Does the outflow of cash result in a decrease in assets or increase in equity or increase in liability or decrease in liability?
What is the punishment for violation of Sections 188 and 169 of the Companies Act, 2013?
The return of allotment for forfeited shares requires filing of which form?
Across India, scientists, marketing experts, manufacturing technologists, governance gurus, social activists and private equity leaders, among others, are being asked questions like these in a multiple-choice test that they must pass to serve as independent director on an Indian company board.
The pandemic has bought them some time to brush up on their accounting, finance, company law and company secretarial skills. Apparently that’s what it takes to be an effective independent director – knowing which form must be filed for return of allotment of forfeited shares.
If you are an independent director, aspiring or with less than 10 years’ experience, hurry! You now have up to year end to register, pass the test with a minimum 60% score and only then retain your seat on the board.
The Need To Be ‘Assessed’ and ‘Certified’
These new rules, under the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019, are a consequence of the inclusion of the independent director provision in the Companies Act, 2013. Till then, SEBI regulations set out ‘independence’ and the role of such directors. So when Sections 149 and 150, pertaining to directors and their qualifications, were included in the Companies Act, 2013, the corporate world saw it as codifying existing law into primary legislation.. Until, in October 2019, the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 required independent directors to be “assessed” and “certified” to be competent by government.
Are The Rules Legal?
The government claims that the legal basis for these rules is Section 149 of the Companies Act, 2013 where the government can prescribe “any other qualifications” for independent directors. It is patently arbitrary that independent directors are required to be better qualified than executive directors, promoters, and other directors, all of whom have the same legal duties and responsibilities.
The section, 149(6), lists the criteria for independence and contains scenarios where directors will not be considered independent. provides for other qualifications to be prescribed. In that context, 149(6) (f) provides for any additional qualifications prescribed in the future.
At best such a provision can add to the existing disqualifications. It is completely absurd for the government to use this to require independent directors to pass a qualifying examination.
There is no mention in the Parliamentary Standing Committee report or the Companies Law Committee of a qualifying examination being discussed by lawmakers and it is very unlikely given the other recommendations that it would have been approved .
The creation of a databank has been inserted in Section 150, that otherwise was limited to the manner of selection of independent directors, namely shareholder vote in a general meeting. Now it reads - Manner of selection of independent directors and maintenance of databank of independent directors.
Why Do We Need Another Databank Of Independent Directors?
The Securities and Exchange Board of India and the Ministry of Corporate Affairs already have details of all independent directors. The MCA database has personal data including email address, mobile phone number, residential address, PAN and Aadhaar details, and even voice and video samples of all directors.
There is always the issue of privacy and the misuse resulting from the data that is in the database. It is not beyond the realms of reality that this data, with the use of “deep fake” technology, could be easily misused by anyone, including the government to implicate directors in crimes and harass them in a multitude of ways.
The government has acknowledged in Parliament its databases have have been the target of hacking and data scraping and need better security measures.
Therefore, the question everyone should be asking – what is the need for another database to be created and maintained by the IICA?
What Is The IICA?
The Indian Institute of Corporate Affairs was established by the Ministry of Corporate Affairs with the minister as its ex-officio president. It has been chosen by the government to build, maintain, and monetise the databank.
It was conceived to train Indian Corporate Law Service officers – much-needed to ensure more effective regulation and enforcement. Now it does many other things.
The board of governors of IICA has nine serving or retired bureaucrats, an economist from the State Bank of India, a retired managing director of a public sector bank, and includes officers from companies Jaypee Associates Ltd. and Mukand Ltd, not companies with any great governance track record.
To give itself a veneer of credibility, there are three academics – Venkat Rao, the former vice chancellor of NLSIU and now Chairperson, Vivekananda School of Law and Legal Studies and Vivekananda schools of English Studies; Ram Singh of the Delhi School of Economics; and Ranbir Singh. Anil Padmanabhan, deputy managing editor of a national newspaper, and Veni Thapar, a chartered accountant who has been a government nominee on the board of Bank of India complete the lineup of 18 governors.
A Government-Sponsored ‘Certificate Factory’
The objectives of IICA make no mention of becoming a national testing and examination authority on corporate law. Maybe this seemed like a good pivot to realise its ‘self-financing’ objective.
Good for IICA, not so much for the rest of us.
The decision to introduce a test for independent directors smells of ‘certification obsession’ in India. Such directors are meant to be experts in varied fields and shareholder approval is the only certification they should need.
The ‘learning materials’ seem to have been prepared by coaching classes for company secretaries and focus on clerical and administrative tasks that independent directors will never have to perform.
The format – PowerPoint slides with voice-over, is pedantic.
The examination tests the knowledge of forms that are required to be filed by a company, its directors and subsidiaries, accounting standards, and treatment and provisions of company law that are unnecessary for independent directors to memorise.
The mock tests do not give answers which means that there is no learning as a result of the examination.
What may have helped, if ever there had to be a test, is to offer real case studies, allow the use of reference materials, and engage with the director to discuss board functions, fiduciary duty and such.
The Examination System Hurts Diversity
The need and law of the hour is board diversity, and the law requires companies to disclose compliance with this important issue. Are experts in sales and marketing, strategy, information technology, science, economics, and human resource development now required to learn the job of a company secretary?
Are we really expecting a Nobel Laureate or a management guru to take this examination before being ‘qualified’ to join the board of an Indian company?
Is the government really mandating that international talent will now be required to learn Indian corporate law and procedure, accounting standards, and secretarial practice?
What about those Indians and global citizens whose first language is not English but have all the qualities to be effective directors of Indian companies with global aspirations? Do they now stand excluded from being independent board members until they can all learn enough bureaucratic 'Indian English' and Indian accounting and corporate procedure to be able to pass the examination?
How will Indian companies explain this to their global independent directors?
Nanny State: Unnecessary Restrictions On Shareholder Choice
Besides, why is the government overriding shareholder will? It is boards and shareholders who must select the women and men best suited to oversee the affairs of their company.
Passing the exam is unlikely to inculcate or guarantee independence, which is what is most needed from such directors. Not the knowledge of which form must be filled at what periodic frequency.
Section 149(6)(f) is being used to solve problems that don’t exist, a hammer looking for nails.
What the new rules the IICA can achieve is a databank of unemployable clerks with useless certificates that they have paid for, making India’s corporate law the laughing stock of the world.
Since there hasn’t been a murmur of protest from corporate India, perhaps India deserves this!
Murali Neelakantan has been a corporate lawyer in the United Kingdom and India for about 25 years.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.
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