Whether examination for aspiring Independent Directors serves any logical purpose?

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.