Some 14 years ago, India’s corporate sector was put to a severe test. 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, and eventually led to the amendment of the laws concerning their appointment.
According to several estimates, about 620 Independent Directors came under the scanner and resigned, post-Satyam.
Why were these Independent Directors implicated in a scam perpetrated by one company?
The answer is that above all else, Independent Directors are responsible for good corporate governance and best practices. And the Satyam scam involved bad practices on the part of several companies, which ended up aiding and abetting the financial irregularities of the Satyam group.
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, of more than INR 50 crore
How many Independent Directors do we actually have and how many do we need?
According to the National Stock Exchange, India has 2,113 companies which are listed, as on December 31, 2022. Some 1.7 lakh were incorporated in 2022 itself, as per the MCA.
You may know 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 the Indian Institute of Corporate Affairs (IICA).
All such individuals are additionally required to clear the online self-assessment proficiency test conducted by the IICA within one year of their names being included in the databank.
Do you know how many people have cleared this test currently? Only 11,697! And only about 21,318 names are in the databank as of April 2023 (including 6303 women IDs).
At present, India needs over 30,000 more qualified Independent Directors, assuming every listed company is required 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 trebling our GDP. India will require tens of thousands of Independent Directors.
Immense opportunity
There is an unprecedented opportunity ahead for senior professionals. From the information mentioned above, do you realise the huge demand-supply gap when it comes to Independent Directors?
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 such few individuals qualified to function as Independent Directors, and why they 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 on, 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. Nor is there an upper age limit for appointment, which means you can begin a second innings after retiring from your current job.
All you need is some guidance and help in clearing the self-assessment test, which we are happy to provide. I invite you to connect with us to know more.
You can contact our counsellors on +91 98186 78383 (10.00 am-8.00 pm IST) or email us at counselling@lawsikho.in. We will show you how best to approach the test and crack it.