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Governance

Data Bank of Independent Directors

  • 03 Dec 2019
  • 4 min read

Why in News

Recently, the Ministry of Corporate Affairs launched the Independent Directors Databank in accordance with the provisions of the Companies Act, 2013 and the rules made thereunder.

Background

  • The ministry was working on ways to strengthen the framework for independent directors, who have an important role in ensuring good corporate governance practices at companies.
  • It seeks to make the process stringent because in many cases political appointees with standard financial background were also getting rehabilitated in several companies as independent directors.
  • Recent Infrastructure Leasing and Financial Services (IL&FS) crisis highlighted the reckless grading by credit rating agencies who liberally granted and downgraded the companies as per their wish and got away with it.
  • Apart from the launch of Independent Directors Bank, the government has also decided to conduct examinations for appointments of independent directors in which a score of 60% marks will be mandatory criteria for qualification.
    • The change is in line with the amended Companies Act. The government will also maintain a database of professionals qualifying in the test that can be used by companies looking to expand their board or making fresh appointments under the current regulations.

Significance

  • Independent directors must not assume a passive role, merely reacting to ideas foreseen by the controlling shareholder or their appointees. They should be willing to question the status quo in the interest of shareholders not play a risk-free mute spectator limiting to attending just number of board meetings.
  • Strict accountability and eligibility will curb promoters placing their own ineligible candidates and family members on the listed company boards.
  • The concept of the institution of Independent Director is of utmost importance for Corporate Governance who should act act as the trustees of stakeholders.

Data Bank

  • It has been developed and maintained by the Indian Institute for Corporate Affairs (IICA) under Ministry of Corporate Affairs.
  • It is a first of its kind initiative which provides for a wide array of e-learning courses on various topics including the Companies Act, Securities laws, basic accountancy, board practices, board ethics and board effectiveness.
  • It provides an easy to access navigation platform for the registration of existing Independent Directors as well as individuals aspiring to become independent directors.
  • Companies can register themselves with the databank to search, select and connect with individuals aspiring to be Independent Directors.

Independent Director

  • An Independent Director (also sometimes known as an outside director) is a director on a board of directors representing minority shareholders and who does not have a pecuniary relationship with the company or related persons, except for sitting fees.
  • Their role is to take a stand unambiguously and independently to have a check and balance on the exuberance of majority shareholders that may expose the company to unwarranted risks.
  • The Companies Act, 2013 has mandated all listed public companies to have at least one-third of the total Directors to be independent.
  • Their role requires them to be clinical while businesses expect them to be practical, that’s the tight rope they walk on.

Source: PIB

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