It has been a fundamental principle of company law for centuries that shareholders should be able to elect their directors and hold them responsible for managing the company. By the same token, shareholders should be able to get rid of directors in whom they do not have confidence to manage the company. We have seen examples of this recently with Dhanlaxmi Bank and Lakshmi Vilas Bank. There is also the recent example of the shareholders of Sriram Transport Finance voting against the re-election of a director.
The government, however, does not trust shareholders anymore. Now, the regulations of Securities and Exchange Board of India (SEBI) encourage listed companies to promote diversity on their boards and require an annual report on the diversity of skills of the board. The nomination and remuneration committee of the board is tasked with finding suitable directors with diverse skills who can provide the board with a variety of experiences and there is also an annual evaluation of all directors. As a result of this process, shareholders’ choice is already somewhat limited but they may still choose to elect an experienced doctor or chemist or scientist to the board of companies which are in the healthcare sector or an international technology expert to the board of a technology company.
There are several examples of this—Dr Peter Mugyenyi, a global expert on HIV or AIDS on the board of Cipla; Biocon has Mary Harney, a former Irish minister for health and children, and Michael Gibbs, the former CIO of BP, Conoco and Uri Levine, a successful technology entrepreneur, are both independent directors of Infosys.
Patrick Dupuis, the former CFO of PayPal Holdings, Dr Patrick J Ennis, a nuclear physicist and William Arthur Owens, a former vice chairman of the joint chiefs of staff are independent directors of Wipro. Virtually every leading Indian company with global ambitions has experts of global stature on their boards as independent directors. It is a tribute to these Indian companies that they have now been able to attract global leaders at the highest level to guide them in the global marketplace.
Section 150 of the Companies Act, 2013 requires all independent directors to register themselves with the Indian Institute of Corporate Affairs (IICA), a body established by the ministry of corporate affairs (MCA). Corporate India may have thought of this as an innocuous provision that merely adds another filing to the mass that already burdens it and there was very little, if any, coverage of this provision in the news. All independent directors will now have to register themselves with the IICA and their details will be in a databank created by the IICA.
The IICA was established to train members of the Indian corporate legal services, the minor bureaucrats, who are in the MCA and are also able to become members of specialist tribunals as technical members.
The creation of a databank calls into question the need for it when the MCA and the SEBI already have all the information about directors. What is the purpose of another databank with information that already exists with the government and the regulator?
A closer inspection reveals that the databank will also have details of prospective independent directors. That means that all those individuals, who wish to become independent directors, can register themselves with the IICA.
Does the government really believe that companies who are looking for independent directors will search the databank for potential candidates? We already have employment exchanges and most reputed companies will not bother with candidates for even low-level jobs from there.
Everyone who uses the MCA website for filing statutory documents knows that the data there is monetised, i.e., personal details are sold to marketing companies that send unsolicited messages and emails. Is this just another easy monetising opportunity for the IICA?
Now, the government has notified the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 which require all independent directors to be 'assessed' and 'certified' to be competent by the IICA.
All independent directors now have to pass an online exam and only those who pass the exam can remain on the board. In other words, those independent directors who do not pass this exam in the next few months will be disqualified from continuing as independent directors.
No other country in the world has such an absurd requirement.
To help the directors with preparing for the exam, the IICA has several learning modules on its website. Unfortunately, but not unexpectedly, the quality of the learning materials and the mock exam is, to put it mildly, shocking.
The 'materials' are slides with very poor voice over that just reads out the text as if the learner was blind. One can safely say, having looked through the material, that they have been prepared by someone who probably runs a coaching class for those who are taking the company secretaries exams.
The exam is in a multiple-choice format and can be taken any number of times. A basic understanding of probability will tell us that if we randomly answer questions a number of times, one will eventually pass the exam even without any understanding of the questions or knowledge of answers!
Nothing in those slides and the examination is remotely relevant for any independent director to perform their statutory duties.
Those 'entrepreneurs' who were running coaching classes for various government exams can now flog this as an opportunity for the unsuspecting unemployed masses, who will have a certificate from the IICA that they can post on social media!
The IICA will make money 'registering' independent directors and issuing 'certificates' to those who have been sold a dream job.
As a result of these Rules, every independent director will now have to memorise accounting and company secretarial standards.
Does the government really expect that all the independent directors will now supervise the auditors and company secretary?
Is that the primary role of independent directors?
Since when did we expect that independent directors will know all accounting and secretarial standards and company law and rules by heart?
Why is it necessary for specialists with deep domain knowledge and skills to learn this?
How will knowing this help them function better?
If the government really believed that this level of knowledge was necessary to manage a company, why is this not a requirement for all directors? After all, every director is responsible to the same extent for compliance by the company.
There is nothing in company law that imposes a higher burden on independent directors for compliance. In fact, there is a higher standard on executive directors, as officers in default, to ensure compliance by the company but they don’t require “certification” by IICA!
A quick look at listed companies will show that most independent directors are middle-aged men, who have been on boards for decades. Most of them are retired bureaucrats or other government employees, retired public sector undertakings (PSU) directors, and a few corporate leaders and professionals.
In every case of major corporate fraud that has been discovered, the companies have had 'eminent' directors with long experience of being directors and no one has asked why those directors did not demonstrate knowledge in corporate law and procedure.
For example, Manmohan Kapur Singh, the former chairman and managing director (CMD) of Vijaya Bank was an independent director of Kingfisher Airlines would not be required to demonstrate his knowledge of company law under the Rules. Similarly, all the independent directors of IL&FS will be exempt from the requirement to take the exam.
They are, by virtue of having been directors for 10 years or more, deemed to be 'qualified' to be independent directors!
Surely, when the very people who have failed to ensure corporate governance are exempt by the Rules, one can only conclude that government wants the 'privileged uncles' to have their own exclusive club. Very few companies have individuals, who are independent directors for the first time and who are now required to pass the exam. Perhaps that is why there has been no attention drawn to this in the mainstream media.
The consequence of these Rules is that Indian companies will have the embarrassment of having to explain
• to their independent directors that they have to now pass the exam,
• that bureaucrats and other “experienced” former executives are exempt and
• to shareholders that can only elect those who the government certifies as qualified to be independent directors.
Sadly, these days, it seems like corporate India seems immune to every (dis)ease of doing business that the bureaucracy is creating in its labs.
(Murali Neelakantan has been a corporate lawyer for over 20 years)