- The non-executive directors or
independent directors will now have to go through an online assessment exam to be hired on company boards. - The assessment exam will be based on corporate literacy including
Indian company law , ethics, and capital market norms. - Experienced directors will not be required to take the test, but will need to register on a government portal.
According to the Corporate Affairs Secretary, Injeti Srinivas these non-executive directors will be tested by an online assessment exam that the ministry will design.
Testing Corporate Literacy
These assessment exams will test the corporate literacy of ‘budding’ independent directors.
The questions on the exam will cover the basics of Indian Company Law, ethics, and capital market norms, corporate government standards among others.
Aspiring directors will be able to take as many attempts as possible to pass these tests within a limited period of time.
“This is a step in the right direction. Anything which potentially improves the quality of independent directors thereby improving the quality of governance is welcome.Government is trying to ensure that Independent directors are qualified to add value that companies today are looking from them,” said Ankit Bansal, CEO and Founder of Sapphire Human Solutions, an executive Search firm.
This move will result in many ‘active’ independent directors, experts say.
“The independent directors are hired for a fixed time period, which can be extended with mutual consent. Several companies hire via executive search firms or market networks. However, the online test will focus on producing independent directors who are active corporate employees and possess relevant knowledge and experience to serve the industry,” Agamjeet Dang, Managing Partner of Executive Access told Business Insider.
According to Dang, the demand for independent directors is expected to rise in the coming years. And, the government will also make it easy for companies to access talent and vice versa.
However, experienced directors — who are furnished with the unique Director Identification Number (DIN) — need not go through the test. They can register on a government database. This will bridge the gap between hiring companies and aspiring independent directors.
Active directors
As the incidence of corporate fraud is rising, the government is increasing scrutiny on the internal workings of boards.
In the current system, the remuneration committee of a company tends to choose independent directors after a member proposes a name. Now, the government wants to vet these directors beforehand.
Independent directors are expected to bring in diverse experience and knowledge to the decisions taken by the board of directors of a company.
In many cases, family owned businesses in India tend to bring in their own relatives, friends or acquaintances on board who tend to sway the votes in favour of them. And, that has led to many indiscrepancies in companies which are passed, without objection from the board.
“This will promote appointment of directors on merit rather than network or connections. Government is trying to ensure that Independent directors are qualified to add value that companies today are looking from them. This will promote appointment of directors on merit rather than network/ connections,” Bansal said.
Recently, the independent directors of various IL&FS companies have been in the radar of the Corporate Affairs Ministry due to increasing repayment defaults, which accounted for ₹940 billion of debt.
The government directs all publicly listed companies in India to have at least one-third of independent directors onboard.
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