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India Inc struggling to find independent directors?

About 15 years ago, India’s corporate sector was put to a severe test. Because in 2009, we saw the unveiling of the biggest scandal in corporate India’s history with the Satyam Computer Services scam. 

That scam is relevant to this discussion because it resulted in an unprecedented mass exodus of Independent Directors from the boards of multiple Indian companies. According to several estimates, about 620 Independent Directors came under the scanner and resigned post-Satyam.

This incident reinforced the need for ethical Independent Directors and eventually brought about a change in the rules regarding their appointment, but the supply has been nowhere close to the demand. 

How many Independent Directors do we actually have and how many do we need?

As of June 2021, India had almost 22 lakh public companies. Of these, around 5,311 companies have listed their shares on the Bombay Stock Exchange as of January 2023, while the National Stock Exchange website states that 2,113 were listed on the NSE as of December 31, 2022. 

You may be knowing that since December 2019, it has become mandatory for all Independent Directors to register with the Independent Directors’ databank maintained by the Ministry of Corporate Affairs and Indian Institute of Corporate Affairs (IICA). 

With a few exceptions, all such individuals are required to clear the Online Self-Assessment Proficiency Test conducted by the IICA within one year of their names being included in the databank.

Even those who do not need to clear the exam officially should clear it simply because it increases their chances of being picked up as Independent Directors.

Do you know how many people have cleared this test as of March 11, 2023? Only 11,511! And a total of about 21,500 names are registered in the databank.

At present, India already needs at least 30,000 more qualified independent directors, assuming every listed company requires to appoint 3-4 directors. If you add unlisted companies and private companies currently preparing to issue their IPO, the number is bound to be much higher.

I am not even counting all the companies that will go public as the Indian economy goes through a boom over the next decade, almost tripling our GDP. India will require tens of thousands of independent directors.

This is an unprecedented opportunity ahead for senior professionals.

Which brings us to the role that Independent Directors play in the running of a company.

Why does a company need Independent Directors?

With India’s corporate sector being hit by successive corporate scandals like the Satyam scam, the government amended the Company Act in 2013 and included certain mandatory provisions for the appointment of Independent Directors, which were not part of the original act.

The idea was to bring such people on the board of directors who would independently ensure corporate governance compliances and help a company run efficiently for the benefit of all. The amendment was designed to bring people into the management without any material relationship with the company. Which means they cannot have a vested interest in the company. 

In addition, an Independent Director must be a subject matter expert with the necessary experience in domains such as finance, law, management, research, and corporate governance. He/ she must also be a person of good moral character, faith, and honesty.

Independent Directors attend board meetings of companies, go through their financial documents, ask questions to ensure that appropriate compliances are in place, and their job is done.

Which companies must appoint Independent Directors?

Sub-section (4) of Section 149 of the Companies Act 2013 provides that every listed and unlisted public company that fulfils certain criteria must appoint at least 1/3rd of its total number of directors as Independent Directors.

Rule 4 of the Companies (Appointment & Qualification of Directors) Rules, 2014 states that at least two Independent Directors or one-third of total directors on the board, whichever is higher, must be part of public companies which:

  • Have a paid-up share capital of INR 10 crore or more
  • Have a turnover of INR 100 crore or more 
  • Have in the aggregate, outstanding loans, debentures, borrowings, and deposits, more than INR 50 crore

So what is the problem? 

The problem is that owing to the difficulty of the test, and since most senior executives approach it without adequate and focused preparation, clearing it is a big challenge for most people. 

That is one of the primary reasons why the Indian corporate sector has so few individuals qualified to function as Independent Directors, and why you are paid so well once qualified.

Companies appoint executive search firms to look for Independent Directors, and yet it takes ages to find someone because the number of companies which an Independent Director can serve is restricted by law. 

Caught between government regulations and the scarcity of qualified candidates, many public companies are willing to pay a high price to meet their quota of Independent Directors. 

This is even more true for women and people from marginalised communities, because large corporations seek to bring diversity to their boards and struggle to find candidates who match the minimum legal qualifications.

So this is an opportunity you should take very seriously if you are looking to build a corporate career that is as prestigious as it is financially rewarding. And the best thing is that there is no retirement age here. Neither is there an upper age limit for appointment, which means you can begin a second innings after retiring from your current job.

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