Independent Directors Will Now Need To Pass Corporate Literacy Exam; Unlimited Attempts Allowed

As per the current corporate governance laws, every company’s board should have atleast 30% of directors as an independent.

The logic is that these independent directors should act as a watchdog of the company affairs, and check any wrongdoings.

However, practical life is different.

Often, when that company is stuck in a financial crisis or gets investigated for fraud, then the company directors plead ignorance of the laws as an excuse to get away with the mess.

But not anymore.

PM Modi led BJP Govt is now all set to mandate exam for independent directors.

This can change so many things if executed in the right manner.

Passing Exam Mandatory For Independent Directors

Within next two months, the Ministry of Corporate Affairs will introduce a new rule, as per which independent directors of any company will be required to pass an examination, else, they won’t be eligible.

This exam will be part of their corporate literacy, and the questions would consist of Indian company laws, ethics, and capital market norms.

This has been confirmed by Corporate Affairs Secretary Injeti Srinivas, as he said, “We want to demolish the myth that independent directors don’t have any fiduciary duty. We want to propagate corporate literacy to make them aware of their duties, roles and responsibilities,”

The good news is that the applicants would be allowed unlimited attempts to pass this exam, and become independent directors.

Why This Examination Rule Makes Sense?

Right now, as per company laws, 30% of the company’s board strength should be of independent directors, and thus, this new rule will directly impact 30% of all directors in the corporate world.

A big, massive change can be unleashed.

Now, a need for this special corporate literacy examination was felt, after the debacle at Infrastructure Leasing & Financial Services (IL&FS).

Deloitte Haskins Sells and KPMG affiliate BSR & Associates, who were auditing this public-private partnership company made huge lapses, and the company directors pleaded ignorance of the whole affair.

Govt. may soon ban Deloitte Haskins Sells and KPMG affiliate BSR & Associates for 5 years, but just a ban won’t serve the purpose.

In case the directors of Infrastructure Leasing & Financial Services had known the basics of corporate governance, then maybe, this situation wouldn’t have arisen.

Having said that, the proper execution of this proposed rule is crucial, which can actually make a difference.

We will keep you updated, as more details come in.