MCA Provides Relaxation to Independent Directors w.r.t Online Test

Every listed public company needs to have at least one-third of independent directors in its Board of Directors. The independent directors are directors who do not have any connection or relation to the company and are independent and unbiased when it comes to approving decisions of a company.

The Companies (Appointment and Qualification of Directors) Rules, 2014 provides the rules and compliances required to be fulfilled by a person for getting appointed as an independent director.  The MCA (Ministry of Corporate Affairs) issued a circular amending the Companies (Appointment and Qualification of Directors) Rules, 2014. The amended rules provide relaxation in the compliance requirements, which are to be fulfilled by an individual for appointment as an independent director.

The Companies Rules state that every individual appointed or who intends to get appointed as an independent director in a company should apply online to the Indian Institute of Corporate Affairs (IICA) for including his name in the data bank maintained by them. 

As per the Companies Rules, every individual who includes his name in the data bank of independent directors should pass an online proficiency self-assessment test conducted by the IICA within one year of inclusion of his name. The MCA circular amends the rules and provides relaxation for passing the self-assessment test within two years by an individual.

The MCA circular further provides relaxation to individuals who need not pass the self-assessment test if they come under the exemption clauses. An individual need not pass the test when he has served for three years from the date of including his name in the data bank if:

• An individual is a director or key managerial personnel in one or more of the following:
  • A listed public company.
  • An unlisted public company which has a paid-up share capital of Rs.10 crore or more.
  • The body corporate which is listed on any recognised stock exchange or in the country which is a Member State of the Financial Action Task Force on Money Laundering and the regulator of the securities market of such Member State is a member of the International Organization of Securities Commissions.
  • Bodies Corporate incorporated outside India having paid-up share capital of US$ 2 million or more.
  • The Statutory corporations set up under an Act of Parliament or any State Legislature carrying on commercial activities.
• An individual is in the pay scale of Director or above and having an experience in the matters relating to securities laws or corporate laws or economic laws in the:
  • Ministry of Corporate Affairs.
  • Ministry of Finance.
  • Ministry of Commerce and Industry.
  • Ministry of Heavy Industries and Public Enterprises.
• An individual is in the pay scale of Chief General Manager or above and having experience in the matters relating to securities laws or corporate laws or economic laws in the:
  • Securities and Exchange Board.
  • Insurance Regulatory and Development Authority of India.
  • Pension Fund Regulatory and Development Authority.

For calculation of three years of an individual, any period during which an individual was acting as key managerial personnel or a director in two or more companies at the same time shall be counted only once.

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Earlier, the exemption from the online test was provided to a director or key managerial personnel when he has served for ten years from the date of inclusion of his name in the databank if he is a director or key managerial personnel in one or more of the following:

• A listed public company.
• An unlisted public company which has a paid-up share capital of Rs.10 crore or more.
• The body corporate which is listed on any recognised stock exchange.

Now, there is an extension in the scope and the period for an individual to pass the online proficiency self-assessment test conducted for independent directors. There will be a removal of the name of the individual who does not pass this test from the databank of the institute. It will result in the breach of compliance to be followed by an independent director under the Companies Rules.

Further, the circular has also provided relaxation in the passing percentage of the online proficiency self-assessment test. There is a reduction in this passing percentage from 60% to 50%. 

The MCA circular amending the Companies (Appointment and Qualification of Directors) Rules, 2014 has provided many relaxations in the compliances to be followed by an individual appointed as an independent director. Earlier, an individual had to pass the online proficiency self-assessment test within one year from the date of inclusion of his name. Now, the individual can take time and pass this test within two years.

The exemption from online proficiency self-assessment test is provided for individuals who are already directors or having a pay scale of directors in specified companies or corporate bodies for three years as against the extensive period of ten years. There is a reduction in the passing percentage of the test to a 50% score in aggregate. This relaxation provided in the compliances for an independent director helps in ease of doing business. There is a reduction of burden on the companies for appointing the eligible independent directors due to the relaxation in compliances to be followed by independent directors. 

For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@cleartax.in