The First Edition: How to Become an Independent Director in India

Institute of Directors (IOD), India Directors' Institute - World Council Of Directors KPMG India Boardshire "MentorMyBoard" Board Stewardship Skill Arbitrage Indian Institute of Management Bangalore NITWAA NITW

Introduction:

In today's corporate landscape, independent directors play a pivotal role in ensuring accountability, transparency, and ethical governance. Their role has evolved significantly over the years, reflecting the growing importance of effective corporate oversight. This edition of the newsletter aims to provide a comprehensive overview of the journey to becoming an independent director in India, from historical context to the essential steps involved.

Early beginnings:

The concept of independent directors in India can be traced back to the late 1990s, when the country was undergoing significant economic liberalization and globalization. As Indian businesses began to expand and compete on a global scale, there was a growing recognition of the need for improved corporate governance practices.

While the term "independent director" was not formally defined or mandated at that time, there were early examples of companies appointing external directors to their boards who were not affiliated with the company's management or major shareholders. These directors were often brought in to provide outside perspectives, expertise, and objectivity to the decision-making process.

The early years of independent directors in India were characterized by a gradual evolution and experimentation with different models of board composition and governance. There was no standardized definition or criteria for independence, and the role and responsibilities of independent directors varied widely from company to company.

Global influences:

The evolution of independent directors in India was significantly influenced by global trends and developments in corporate governance. Several key global events and initiatives played a pivotal role in shaping the Indian landscape:

Corporate Scandals and Regulatory Reforms:

Enron and WorldCom: The high-profile corporate scandals of Enron and WorldCom in the United States exposed serious deficiencies in corporate governance practices, leading to increased scrutiny of board oversight and the role of independent directors.

Sarbanes-Oxley Act: The passage of the Sarbanes-Oxley Act in the United States in 2002 introduced stricter corporate governance requirements, including the mandatory appointment of independent directors to audit committees. These reforms had a significant impact on global corporate governance standards, including those in India.

International Best Practices:

OECD Principles of Corporate Governance: The Organization for Economic Co-operation and Development (OECD) published its Principles of Corporate Governance in 1999, which provided a framework for effective corporate governance practices. These principles emphasized the importance of independent directors in ensuring transparency, accountability, and ethical behavior. ?

International Financial Reporting Standards (IFRS): The adoption of IFRS by many countries, including India, led to a convergence of accounting standards and practices. This increased the need for independent directors with financial expertise to oversee the financial reporting process.

Key Milestones in the Evolution of Independent Directors in India

The role of independent directors (IDs) in India has evolved significantly over the years, shaped by various key milestones and recommendations from prominent committees. These developments have been instrumental in establishing a robust framework for corporate governance in the country. Here’s a look at some of the most important milestones:

The Kumar Mangalam Birla Committee Report (1999):

The concept of independent directors was formally introduced in India by the Kumar Mangalam Birla Committee, which was constituted by SEBI in 1999 to suggest improvements in corporate governance. The Committee recommended the appointment of independent directors on the boards of companies to enhance transparency, accountability, and protect the interests of all stakeholders, including minority shareholders. Although the recommendations were initially voluntary, they laid the foundation for the concept of independent directors in India.

The Naresh Chandra Committee (2002):

In the wake of corporate scandals in the United States, such as Enron and WorldCom, the Indian government appointed the Naresh Chandra Committee in 2002 to further strengthen corporate governance. The Committee emphasized the importance of independent directors and recommended that at least 50% of the board of directors in large public companies should consist of independent directors. This was a significant step towards making the role of independent directors more integral to corporate governance in India.

The Narayana Murthy Committee Report (2003):

The Narayana Murthy Committee Report, built on the recommendations of earlier committees and emphasized the importance of independent directors in maintaining corporate accountability. The Committee proposed stricter norms for the definition and role of independent directors, suggesting that they should constitute at least one-third of the board in companies with a non-executive chairman and at least 50% if the chairman is an executive director. These recommendations were critical in shaping the regulatory framework for independent directors in India.

The Clause 49 of the Listing Agreement (2005):

SEBI introduced Clause 49 of the Listing Agreement in 2005, incorporating many of the recommendations from the aforementioned committees. Clause 49 made it mandatory for listed companies to appoint a specified minimum number of independent directors. This was a significant regulatory development that brought the role of independent directors to the forefront of corporate governance in India, making it a requirement for compliance rather than a voluntary practice.

The Satyam Scandal and Its Aftermath (2009):

The Satyam scandal of 2009 was a watershed moment for corporate governance in India. The failure of independent directors to prevent or detect the fraud highlighted the weaknesses in the existing governance framework. The scandal led to a wave of resignations by independent directors across the country due to fears of legal repercussions. This incident triggered a stronger focus on the accountability and effectiveness of independent directors, ultimately leading to stricter regulations and the codification of their roles and responsibilities in the Companies Act, 2013.

The Companies Act, 2013:

The enactment of the Companies Act, 2013, marked a major milestone in the evolution of independent directors in India. The Act codified the role, responsibilities, and liabilities of independent directors, providing a legal framework that formalized their presence on corporate boards. Some of the key sections related to independent directors in the Companies Act, 2013 include:

Section 149(4): Mandates that every listed public company shall have at least one-third of the total number of directors as independent directors. Certain classes of public companies, as prescribed by the rules, are also required to appoint independent directors.

Section 149(6): Defines the qualifications and criteria for an individual to be considered an independent director, including the requirement of not having any material or pecuniary relationship with the company, its promoters, or directors.

Section 149(8): Provides a code for independent directors, outlining their duties, roles, and responsibilities to ensure they act in the best interest of the company and its stakeholders.

Section 150: Establishes a data bank of independent directors, managed by the Indian Institute of Corporate Affairs (IICA), to facilitate the appointment of qualified individuals as independent directors.

Section 177: Mandates the formation of an Audit Committee, which should include a majority of independent directors, underscoring their role in overseeing the financial integrity of the company.

Section 178: Requires the formation of a Nomination and Remuneration Committee, which must consist of a majority of independent directors, ensuring transparency in the appointment and remuneration of top executives.

Since the introduction of the Companies Act in 2013, there have been several amendments to the act, which will be discussed in future newsletters.

The Growing Complexity of Corporate Governance

While these regulations were a significant step forward, they still did not address the need for a formal assessment of a director's knowledge and suitability for the role.

As corporate governance became more complex, with increasing regulatory requirements, global competition, and stakeholder expectations, the need for independent directors to have a deep understanding of governance principles, financial management, and legal obligations became more pronounced. The evolving business environment required directors who could not only contribute strategically but also uphold the highest standards of integrity and accountability.

The Introduction of the Self-Assessment Test:

Recognizing the need for a formal mechanism to evaluate the readiness of individuals to serve as independent directors, the Ministry of Corporate Affairs (MCA) introduced a mandatory self-assessment test in 2019. This test was designed to ensure that individuals aspiring to become independent directors possess the necessary knowledge of corporate governance, legal frameworks, and financial management.

Operational Procedures for the Self-Assessment Test by Indian Institute of Corporate Affairs (IICA):

The self-assessment test for independent directors is administered by the Indian Institute of Corporate Affairs (IICA), an autonomous body under the Ministry of Corporate Affairs. Here’s how the test operates.

Registration with the Independent Director's Databank:

Mandatory Registration: Prospective independent directors are required to register with the Independent Director's Databank (IDDB) managed by IICA. The databank is a repository of professionals eligible to be appointed as independent directors and serves as a platform for companies to identify suitable candidates.

Profile Creation: During registration, individuals create a profile that includes their qualifications, experience, and areas of expertise. This profile is visible to companies seeking to appoint independent directors.

The Self-Assessment Test:

Eligibility: The self-assessment test is mandatory for all individuals who wish to be appointed as independent directors, except for those who have served as a director or key managerial personnel in listed companies or certain unlisted companies for a specified duration. Such individuals are exempt from taking the test but must still register with the IDDB.

Test Format: The test is conducted online and consists of multiple-choice questions. It covers various aspects of corporate governance, financial management, company law, and other relevant topics.

Structure of the Test:

The test is typically conducted online, providing flexibility for directors to complete it at their convenience. It is designed to be both rigorous and reflective, encouraging directors to critically assess their own performance and knowledge.

Course Modules Offered by IICA:

The Indian Institute of Corporate Affairs (IICA) offers a variety of course modules aimed at equipping independent directors with the necessary knowledge and skills to effectively fulfill their roles. These courses are available through the Independent Director's Databank (IDDB) portal and cover a broad spectrum of topics relevant to corporate governance. The IICA provides the courses for the self-assessment on its website, and they are divided into two categories, board essentials (20 courses) and board practices (10 courses). In addition, several case studies (14) are also given. In total one needs to prepare well for the self-assessment test on these 49 courses as given below.

Board Essentials Courses (20 courses)

Incorporation of Companies

Share Capital

General Meetings

Accounts of Companies

Debentures and Bonds

Acceptance of Deposits

Prospectus and allotment of shares

Related Party Transactions

Audit & Auditors

Mergers Amalgamation (M&As)

Institution of Directors

Duties of Directors

Liability of Directors and KMP

Oppression & Mismanagement

Safeguarding directors

Penalties and compounding of offences

SEBI (LODR) Regulations, 2015

Board Committees

Secretarial Audit & Compliances

Board Meetings

Secretarial Standard 2

Corporate Social Responsibility

How to Read Balance Sheet?

Decoding Financial Statements

Professional Ethics for Independent Directors

Board Practice Courses (10 courses)

Due Diligence Before Joining a Board

Exemplary Board

Board Effectiveness & Culture

Building Resilient Company: Board’s Role

Governance of Committees

Governance of Strategy

Managing CSR & Engaging Stakeholders

Managing Through Financial Ratios

Board Evaluation

Evaluation of Independent Directors

Case Studies (14)

Case Study - Financial Irregularities of the Amrapali Group

Case Study - Bankruptcy of Bhushan Power and Steel Ltd. (BPSL)

Case Study - Bankruptcy of Alok Industries

Case Study - Financial Irregularity of Yes Bank

Case Study - Bankruptcy of Essar Steel Ltd. (ESL)

Case Study - Financial Irregularity of IL&FS

Case Study - Financial Irregularity of Punjab and Maharashtra Cooperative (PMC) Bank

Case Study - VOLKSWAGEN

Case Study - Olympus

Case Study - Hydro One

Case Study - WorldCom

Case Study - Enron Corporation

Case Study - Satyam

Case Study - Maruti Suzuki

Accessing Course Modules:

Once you register on the IDDB website, you will gain access to the aforementioned modules, along with the mock tests. The courses are available online, providing flexibility for would be directors to learn at their own pace.

Mock Tests:

To help aspiring independent directors prepare for the self-assessment test, IICA offers mock tests and other preparation resources. These are invaluable tools for directors who are required to take the test or who wish to assess their knowledge before attempting the actual exam.

Practice Sessions: Mock tests simulate the actual self-assessment test environment, allowing directors to familiarize themselves with the format and types of questions that will be asked.

Immediate Feedback: Upon completion of a mock test, directors receive immediate feedback on their performance, including detailed explanations of correct answers and suggestions for areas of improvement.

Multiple Attempts: Directors can take the mock tests multiple times, allowing them to improve their scores and confidence before taking the official test.

How to Access Mock Tests:

Mock tests are available through the Independent Director's Databank portal. Aspiring directors need to log in to their accounts and navigate to the "Mock Test" section to begin their practice sessions.

IICA periodically updates the mock test questions to reflect the latest developments in corporate governance and regulatory changes, ensuring that directors are well-prepared for the real test.

Exemptions from the Self-Assessment Test:

The Ministry of Corporate Affairs (MCA) has outlined specific exemptions from the self-assessment test for certain categories of individuals who possess significant experience or hold key positions in the corporate governance ecosystem. These exemptions recognize the expertise and credentials of these professionals, thereby waiving the requirement for them to take the test. The exempt categories include:

1. Serving or Former Directors:
2. Professionals with Certain Qualifications:
3. Civil Servants and Public Officials:

These exemptions are designed to acknowledge the extensive experience and expertise that these professionals bring to boardrooms, reducing the need for further assessment through the self-assessment test.

Self-assessment Test Scores:

I’ve come across a few pass-out mark sheets from the self-assessment test, which specifically indicate that the test is based on the topics covered in the course modules as given below.

Functioning of Board

Related Party Transactions (RPT) and Audit Issues

Role and Responsibility of Directors

Security Law and Secretarial

Understanding of Companies Law

Understanding Finance and Ethics

Board Effectiveness Practice

Best Practice

Pass Criteria: There are 50 questions and out of which 25 questions are from board essentials courses and the nature of questions is direct whereas for 25 questions from board practice courses the nature of questions is scenario based. Each question carries 2 marks and the average time given per question is 1.5 minutes. Thus, the test duration is 75 minutes.?

For anyone to clear the test one needs to obtain not less than 50% in aggregate out of 100 marks. After clearing the exam your name will be entered into the databank of independent directors. This databank is maintained by IICA.???

An individual who has obtained a score of not less than 50% in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test.

There shall be no limit on the number of attempts an individual may take for passing the online proficiency self-assessment test.

Certification and Validity:

Certification: Upon passing the test, candidates receive a certificate of qualification, which is a prerequisite for appointment as an independent director in India.

Validity: It depends on the kind of registration with the IDDB, and is valid either for one year, five years or for lifetime. If you have opted for one- or five-years registration you have to renew it upon paying the fees for renewal prevailing at that time.

The above-mentioned steps are provided in this handbook provided by IICA. Here's a schematic of the empanelment process of the independent directors as given in this handbook.

Why Self-Study Alone Falls Short: The Value of Reputable Courses for Aspiring Independent Directors:

Clearing the IICA exam by studying self-study modules might seem like a convenient and cost-effective option, but it has significant limitations, especially when compared to obtaining the same knowledge through a well-reputed government organization or a credible private institution. Here’s why relying solely on self-study modules is not the best approach:

Limited Interaction and Networking:

Self-study modules are designed for individual learning, which means you miss out on the critical aspect of networking. Networking is a vital component of securing an Independent Director (ID) position, as many board appointments are made through professional connections and recommendations. When you study on your own, you don’t get the chance to meet and interact with peers, mentors, and industry leaders who can provide insights, share experiences, and potentially open doors for future opportunities. In contrast, attending courses at reputable institutions offers you the chance to build a strong professional network, which can be invaluable in your career as an independent director.

Lack of Real-World Insights:

Self-study modules often focus on theoretical knowledge, which is essential but not sufficient. In the complex world of corporate governance, understanding the practical application of this knowledge is equally important. Government organizations and established private institutions bring together experienced faculty, industry professionals, and guest speakers who provide real-world insights, case studies, and examples that go beyond what’s covered in the modules. This practical exposure helps you understand the nuances of boardroom dynamics, decision-making processes, and the challenges that independent directors face.

Enhanced Credibility and Recognition:

While self-study modules can help you pass the IICA exam, they don’t carry the same weight in terms of credibility as certifications or courses from recognized institutions. Completing a program at a well-known government organization or a reputable private institution not only equips you with in-depth knowledge but also enhances your professional credibility. These institutions have established reputations, and their certifications are often recognized and respected in the industry, making you a more attractive candidate for ID positions.

Structured Learning Environment:

Self-study requires a high level of discipline and self-motivation, and it’s easy to miss out on critical aspects of the curriculum without proper guidance. In contrast, courses offered by reputable institutions provide a structured learning environment, with a well-designed curriculum, regular assessments, and support from instructors. This ensures that you fully understand all the necessary concepts and are well-prepared for the exam and your future role as an independent director.

Immense Networking Opportunities:

One of the biggest advantages of studying through a reputable institution is the networking opportunities it provides. These courses often attract professionals from various industries who are also pursuing independent director roles. This creates a rich environment for networking, where you can form relationships with peers who may become your colleagues in the boardroom, or with industry leaders who can recommend you for board positions. These connections can be pivotal in advancing your career as an independent director.

Thus, self-study modules may help you clear the IICA exam, they fall short in providing the comprehensive learning experience and professional networking opportunities that are crucial for a successful career as an independent director. Investing in a program offered by a well-reputed government organization or a credible private institution not only enhances your knowledge and credibility but also opens doors to valuable connections that can significantly impact your career trajectory. In the long run, these benefits far outweigh the initial cost and effort, making it a far superior option for aspiring independent directors.

The Importance of Joining LinkedIn Groups for Independent Directors:

In today’s digital age, LinkedIn has become a vital platform for professionals looking to expand their networks, share insights, and stay updated on industry trends. For independent directors, joining or following relevant LinkedIn groups can be particularly beneficial. Here’s why:

Networking with Peers and Industry Leaders:

Joining LinkedIn groups focused on independent directors allows you to connect with peers, seasoned professionals, and industry leaders who share your interests and challenges. These connections can lead to valuable discussions, collaborations, and even opportunities for board positions. Networking within these groups can also help you stay on the radar of potential employers and keep you informed about new openings in the boardroom.

Staying Updated on Industry Trends and Best Practices:

LinkedIn groups are a great resource for staying updated on the latest trends, regulatory changes, and best practices in corporate governance. Group members often share articles, reports, and updates that are relevant to independent directors. By actively participating in these discussions, you can gain insights into emerging issues and learn how other directors are addressing similar challenges.

Gaining Insights and Advice:

Being part of a LinkedIn group gives you access to a community of professionals who can offer advice and share their experiences. Whether you’re facing a specific challenge in your role or looking for guidance on professional development, these groups provide a platform to ask questions and receive feedback from others who have been in similar situations.

Enhancing Your Personal Brand:

Active participation in LinkedIn groups helps to build and enhance your personal brand. By sharing your expertise, commenting on discussions, and contributing valuable content, you position yourself as a thought leader in the field of corporate governance. This visibility can increase your credibility and make you a more attractive candidate for independent director roles.

Learning About Educational and Certification Opportunities:

LinkedIn groups often feature posts about upcoming workshops, webinars, courses, and certification programs relevant to independent directors. By staying connected with these groups, you can discover opportunities for continuous learning and professional development that can enhance your qualifications and keep you competitive in the field.

Joining LinkedIn groups dedicated to independent directors is not just about networking; it’s about staying informed, gaining insights, and continuously developing your skills. These groups offer a wealth of resources and connections that can significantly impact your career as an independent director, making them an essential part of your professional strategy.

The Importance of Personal Branding for a Successful Independent Director:

Clearing the IICA self-assessment exam is an essential step in becoming an independent director, but it is only the beginning of the journey. To truly succeed in this role, personal branding plays a crucial role. As an independent director, your personal brand is not just about your qualifications; it’s about how you are perceived in the corporate world, your expertise in various disciplines, and your commitment to continuous learning and ethical governance.

Beyond Basic Qualifications:

While passing the IICA exam is necessary, it merely establishes your eligibility. What sets you apart as a successful independent director is your ability to demonstrate deep knowledge and expertise across multiple areas critical to corporate governance. Building a strong personal brand involves showcasing your understanding of key disciplines such as Occupational Safety and Health Administration (OSHA) standards, Enterprise Risk Management (ERM), Corporate Social Responsibility (CSR), and Environmental, Social, and Governance (ESG) principles.

Knowledge in Key Disciplines:

As an independent director, you must possess a broad and deep understanding of various domains that impact a company’s operations and strategy. Knowledge in OSHA standards is essential for ensuring workplace safety and compliance, which is crucial for mitigating risks. Expertise in ERM allows you to identify, assess, and manage risks across the organization, safeguarding the company’s assets and reputation. Understanding CSR and ESG principles is increasingly important as stakeholders demand greater transparency and accountability in how businesses impact society and the environment.

Acquiring Relevant Certifications:

To bolster your personal brand and stand out as a credible and competent independent director, it is important to acquire certifications in these areas. Certifications in OSHA, ERM, CSA, and ESG not only enhance your knowledge but also signal to potential boards and companies that you are committed to staying at the forefront of corporate governance. These certifications validate your expertise and demonstrate your ability to contribute meaningfully to the boardroom, ensuring that the company adheres to best practices in safety, risk management, sustainability, and governance.

Building a Personal Brand:

Your personal brand as an independent director is built on the foundation of your qualifications, experience, and expertise. It is enhanced by your visibility in industry forums, participation in thought leadership activities, and engagement in continuous professional development. Writing articles, speaking at conferences, and being active in LinkedIn groups related to corporate governance can help establish you as a thought leader in the field. A strong personal brand not only opens doors to new opportunities but also instills confidence in stakeholders about your ability to guide the company with integrity and foresight.

In the competitive landscape of corporate governance, clearing the IICA exam is just the first step. To become a successful independent director, you must build a strong personal brand that reflects your deep expertise, continuous learning, and commitment to ethical governance. By acquiring knowledge and certifications in key disciplines such as OSHA, ERM, CSA, and ESG, you position yourself as a valuable asset to any board, capable of steering the company towards sustainable growth and success.

Conclusion:

The evolution of independent directors in India reflects a significant shift toward greater corporate governance and accountability. The introduction of the self-assessment test by the Indian Institute of Corporate Affairs (IICA) marks a critical milestone in this journey, ensuring that directors possess the necessary knowledge and skills to fulfill their roles effectively. However, while self-study of the IICA modules is an option, joining a leading organization that provides specialized training offers invaluable benefits, particularly in terms of networking opportunities. Engaging with seasoned professionals and industry experts can enhance one's understanding of the role and create connections that are crucial for career advancement.

Moreover, personal branding has become a vital factor in the selection process for independent directors. In today's digital age, platforms like LinkedIn play a pivotal role in showcasing one's expertise and building a professional image. Active participation in LinkedIn groups related to corporate governance can further strengthen networking efforts, opening doors to new opportunities and collaborations.

In the next edition of Independent Director’s Digest, I will provide detailed information on the top organizations offering training programs to help you clear the IICA self-assessment test.

Until then cheers!!!

PS: Spoiler, I already gave a couple of them in my last week’s article.?

This newsletter compiles information from various online resources, including ChatGPT. For any omissions or corrections, please send me a direct message. Thank you.

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