IICA Independent Director Test Exam Flashcards

Q: What does the IICA Independent Director self-assessment test cover?

IICA publishes four areas: Companies Law, Securities Law, Basic Accountancy, and Corporate Governance. Its e-learning page further lists board essentials, board practice, and corporate case-study modules, but the public pages do not assign test weights to the four areas.

Q: What score is required to pass the test?

A candidate must obtain at least 50% in aggregate. The public self-assessment page does not publish a fixed question count or test duration.

Q: How soon can a candidate book another attempt?

IICA allows unlimited attempts, but requires a gap of one day between two booked slots. The same rule applies if a candidate fails a test or misses a booked slot.

Q: How long does a Databank member have to pass?

Unless exempt, an individual must pass within two years from the date the individual's name is included in the Databank. Failure to do so results in removal of the name from the Databank under the published rule.

Q: Who may be exempt from the proficiency test?

The current rules include exemptions for specified individuals with at least three years in qualifying director, KMP, government, regulator, or statutory-body roles, and for advocates, chartered accountants, cost accountants, or company secretaries who are or have been in practice for at least ten years. Candidates should check the complete current rule against their own record.

Q: How are these 50 flashcards allocated?

Because IICA does not publish domain weights, this set uses a balanced editorial allocation: 13 cards each for Companies Law and Securities Law, and 12 cards each for Basic Accountancy and Corporate Governance. This is a study allocation, not an official blueprint.

Question 1

Which board roles are excluded from the Companies Act definition of an independent director?

Accepted Answer

An independent director is a director other than a managing director, whole-time director, or nominee director. The individual must also satisfy the independence criteria in section 149(6).

Question 2

What minimum independent-director proportion does the Companies Act require for a listed public company?

Accepted Answer

At least one-third of the total number of directors must be independent directors. A fraction in that one-third calculation is rounded up to one.

Question 3

When must an independent director give the Companies Act declaration of independence?

Accepted Answer

At the first Board meeting in which the person participates, at the first Board meeting of every financial year thereafter, and whenever circumstances change in a way that may affect independence.

Question 4

Can an independent director receive stock options under the Companies Act?

Accepted Answer

No. An independent director is not entitled to stock options. Subject to the Act, the director may receive meeting fees, reimbursement of participation expenses, profit-related commission approved by members, and permitted remuneration where profits are absent or inadequate.

Question 5

What is the Companies Act limit for one independent-director term?

Accepted Answer

A term may run for up to five consecutive years. Reappointment requires a special resolution and disclosure of the reappointment in the Board's report.

Question 6

What follows two consecutive terms as an independent director?

Accepted Answer

The person must complete a three-year cooling-off period before appointment again. During that period, the person must not be appointed in, or associated with, the company in another capacity, directly or indirectly.

Question 7

When can an independent director be liable for a company's act or omission?

Accepted Answer

Liability is limited to matters that occurred with the director's knowledge attributable through Board processes and with consent or connivance, or where the director did not act diligently.

Question 8

Whose interests must a director consider when acting in good faith under section 166?

Accepted Answer

The director acts to promote the company's objects for members as a whole and in the best interests of the company, employees, shareholders, and community, while protecting the environment.

Question 9

What conduct standard does section 166 set for a director's decision-making?

Accepted Answer

The director must exercise due and reasonable care, skill, and diligence, and must exercise independent judgment. Attendance alone does not satisfy that standard.

Question 10

What should a director do about a direct or indirect interest that may conflict with the company?

Accepted Answer

The director must avoid a situation in which the interest conflicts, or may possibly conflict, with the company's interest. Applicable disclosure and participation restrictions must also be followed.

Question 11

How is an Audit Committee constituted under section 177 of the Companies Act?

Accepted Answer

It has at least three directors, with independent directors forming a majority. A majority of members, including the chairperson, must be able to read and understand financial statements.

Question 12

What is the Audit Committee's core role in relation to the statutory auditor?

Accepted Answer

It recommends the auditor's appointment, remuneration, and terms, and reviews the auditor's independence, performance, and the effectiveness of the audit process.

Question 13

What protections must a Companies Act vigil mechanism provide?

Accepted Answer

It must provide adequate safeguards against victimisation and allow direct access to the Audit Committee chairperson in appropriate or exceptional cases.

Question 14

What basic Board-composition rule does SEBI LODR regulation 17 set?

Accepted Answer

The Board must have an optimum mix of executive and non-executive directors, include at least one woman director, and comprise at least 50% non-executive directors.

Question 15

How does the Board chair affect the LODR minimum proportion of independent directors?

Accepted Answer

With a regular non-executive chair, at least one-third of the Board must be independent. Without one, at least half must be independent. At least half is also required when that non-executive chair is a promoter or is related to specified promoters or management personnel.

Question 16

What does LODR require of a listed entity's Audit Committee membership?

Accepted Answer

It must have at least three directors, at least two-thirds independent directors, all members financially literate, and at least one member with accounting or related financial-management expertise.

Question 17

How often must a listed entity's Audit Committee meet under LODR?

Accepted Answer

At least four times in a financial year, with no more than 120 days between consecutive meetings. Quorum is two members or one-third of the committee, whichever is greater, including at least two independent directors.

Question 18

How must a listed entity's Nomination and Remuneration Committee be composed?

Accepted Answer

It must have at least three directors, all non-executive, with at least two-thirds independent directors. Its chairperson must be an independent director.

Question 19

What shareholder approval does LODR generally require for an independent director?

Accepted Answer

The appointment, reappointment, or removal of an independent director is subject to shareholder approval by special resolution, including the voting route in the regulation's provisos where applicable.

Question 20

What must listed-entity independent directors do at their separate annual meeting?

Accepted Answer

Without management or non-independent directors present, they review the performance of non-independent directors, the Board as a whole and the chairperson, and assess the quality, quantity, and timeliness of management-to-Board information.

Question 21

What extra confirmation accompanies an LODR declaration of independence?

Accepted Answer

The director confirms meeting the regulation 16 independence criteria and being unaware of circumstances that could impair objective independent judgment or expose it to external influence. The Board must assess the declaration's veracity.

Question 22

What makes information UPSI under the SEBI insider-trading rules?

Accepted Answer

It relates directly or indirectly to a company or its securities, is not generally available, and would likely materially affect the securities' price when made public. The regulations list ordinary examples, but the definition is not limited to that list.

Question 23

Who is an insider under the SEBI PIT Regulations?

Accepted Answer

A connected person, or any person who possesses or has access to unpublished price sensitive information. A job title is not required for the possession-or-access limb.

Question 24

When may UPSI be shared for a legitimate purpose?

Accepted Answer

Only in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations. A recipient of UPSI for a legitimate purpose is treated as an insider and must be notified to maintain confidentiality.

Question 25

What must a structured digital database record about shared UPSI?

Accepted Answer

It records the nature of the UPSI, who shared it, who received it, and PAN or another authorised identifier where PAN is unavailable. It must be maintained internally with controls such as time stamps and audit trails, and ordinarily preserved for at least eight years after the relevant transaction.

Question 26

What is the basic SEBI rule on trading while holding UPSI?

Accepted Answer

An insider must not trade in securities listed or proposed to be listed while in possession of UPSI. The regulations contain specific defences and exceptions, so a director should obtain compliance review rather than assume a trade is permitted.

Question 27

What is the fundamental accounting equation?

Accepted Answer

Assets = Liabilities + Equity. Every correctly recorded transaction preserves this equality, even when several accounts change at once.

Question 28

How does a balance sheet differ from a statement of profit and loss?

Accepted Answer

A balance sheet shows assets, liabilities, and equity at a point in time. A statement of profit and loss reports income and expenses over a period.

Question 29

Why can accrual profit differ from cash generated?

Accepted Answer

Revenue and expenses are recognised when earned or incurred under accrual accounting, not necessarily when cash moves. Credit sales, payables, depreciation, provisions, and working-capital changes can separate profit from cash flow.

Question 30

What do the three sections of a cash-flow statement show?

Accepted Answer

Operating activities show cash from core operations; investing activities show purchases and disposals of long-term assets and investments; financing activities show transactions involving borrowings and owners' capital.

Question 31

What does the current ratio test?

Accepted Answer

Current assets divided by current liabilities indicates short-term balance-sheet liquidity. A higher ratio is not automatically better because slow inventory or overdue receivables may inflate current assets.

Question 32

Why is the quick ratio stricter than the current ratio?

Accepted Answer

It focuses on more liquid current assets, commonly cash, short-term investments, and receivables, and excludes inventory and other less readily convertible items before dividing by current liabilities.

Question 33

What does the debt-to-equity ratio indicate?

Accepted Answer

Debt divided by shareholders' equity indicates the extent to which debt financing is used relative to owners' capital. Compare like-for-like definitions and industry peers before drawing a conclusion.

Question 34

How is gross profit margin calculated and interpreted?

Accepted Answer

Gross profit divided by revenue, multiplied by 100. It shows the share of revenue remaining after the directly attributable cost of goods or services, before operating expenses, finance costs, and tax.

Question 35

What does return on equity measure?

Accepted Answer

Net profit attributable to equity holders divided by average shareholders' equity is a common formulation. It shows profit generated relative to owners' capital, but leverage can raise both the ratio and financial risk.

Question 36

What is working capital?

Accepted Answer

Current assets minus current liabilities. It is a liquidity measure, but the quality and timing of receivables, inventory, and payables matter more than the total alone.

Question 37

What warning appears when receivables grow much faster than revenue?

Accepted Answer

Cash collection may be weakening or revenue recognition may deserve closer review. The Board should examine ageing, credit terms, customer concentration, subsequent collections, and expected-credit-loss assumptions before concluding why.

Question 38

How do qualified, adverse, and disclaimer audit opinions differ?

Accepted Answer

Qualified means a material issue is not pervasive; adverse means material and pervasive misstatement; disclaimer means the auditor cannot obtain sufficient evidence and the possible effects may be material and pervasive.

Question 39

How does the Board's role differ from management's role?

Accepted Answer

The Board provides direction, approves major strategy and risk boundaries, appoints and oversees leadership, and holds management accountable. Management executes strategy and runs day-to-day operations.

Question 40

What does independence in substance require from a director?

Accepted Answer

Objective judgment free from relationships, incentives, or pressure that impair challenge. Meeting a formal eligibility test is necessary, but effective independence also requires questioning evidence and forming one's own view.

Question 41

What should a prospective independent director examine before joining a Board?

Accepted Answer

The business model, financial condition, ownership, litigation and regulatory exposure, governance record, Board dynamics, expected workload, access to information, and available director-indemnity and insurance arrangements.

Question 42

What is the sound governance response to a personal conflict of interest?

Accepted Answer

Disclose it promptly and fully, follow the applicable law and policy on participation or recusal, and ensure the decision and safeguards are properly documented. Silence does not preserve independence.

Question 43

Why should a Board encourage constructive dissent?

Accepted Answer

Respectful challenge exposes weak assumptions, alternatives, and risks before a decision is fixed. A chair should draw out minority views and prevent hierarchy or groupthink from suppressing relevant evidence.

Question 44

What makes a Board information pack decision-useful?

Accepted Answer

It is timely, concise, accurate, comparable, and explicit about assumptions, alternatives, risks, and decisions required. Directors should request missing source data rather than accept an attractive summary at face value.

Question 45

What is the purpose of Board evaluation?

Accepted Answer

To identify how the Board, committees, and individual directors can improve composition, preparation, information flow, challenge, decision-making, and follow-through. It should produce actions, owners, and review dates rather than a compliance score alone.

Question 46

Why do related-party transactions require heightened governance?

Accepted Answer

A related party may influence terms away from the company's interests. Directors should verify identification, business purpose, pricing and alternatives, required approvals, abstentions, disclosures, and post-approval monitoring.

Question 47

What makes a whistleblowing system credible?

Accepted Answer

Safe and accessible reporting channels, protection against retaliation, independent triage, competent investigation, confidentiality, remediation, and reporting to an oversight body such as the Audit Committee.

Question 48

What is the Board's role in risk appetite?

Accepted Answer

The Board approves the nature and amount of risk the company is prepared to accept in pursuing objectives, checks alignment with strategy and capacity, and monitors whether actual exposures and breaches stay within that boundary.

Question 49

What should the Board do during a corporate crisis?

Accepted Answer

Establish reliable facts, protect people and critical operations, clarify decision rights, oversee lawful and timely disclosure, test management's response and liquidity, preserve evidence, and review causes and remediation after stabilisation.

Question 50

How should stakeholder interests enter a Board decision?

Accepted Answer

Identify materially affected stakeholders, understand lawful duties and likely impacts, compare options and mitigations, and document the reasoning. Stakeholder analysis informs judgment; it does not eliminate accountability to the company and applicable law.

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