ten years as a Director are not required to take the test.

The IICA database will also capture the Permanent Account Number, Director Identification Number and past directorships of the individuals eligible to become Independent Directors. It will also capture if the person faced any criminal proceedings in the past.