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Test of Integrity for an Independent Director under Companies Act 2013

Sundharesan Jayamoorthi 
on 27 January 2015

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The Companies Act 2013 (referred as “the Act”) has introduced lot of funny governance compliances and every Independent Director requiring to issue a declaration of integrity under section 149(6) is one such thing, in India it may be pass off as an act of Agnipariksha. With lots of ambiguity and non-obstante clauses this draconian Act seems to be the biggest stumbling block for driving the initiative “Make in India” and “Ease of doing business”. In fact some of the provisions of the Act is working contrary with the ideologies of the leader of the country, which means the Vision Statement of the CEO of this country itself may be failing, on account of the Act.

What is test of integrity – Agnipariksha

Agnipariksha, in the epic Ramayan required Sita wife of Rama to take a test to prove her chastity. The test of integrity is a similar concept introduced by the Act for all Independent Director who have to prove their integrity to the stakeholders of the Company. The inclusion of the clause seems to be an influence for the regulator who drafted this requirement in section 149(6) and a law for independent directors on these lines has made it mandatory for the appointee to undergo a test for not proving chastity but integrity. This self-declaration would require every person to have a conscience, moral values and a sense of responsibilities.

What is integrity?

The dictionary meaning of integrity is the quality of being honest and having strong moral principles.

What is the modus operandi to prove?

As an independent director before he issues this declaration should he recall all the incidents from the time of his birth before declaring that he has done no wrong, as the period of validation is not mentioned in the Act?

Does this mean we have to find an independent director who has done “NO WRONG” in his entire life cycle? If this is too much for the asking should the Independent Director issue this declaration for the last one year?

For validating the integrity of a person, let us examine whether jumping a traffic signal is an offence (in fact the government is planning to engage a super star to educate Indians on traffic rules and offence).

There are simple questions that an independent director can testify before issuing a declaration of integrity, and this can be applied for all the potential issues inter alia, payment of his personal tax. In a traffic offence case, the questions can be:

i) Did he jump any traffic signal in the last one year?

ii) Did he get caught for the offence?

iii) Did he pay a fine?

iv) If he was not caught, should he disclose and fail the integrity test?

v) If he was not driving his vehicle and his driver jumped the signal when he there inside the car and he did not stop this act?

In case the person has committed any of the above actions will he FAIL the test of honesty or morality? Will he FAIL the test of integrity and will the declaration of integrity be in the negative? If he pays fine will he be considered honest?Test of Integrity for an Independent Directors under Companies Act 2013

What is the legal requirement?

As per section 149(7), every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6).

The declaration under section 149 (6) states “an independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director and he has to give this declaration:

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience; “

The following are the issues that may arise on account of this declaration:

i) How can the Board form an opinion on the integrity of a person?

ii) How can an Independent Director prove to the Board that he is a person of integrity?

iii) Why should the Board vouch for the integrity of a person?

iv) In case a person is identified as a person of integrity, thereafter commits an offence will he lose his certificate of Integrity?

v) In case he loses his test on integrity, is he eligible for re-appointment?

vi) When should the independent director report to the Board about the violation?

vii) When can the independent director resign?

viii) Will the integrity test be only for business issues or for integrity in his profession or integrity in his personal life?

What to give?

A Self Declaration titled Declaration of Integrity, as there is no specific format issued by the regulators this certificate will form part of a lengthier declaration prescribed under section 149(7).

When to give?

Every independent director shall:

i) At the first meeting of the Board in which he participates as a director

ii) And thereafter at the first meeting of the Board in every financial year

iii) Or whenever there is any change in the circumstances which may affect his status as an independent directorTest of Integrity for an Independent Directors under Companies Act 2013

Who should give?

All Independent directors who are being appointed in a listed or unlisted company on or after April 1, 2014.

Whom to give?

This declaration has to be addressed to the Board of Directors of the Company.

What is the reporting requirement?

The declaration given by the independent director has to be included to the report of the Board of Directors under section 134(3)(d) “a statement on declaration given by independent directors under sub-section (6) of section 149.”

The Act is not clear whether the declaration of all the independent directors is required to be attached to the Directors’ report of it has to be an integral part of a report. Included in this section means contained in the report and hence it is advisable to make it part of the regular content with a separate heading – declaration from independent directors and paste all the declarations of the Independent Directors (the report of directors will be at least a 100 pages)

Onus of compliance

Once a director gives the declaration the onus is on the Board to place it at a meeting of the Board and consider it and take note of its contents. This declaration has to be included to the report of board of directors for circulation to members, which means the board has to approve the declaration alongwith the directors’ report. The ownership of validity of the declaration of integrity is on the Board. 

What is the consequence if the director fails to give the declaration?

There is a punishment laid out in section 172 of the Act wherein a fine of not less than rupees fifty thousand rupees to a maximum of rupees five lakhs for non-compliance. If the director does not give the declaration then he will violate the provisions of companies act and he will have to pay the fine.

A bad drafting giving scope for interpretation and does not seem to lead corporate governance anywhere and requires the regulators to take the Agnipariksha. If the regulators draft laws that are ambiguous, the least that is expected is a clarification in support of these loose drafting.


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