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This article is written by Shivam Bhatt.

 

Authority

Ministry of Corporate Affairs (“MCA”)

Amendment/ Update

Examination and exemption criteria relating to Independent Director (“ID”)

Date of Notification

December 18, 2020

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.

Existing Provisions

Amended Provisions

Summarised impact of Amendment(s)

  • Every individual whose name is so included in the data bank shall pass an online proficiency self-assessment test conducted by the institute within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute:

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:

  • listed public company; or

  • unlisted public company having a paid-up share capital of rupees ten crore or more; or

  • body corporate listed on a recognized stock exchange:

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.

  • Every individual whose name is so included in the data bank shall pass an online proficiency self-assessment test conducted by the institute within a period of two years from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute:

(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:

  • as a director or key managerial personnel, as on the date of inclusion of his name in databank, in one or more of the following, namely:
  • listed public company;
  • unlisted public company having a paid-up share capital of rupees ten crore or more; or

(New insertion)

  • body corporate listed on a recognized stock exchange or in a country which is a member State of Financial Action Task Force (FATF) on Money Laundering and the regulator of the Securities Market in such member State is a member of the International Organizations of Securities Commissions (IOSCO); or 

  • bodies corporate incorporate outside India having a paid up share capital of US $ 2 million or more; or (Newly inserted)

(New insertion)

  • statutory corporations set up under an Act of Parliament or any state Legislature carrying on commercial activities; or  

(New insertion)

  • in the pay scale of Director or above in the Ministry of Corporate Affairs or Ministry of Finance or Ministry of Commerce and Industry or the Ministry of Heavy Industries and Public Enterprises and having experience in handling the matters relating to corporate laws or securities laws or economic laws.

(New insertion)

  • In the pay scale of Chief General Manager or above in the Securities and Exchange Board or Reserve Bank of India or the Insurance Regulatory and Development Authority of India and having experience in handling the matters relating to corporate laws or securities laws or economic laws.

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.

  • Explanation:
  • An individual proposed to be Independent Director (ID), is now, required to pass proficiency test within period of 2 years from the date of inclusion of his/her name in databank.

  • Effect: 
  • After enrolment name in databank, he/she can pass proficiency test in 2 years (earlier 1 year).

  • Criteria relating to service, in terms of no. of years, relaxed:

  • Explanation:

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.

  • Effect:

A person with 3 years of service, at the specified position in certain class of company, can become ID without passing proficiency test.

  • Exemption from passing proficiency test to become ID, for a person serving as Director or KMP in following cases:

  • With Listed Public Company for 3 years.

  • With Unlisted Public Company with paid-up share capital of Rs. 10 Cr for 3 years.

  • With Body Corporate in a country incorporated outside India:

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.

  • With Corporation set up pursuant to an Act of Parliament or State Legislature:

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.

  • Explanation: 

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.

  • Effect:

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.

  • Explanation: 

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.

  • Effect:

Superior level officer in regulatory bodies such as RBI/SEBI/ IRDA, can become Independent Director of a Company without passing proficiency test.

  • Explanation:
  • For seeking exemption from passing proficiency test, holding of position simultaneously by a person with multiple company or body corporate, shall be counted as one.

  • Effect: 
  • A person is required to complete 3 years in each of the company/ body corporate as director or key managerial personnel for seeking exemption from passing proficiency test.
  • Criteria to pass proficiency test relaxed to 50% marks (earlier 60%).

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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