India Allows Independent Directors to Retake Online Self-Assessment Proficiency Test
We explain the new window of name restoration for independent directors in India who did not clear their online self-assessment proficiency test and discuss the government’s efforts to professionalize the institution.
The Ministry of Corporate Affairs (MCA) has introduced a new window of name restoration for independent directors who had not cleared their mandatory online self-assessment proficiency test and were therefore removed from the databank.
In October 2019, the MCA made it compulsory for independent directors to pass the online self-assessment proficiency test, which is conducted by the Indian Institute of Corporate Affairs (IICA) – if they take up or must maintain their positions on the Board of Directors. The independent director’s databank was jointly established by the MCA and IICA in December 2019.
Regulators intend to professionalize the institution of independent directors in India through this online self-proficiency test.
How to restore the independent director’s name in the IICA’s databank?
The individual must pay a fee of INR 1000 and there should be no objection from the IICA. The IICA requires that certain conditions are met – the candidate’s name must appear in a separate restored category for one year from the date of restoration and during that year, the individual must have passed the online proficiency self-assessment test.
Only after the conditions are met, will the independent director’s name be included in the databank. If the individual fails the test, within a year from the date of restoration, their name will be removed from the databank – and they must restart the process of applying for name inclusion in said databank.
Who can become an independent director in India?
Two criteria must be met – the individual should find a place on the IICA’s databank and successfully complete the online self-assessment proficiency test. Independent directors (who are not exempted) have two years from the date of inclusion in the databank to pass the online self-assessment proficiency test.
The eligibility and exemptions criteria have been defined and regulated under the Companies (Appointment and Qualification of Directors) Amendment Rules, 2021 issued by the MCA, in effect from August 20, 2021. Since 2020, India has widened the qualifications criteria for choosing an independent director and extended exemptions from the test for veterans or highly qualified or professional candidates.
On June 1, 2022, the MCA notified a further amendment to the Rules to stipulate that a person seeking appointment as an independent director will require mandatory security clearance from the Ministry of Home Affairs, Government of India if they are a national of a country that shares land border with India.
What is the online self-assessment proficiency test mandated for independent directors in India?
The online self-assessment proficiency test is conducted by the IICA and ensures that only candidates who are competent – such as possessing an understanding of board decisions and their implications – will be eligible to serve as independent directors in India.
This qualification will create trust among key stakeholders – regulators, public financial institutions, minority shareholders, and investors – that the persons hired on the board are capable. The proficiency test strengthens India’s recent commitments to improve its corporate governance mechanisms.
Who is exempted from the online self-assessment proficiency test?
Those eligible for exemption include key managerial employees or directors who have served for at least three years on the board of entities – listed companies, unlisted companies with INR 100 million or more paid-up capital, non-resident companies with US$2 million paid-up capital, or a commercial entity set up under a central or state law.
Others exempted include the below professionals:
- Practicing advocates or an advocate of a Court for 10 years
- Practicing chartered accountants
- Practicing cost accountants
- Practicing company secretaries
The Amendment Rules, 2021 also provided official recognition to senior bureaucrats within select ministries in the central government and regulatory bodies as persons exempted for the test – since they meet the three years of corporate governance criteria. According to the amendment:
- Those “in the pay scale of Director or above in the Ministry of Corporate Affairs or the 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” are exempted from needing to take the proficiency test.
- Similarly, those aspiring directors “in the pay scale of Chief Manager or above in the Securities and Exchange Board (SEBI) or the Reserve Bank of India (RBI) or the Insurance Regulatory and Development Authority (IRDA) and having experience in handling the matters relating to corporate laws or securities laws or economic laws” do not need to take the test.
The relaxations in the experience requirements for independent directors in India widens the field for private and state-owned enterprises to find the best suited candidates to serve on their board of directors.
What are the details included in the independent directors’ databank?
The Independent Directors Databank shall contain the following details of candidates who are eligible and willing to be appointed as independent directors:
- DIN (Director Identification Number), if applicable
- Income tax PAN
- The name and surname in full
- The father’s name
- Date of birth
- The full Address with PIN Code (present and permanent)
- Phone number
- E-mail id
- The educational and professional qualifications
- Experience or expertise, if any
- Any pending criminal proceedings as specified in clause
Other details include:
- The list of limited liability partnerships in which the person is or was a designated partner along with – the name of the limited liability partnership; the nature of industry; and the duration with dates.
- The list of companies in which the person is or was director along with – the name of the company; the nature of industry; the nature of directorship: Executive or Non-executive or Managing Director or Independent Director or Nominee Director; and duration with dates.
However, a person whose name is included in the databank, may restrict the disclosure of their personal information in the databank.
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