Starting this December, those who wish to serve as independent directors of companies in India will need to get enlisted by a government agency and pass a “self-assessment test” conducted by it, according to new rules issued by the ministry of corporate affairs on Tuesday. Persons who are eligible for corporate board membership and are willing to perform the role would have to apply to the Indian Institute of Corporate Affairs (IICA), attached to the ministry, before signing up for the job or within three months of the new rules coming into force. The proficiency test has to be passed within a year of the candidate’s inclusion in the IICA’s database. Those who have already served at least 10 years as directors or in key managerial positions of listed or large unlisted public companies are exempt from the test. The guidelines make it the responsibility of the board of directors to ensure that appropriate individuals are recruited as independent members, and that they get empanelled with the IICA. Other new rules stipulate that from December onwards, the annual reports of companies must include the board’s comments on not just the proficiency (as ascertained by the test), but also the integrity, expertise and experience of independent directors taken aboard.
With anxiety rising among investors over weak standards of corporate governance in India, the need for good independent directors is obvious. For a company to be held properly accountable, the oversight of people whose interests are not aligned with clout-wielding owners or executives is sorely needed. This is especially the case for family-owned firms in which major shareholders also happen to manage day-to-day operations. All too often, however, firms try to get around the mandatory requirement of independent directors by appointing people who are independent only on paper. It is easy for the top bosses to find acquaintances with no relation to the company or its owners, who have few, if any, shares in it and are ready to act as rubber stamps for a fee. Among such directors, not many know much about company law, let alone elementary norms of accountancy and various other rules that they must ensure are being upheld. If a qualifying test tackles that problem, it would do a favour to all investors who rely on corporate boards to keep watch on their behalf. At the very least, no IICA-approved director would be able to plead ignorance in case a scandal erupts.
However, for tighter norms of eligibility to serve their intended purpose of raising the quality of corporate governance in India, the test itself would have to be well designed. Not only should it be fair and transparent, with minimal discretionary authority exercised by the IICA, it’s also crucial that companies—many of which are already reeling under other stiff regulations—have no reason to worry about the filters that apply. Few tests are perfect. This being so, the criteria should be set to minimize the likelihood that a genuine candidate fails. Since dummy directors are easy to identify by their lack of basic knowledge, designing such a the test should not be too hard. Character certificates in annual reports, though, may prove awkward, for these are subjective assessments. While it may have the effect of an oath of good faith, it’s unlikely to help much. Investors have seen too many scams done by people sworn to propriety.