Questions raised over qualifying exam for independent directors

Mumbai: Non-executive directors are puzzled by the central government’s decision to introduce a qualifying exam for independent members of company boards. The Indian Institute of Corporate Affairs (IICA), Haryana, is to hold the exam starting in December and 60% is the qualifying mark. Further, all listed companies have been asked to disclose each independent director’s test result in their annual reports. The proposal has raised concern that this could provide fodder for activist shareholders.

Some critics of the move have said that this could shrink the pool of available people while others said it may not necessarily achieve the goal of improved corporate governance.

Until now, companies weren’t required to choose independent directors from a database maintained by the Ministry of Corporate Affairs (MCA). However, going forward all those chosen for the post will have to be registered with the database and should have cleared the IICA test.

“The idea of having a single exam for all the independent directors is not sound since the skills needed to be in the board of a company vary significantly,” said an independent director on the board of an auto company. “It also gives an impression that all the current independent directors are cronies of promoters, which is not the case. We have some eminent people on the corporate boards.”

There’s no bar on how many times the exam can be taken. The norm applies to listed companies and unlisted ones with more than Rs 10 crore of paid-up capital.

The new requirements were put in place in the wake of corporate governance scandals that have been unearthed in the past few years. This period has also seen a rise in the resignation of independent directors.

“I agree that there should be a process for deciding who can be an independent director but I don’t agree with the current proposal to have a single exam to decide eligibility,” said PH Ravikumar, an independent director of Aditya Birla Capital. “Instead, the government should prescribe a list defining who cannot be an independent director and leave it to the boards of the companies to decide on other aspects.”

Another independent director said it was important for board members to be well versed in business practices.

“I believe it is a good idea to create a sort of continuing education for independent directors,” said Sandeep Parekh, a securities lawyer who is also a non-executive director of HDFC Bank. “Directors across companies, especially the listed ones, should be taught aspects like understanding of fiduciary duties, securities regulations and basics of accounting.”

Having a uniform test may not achieve the intent and could shrink the pool, said another.

“A board needs multiple skills depending on the business they are into. For instance, consumer company board members may need different skills compared to say a banking company or a technology company,” said an independent director at a private lender. “The measure will only increase the shortage of good independent directors across the industry.”

Legal and compliance experts said the requirements of the Securities and Exchange Board of India (Sebi) with respect to choosing independent directors are quite stringent. Every listed company has to inform Sebi of the basis on which an independent director was chosen, along with professional qualifications, work experience and technical expertise.

“Corporate governance cannot be ensured merely by appointing a person who has passed the proficiency test,” said Vinita Nair, partner, Vinod Kothari & Co. “While the government aims at having an accountable board with diverse skill sets, the corporate literacy test will not help in addressing the accountability issue in any manner.”