This article is written by Shivam Bhatt.
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Authority |
Ministry of Corporate Affairs (“MCA”)  |
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Amendment/ Update |
Examination and exemption criteria relating to Independent Director (“ID”) |
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Date of Notification |
December 18, 2020 |
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Effective Date |
December 18, 2020 |
Introduction
- Central Government has relaxed criteria to become Independent Director without passing proficiency test, as conducted by Institute of Corporate Affairs of India (IICA). However, registering the name in data bank will remain mandatory.
- Experience criteria from passing the mandatory test relaxed not only in terms of tenure with the Indian Company or body corporate but it has now also covered tenure with the body corporate incorporated in a country outside India. However, to combat issues with respect to black money or terrorism, it has mandated to the country, Financial Action Task Force (FATF) and regulator of country must be member of the International Organizations of Securities Commissions (IOSCO).
- In addition, Senior or Superior level officers of the Regulatory Body and certain Ministries also exempted from passing mandatory test to become Independent Director. And lastly, obtaining 60% to pass the proficiency test marks reduced to 50%.
- However, one should keep in mind that eligibility criteria to become director should be fulfilled first and there are additional criteria pursuant to Section 149 of the Act, to become the Independent Director of the Company, are relaxed.
- Detailed explanation along with amendments in provisions and its likely effects elucidated as follows:
Amendment(s) in criteria relating to Independent Director
- Relevant Rule: Rule 6 of Companies (Appointment and Qualification of Directors) Rules, 2014.
- Amendment Rule: Companies (Appointment and Qualification of Directors) (Fifth) Amendment Rules, 2020.
- Particulars of Rule: Compliances required by a person eligible and willing to be appointed as an Independent Director.
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Existing Provisions |
Amended Provisions |
Summarised impact of Amendment(s) |
Provided that an individual shall not be required to pass the online proficiency self-assessment test, when he has served as a director or key managerial personnel, for a total period of not less than ten years, as on the date of inclusion of his name in the databank, in one or more of the following, namely: 
Provided further that for the purpose of calculation of the period of ten years referred to in the first proviso, any period during which an individual was acting as a director or as a key managerial personnel in two or more companies or bodies corporate at the same time shall be counted only once. Explanation: An individual who has obtained a score of not less than sixty percent in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test. |
(Substitution) Provided that an individual shall not be required to pass the online proficiency self-assessment test, when he has served not less than three years, as on the date of inclusion of his name in the databank, in one or more of the following, namely:
(New insertion)
(New insertion)
(New insertion)
(New insertion)
Provided further that for the purpose of calculation of the period of three years referred to in the first proviso, any period during which an individual was acting as a director or as a key managerial personnel in two or more companies or bodies corporate at the same time shall be counted only once. Explanation: An individual who has obtained a score of not less than fifty percent in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test. |
For claiming exemption, earlier a person was required to serve for 10 years at specified position in certain class of company, which is now relaxed to 3 years as on the date of registering name in databank.
A person with 3 years of service, at the specified position in certain class of company, can become ID without passing proficiency test.
Explanation: Earlier holding position as Director/KMP in Indian company was only counted, now body corporate incorporated outside in a country1 and having paid up share capital of US $ 2 million or more will also be counted for seeking exemption. 1Country (in which, body corporate is incorporated outside India) must be member of FATF and regulator of Securities Market of such country is a member of IOSCO. Effect: A person holding position as Director/ KMP in overseas body corporate having equity capital of US$ 2 million for 3 years may become Independent Director of an Indian Company without passing proficiency test.
Explanation: Earlier holding position as Director/KMP with the company was only counted, now holding position with any statutory corporation carrying on commercial activities will also be counted for seeking exemption. Effect: Director or KMP of LIC or SBI or any State Govt. Corporation can become Independent Director of a Company without passing proficiency test.
A person serving not lower than Director level position in the specified ministries and experienced in handling matters of corporate/ securities/ economic laws exempt from passing proficiency test.
A person appointed as Nominee of Govt. in any organisation, with holding ministerial level designation, for 3 years, in the Ministry of Commerce/ Finance/ Heavy Industry and Public Enterprises, can become Independent Director of any Company without passing proficiency test.
A person serving not lower than Chief General Manager in the SEBI or RBI or IRDA and experienced in handling matters of corporate/ securities/ economic laws exempt from passing proficiency test.
Superior level officer in regulatory bodies such as RBI/SEBI/ IRDA, can become Independent Director of a Company without passing proficiency test.
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Conclusion
- Ministry has given importance to the experience in various domain etc. marketing, finance, management, accounting, manufacturing etc. over just passing of the test to become an Independent Director. As, only passing just test should not only be main criteria to become Independent Director of the Company.
- With the importance to, for the first time, experience in overseas country, Indian companies may also give seat to foreign national to promote excellence and inclusion.
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