With the intention of strengthening corporate governance, the Ministry of Corporate Affairs recently rolled out the Independent Directors Databank. This initiative aligns with the provisions stipulated in the Companies Act, 2013 and its subsequent rules. The databank’s development comes as a response to evaluate the role of independent directors in corporations and implement measures to enhance their contribution effectively.
The Genesis
The Ministry had been studying methods to strengthen the framework for independent directors. These individuals play a pivotal role in endorsing robust corporate governance practices within companies. The need for a stricter process became apparent when political appointees with basic financial proficiencies started representing several companies as independent directors. A notable instance that created the urgency was the Infrastructure Leasing and Financial Services (IL&FS) crisis, where credit rating agencies indiscriminately granted and downgraded companies, flagrantly escaping consequences.
Changes in the Appointment of Independent Directors
In addition to launching the Independent Directors Databank, the government has also resolved to conduct examinations for independent director appointments. As per the modified Companies Act, a compulsory qualification criterion has been set at a score of 60% marks. A database of professionals who qualify in this test will be maintained by the government. Companies seeking to enlarge their board or make new appointments under current regulations can utilize this database.
The Role of Independent Directors
Independent directors should refrain from adopting a passive approach, merely responding to concepts proposed by the controlling shareholder or their appointees. They are required to go beyond attending only a certain number of board meetings and actively question the status quo for the benefit of shareholders. Strict accountability and eligibility restrictions will prevent the company’s promoters from placing inept candidates or family members on the boards of listed companies. Independent directors, therefore, serve as the trustees of stakeholders, a role that is key to corporate governance.
Key Facts
| Name | Description |
|---|---|
| Independent Directors Databank | Database of independent directors meeting the qualification threshold. |
| Maintaining Agency | Indian Institute for Corporate Affairs (IICA), under the Ministry of Corporate Affairs. |
| E-Learning Courses | Courses on Companies Act, securities laws, basic accountancy, board practices, ethics, and effectiveness. |
Details of the Data Bank
The Indian Institute for Corporate Affairs (IICA), operating under the Ministry of Corporate Affairs, developed and maintains the Independent Directors Databank. This databank, which is the first of its kind, provides a broad selection of e-learning courses covering topics like the Companies Act, Securities laws, basic accountancy, board practices, board ethics, and board effectiveness. It also serves as a user-friendly navigation platform for registration of existing independent directors and individuals aspiring to become independent directors. Companies can register themselves with the databank to search, select, and connect with prospective Independent Directors.
Independent Directors Defined
An Independent Director, sometimes referred to as an outside director, is a director on a board representing minority shareholders. This individual possesses no pecuniary relationship with the company or related persons, barring sitting fees. Their role is to unequivocally and independently control and balance the excesses of majority shareholders, preventing exposure of the company to unnecessary risks. The Companies Act, 2013 mandates all listed public companies to have a minimum of one-third of the total directors as independent. The balancing act they perform obliges them to remain analytical, even while businesses require them to be pragmatic.
