New rules for independent directors

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The Ministry of Corporate Affairs (MCA) on 22 October 2019 notified the: (1) Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019; (2) Companies (Creation and Maintenance of Data Bank of Independent Directors) Rules, 2019; and (3) Companies (Accounts) Amendment Rules, 2019. The substantive provisions of each of the rules came into force from 1 December 2019.

Section 150 of the Companies Act, 2013 provided that the central government would take steps to create a centralized data bank of individuals who were qualified and willing to act as independent directors for Indian companies. The data bank was meant to serve as a reference point for individuals who can serve on their boards.

Pursuant to the introduction of these rules, the Indian Institute of Corporate Affairs (IICA) has been mandated to create and maintain an online data bank with information relating to independent directors. A website: https://www.independentdirectorsdatabank.in/ has been launched.

As per the rules, any individuals who are currently serving as independent directors on the board of companies, or who propose to be appointed as independent directors, have to register themselves on the online data bank and further appear for an online self-assessment proficiency test, which will be conducted by the IICA within one year from the date of inclusion of the name in the online data bank, failing which, his/her name shall be removed from the online data bank.

Furthermore, in the preparation of the annual report and audited financial statements, the board’s report must include a statement regarding the opinion of the board with regard to integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year. The impact of these changes on the institution of independent directors remains to be seen.

The business law digest is compiled by Nishith Desai Associates, a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. The firm specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.