India Eases Qualification Norms for Independent Directors
The Ministry of Corporate Affairs notified an amendment to the Companies (Appointment and Qualification of Directors) Rules, 2014 on December 18, 2020 that eases proficiency norms for independent directors – serving directors and experienced directors (see here for the official notification).
Last year, the Rules were amended to ensure that all serving directors registered their names by the end of October 2020. There has been no relaxation in this regard. Aspiring candidates need to be enrolled in the registry before they can serve as directors.
Time extended to pass proficiency test
The latest amendment extends the time that is given to serving independent directors and eligible candidates to pass a compulsory proficiency test. Serving directors will now have two years (instead of one year) to pass the online proficiency test – calculated from the date of their inclusion/registration in the database of independent directors that is maintained by the Indian Institute of Corporate Affairs.
Further, candidates are required to pass the test with a minimum 50 percent score; previously, this had been amended to 60 percent.
What is the proficiency test?
The proficiency test ensures that only those candidates who have competency – such as understanding board decisions and their implications – will be eligible to serve as independent directors. This will also engender 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.
Exemption for veteran directors
The latest amendment also liberalizes the requirement – pertaining experience – for veteran directors. Those who have previously held a directorship for at least three years are now exempt from taking the proficiency test. Previously, this experience threshold was much higher, at 10 years.
Directors who qualify for the exemption from the test are those who have served for at least three years on the board of entities – listed companies, unlisted companies with INR 100 million (US$1.35 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.
Widening the field of selection for hiring experienced directors
The amendment also provides 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 relaxation in the experience requirement will also widen the field for private and state-owned enterprises alike in finding the best suited candidates to serve on their board of directors.