Mandatory e-Registration for Independent Directors

Last Updated at: October 23, 2019
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Mandatory E-Registration For Independent Directors

Independent Directors act as a guide to the company, offering valuable suggestions, credibility to board decisions while also acting as a moral compass for the company. An independent director is a non-executive director of a company and is responsible for ensuring that the company does not breach its fiduciary duties to its stakeholders such as creditors, customers, shareholders and the government. Public companies are mandatorily required to ensure at least one-third of its overall board composition is independent. 

One of the major tasks entrusted to an Independent Director is to oversee financial reporting processes including disclosure of the company’s financial information, compliance with listing and other legal requirements and disclosure of related party transactions. 

Why e-KYC has been proposed? 

While the Companies Act 1956 did not provide for any definition of Independent Director, the new Companies Act, 2013 and various rules framed after it, clearly outline the duties and other dynamics of Independent Director. Since the passing of the new act, it was realised that many companies in an urgent bid to satisfy the mandatory compliance requirement of appointment of an independent director hastily appointed directors who neither had the financial acumen, relevant technical expertise or experience to function as an Independent Director.

The Ministry of Corporate Affairs recently passed a notification stating that every company appointing an independent director must do an e-KYC process. It is believed that such a move will help in the creation of a pool of talented individuals possessing adequate knowledge and experience in the field of corporate management, finance, taxation, accounting or other allied areas. 

Register Your Business

Will the new process helps to weed out irregularities? 

Currently, the process requires filing the nomination of a director, a DIN – Director Identification Number had to be compulsorily obtained and mentioned with every individual filing for the position of a director in every company. However, this new rule is in line with an earlier effort to find a screening mechanism for independent directors. It has been seen that many directors and promoters who were initially a part of the key decision making processes resign after noticing irregularities. This was specifically highlighted after the Jet Airways fiasco that has led to the collapse of operations of the airline.

Although the demand for a review mechanism for the process of selection and oversight over independent directors is not new, a proper surveillance system on the conduct of independent directors against affairs of the company is yet to be implemented. The MCA has also come up with a voluntary training programme on corporate issues that Board Members are likely to face, which is offered through an online portal maintained by the Indian Institute of Corporate Affairs. 

Additionally, even a corporate boss or a promoter who may be an executive director in a company will have to go through the e-KYC registration process, if he/she holds the position of an independent director in another company. This is likely to create a stronger database which would be an asset to regulatory bodies in addition to the Ministry of Corporate Affairs, such as the Registrar of Companies, Serious Fraud Investigation Office etc, in mapping corporate liability in cases of irregularities, inconsistencies and investigation of frauds.

Mandatory e-Registration for Independent Directors

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Independent Directors act as a guide to the company, offering valuable suggestions, credibility to board decisions while also acting as a moral compass for the company. An independent director is a non-executive director of a company and is responsible for ensuring that the company does not breach its fiduciary duties to its stakeholders such as creditors, customers, shareholders and the government. Public companies are mandatorily required to ensure at least one-third of its overall board composition is independent. 

One of the major tasks entrusted to an Independent Director is to oversee financial reporting processes including disclosure of the company’s financial information, compliance with listing and other legal requirements and disclosure of related party transactions. 

Why e-KYC has been proposed? 

While the Companies Act 1956 did not provide for any definition of Independent Director, the new Companies Act, 2013 and various rules framed after it, clearly outline the duties and other dynamics of Independent Director. Since the passing of the new act, it was realised that many companies in an urgent bid to satisfy the mandatory compliance requirement of appointment of an independent director hastily appointed directors who neither had the financial acumen, relevant technical expertise or experience to function as an Independent Director.

The Ministry of Corporate Affairs recently passed a notification stating that every company appointing an independent director must do an e-KYC process. It is believed that such a move will help in the creation of a pool of talented individuals possessing adequate knowledge and experience in the field of corporate management, finance, taxation, accounting or other allied areas. 

Register Your Business

Will the new process helps to weed out irregularities? 

Currently, the process requires filing the nomination of a director, a DIN – Director Identification Number had to be compulsorily obtained and mentioned with every individual filing for the position of a director in every company. However, this new rule is in line with an earlier effort to find a screening mechanism for independent directors. It has been seen that many directors and promoters who were initially a part of the key decision making processes resign after noticing irregularities. This was specifically highlighted after the Jet Airways fiasco that has led to the collapse of operations of the airline.

Although the demand for a review mechanism for the process of selection and oversight over independent directors is not new, a proper surveillance system on the conduct of independent directors against affairs of the company is yet to be implemented. The MCA has also come up with a voluntary training programme on corporate issues that Board Members are likely to face, which is offered through an online portal maintained by the Indian Institute of Corporate Affairs. 

Additionally, even a corporate boss or a promoter who may be an executive director in a company will have to go through the e-KYC registration process, if he/she holds the position of an independent director in another company. This is likely to create a stronger database which would be an asset to regulatory bodies in addition to the Ministry of Corporate Affairs, such as the Registrar of Companies, Serious Fraud Investigation Office etc, in mapping corporate liability in cases of irregularities, inconsistencies and investigation of frauds.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.