New Rules underway to create and maintain databank of Independent Directors; MCA notifies connected Rules; provisions gain effect from 1st December, 2019

As per Section 150 sub section (1) the Companies Act, 2013 “……an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by any body, institute or association, as may by notified by the Central Government, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors:

 

Provided that responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director shall lie with the company making such appointment.”

 

In furtherance of this provision, the Ministry of Corporate Affairs has recently notified the Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 (“New Rule”) which will gain effect from 1st December, 2019.

These New Rules intend to aid in the process of creating and maintaining the databank of eligible and willing Independent Directors.

Presently, integral provisions contained in these New Rules are covered in Rule 6 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 (“Present Provision”) which are now moving in as a part of the New Rule.

The present Rule 6 covers the following:

  • The details of an eligible and willing person to be incorporated in the databank.

  • Direction for placing the databank on the relevant website. The present provision prescribes that the databank should be “placed on the website of the Ministry of Corporate Affairs or on any other website as may be approved or notified by the Central Government” while the Proposed Rule prescribes that the same should be available on the website of the institute.

  • Charging of reasonable fees from individuals for inclusion of their names in the data bank of independent directors.

  • Responsibility of exercising due diligence before selecting a person from the data bank ultimately rests with the company making the appointment.

The New Rule additionally covers the following:

  • Limited access to databank information

The information available in the data bank shall be provided only to companies required to appoint independent director after paying a reasonable fees to the institute.

  • Restricted disclosure of personal information

A person whose name is included in the data bank, may restrict his personal information to the institute, to be disclosed in the data bank.

  • Reasonable fees for companies using the databank

The institute, shall with the prior approval of the Central Government, fix a reasonable fee to be charged from companies for providing the information on independent directors available on the data bank.

  • Online Proficiency test

The institute must conduct an online proficiency self-assessment test covering companies law, securities law, basic accountancy, and such other areas relevant to the functioning of an individual acting as an independent director.

They must also prepare a basic study material,  online lessons, including audio-visuals for easy reference of individuals taking the online proficiency self-assessment test.

  • List to be shared with Central Government

Institute to share daily with Central Government a cumulative list of individuals–

  • whose names have been included in the data bank
  • whose applications for inclusion has been rejected
  • whose names have been removed from the data bank

As the present, Rule 6 of The Companies (Appointment and Qualifications of Directors) Rules, 2014 which deals with process of creating and maintaining the databank of eligible and willing Independent Directors is being substituted by the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 to incorporate compliances required to be followed by eligible and willing Independent Directors for their appointment.

The substitution lays down the following:

  • Steps to be taken by existing independent directors appointed in a company by 1st March 2020.

  • Steps to be taken by individuals who intend to get appointed as an independent director in a company.

  • The renewal process for independent directors whose names are already recorded in the databank

  • Declaration of Compliance to be submitted by Independent Directors.

  • Online Proficiency Test to be passed by all every individual whose name is included in the databank within one year of such inclusion. Except –
  • Person who has served for ten or more years as director or key managerial personnel in a listed public company
  • Person who has served for ten or more years as director or key managerial personnel in an unlisted public company having a paid-up share capital of Rs. 10crore or more.

The Indian Institute of Corporate Affairs at Manesar (Haryana) (IICA) is the notified Institute to “create and maintain a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, for the use of the company making the appointment of such directors”.

All the notifications shall come into effect from 1st December, 2019.

SourceMinistry of Corporate Affairs

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