Mohan Lavi

Databank, test for independent directors is not enough

Mohan R Lavi | Updated on November 08, 2019

Formulating rules and conducting an online assessment for independent directors does not guarantee good governance and compliance

In the past, if there were corporate governance lapses, questions were raised on the competence of companies and their auditors. These days, however, the questions during such cases are on the competence of companies, auditors and their independent directors. Despite having a separate code of conduct for independent directors in the Companies Act, 2013, there have been situations wherein their independence has had to be questioned. Never one to give up on regulations, the Ministry of Corporate Affairs (MCA) has just thought of another solution — an online proficiency self-assessment test for independent directors. They have even enacted The Companies (Creation and Maintenance of Databank of Independent Directors) Rules 2019.

Clause 3 of the Rules requires the Indian Institute of Corporate Affairs (IICA) to maintain an online databank of independent directors. The databank will contain all information about the director, including any pending criminal proceedings that may have been initiated against him. The concept of a databank for independent directors’ is not new; a few private bodies already have a database that cost around ₹17,500 to enlist on. The IICA states that it will also have the freedom to charge for enlisting independent directors on their database.

The next rule provides information about the online self-assessment test — it will cover company law, securities laws, basic accountancy and other areas relevant to the functioning of an independent director. The IICA has also been tasked with the job of preparing basic study material and online lessons for these tests. There is an eerie and needless proposal that companies must disclose the marks scored by independent directors in their annual report.

While the intention of the MCA is laudable, an online assessment may not be the solution. Independence is basically a state of mind that one has to exhibit in a limited time-frame (such as objecting to an entity giving a loan to a subsidiary at zero rate of interest and with no repayment terms, in the limited time of a board meeting) which cannot be taught in an online course. The IICA appears to be thinking that some level of knowledge of company and securities laws and accountancy should suffice for an independent director. What is possibly more necessary, however, is a list of things that companies cannot do under various laws that would apply to that entity.

Also, various professional courses in India are proof that just passing a theoretical exam does not necessarily translate into performing correctly in the course of doing one’s duties. Whatever be the structure and content of the examination, chances of it transforming the present set of independent directors into an agile set of people who can smell and catch wrongdoing in an instant are limited.

Instead of an exam, the IICA should mandate training for independent directors every year. Since laws keep changingalong with events in the corporate world, a training programme designed on live situations that permits independent directors to enact their roles is the need of the hour. Almost all corporate governance violations can be traced to lapses by the management or those charged with governance. Hence, these training programmes should also focus on the ability to say no and show dissent in writing. The MCA should ensure that just to meet the quorum requirements of women directors and independent directors, companies should not choose family and friends with no qualifications to merit that appointment.

The Companies Act, 2013 casts tremendous responsibilities on independent directors through the Code of Conduct; it should ensure they are also remunerated adequately. If an independent director is paid well and is guilty of compliance with governance lapses, he should be penalised.

The writer is a chartered accountant

Published on November 08, 2019

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