Director Fit-and-Proper: Net Worth Requirements Explained

Fit-and-Proper Tests Look at the Director's Personal Worth, Not the Company's

Within the fit-and-proper criteria, net worth is one strand of a wider question about financial soundness. Depending on the regulator, it typically sits alongside such questions as these.

What the regulator is deciding is whether a particular person should hold a position of trust inside a licensed entity. Money answers only part of that.

Where the Requirement Comes From: RBI, SEBI and IRDAI Rules

Each financial regulator has its own source.

Thresholds and Declarations a Director Signs

Directors expect a minimum figure here and usually do not find one.

Minimum net worth figures in this area generally attach to the licensed entity, not to the individual, which is why a search for a director's minimum keeps returning the entity's capital requirements.

The declaration does the work a number would have done. A typical format asks for:

1. directorships and shareholdings held;
2. relationships with the entity and its group;
3. professional and academic qualifications;
4. any adverse order, conviction or pending proceeding;
5. an undertaking to keep all of it current.

Nothing is collected and left unread.

1. The declarations come inSigned, in the prescribed format, with any annexures.
2. The nomination committee examines themAnd decides whether to accept them.
3. The board records its conclusion in the minutesThat is the moment a self-declared figure either stands on evidence or visibly does not.

The written representation obtained describes the same mechanism as it works in an assurance engagement.

How a Director's Certificate Differs From the Company's

The two statements share a name and little else.

Disclosures on Guarantees, Defaults and Pending Cases

• Personal guarantees

  A personal guarantee never appears among a director's assets, but it can dominate a reviewer's view. Promoters routinely guarantee group borrowings, and the exposure stays contingent until it is not. A reviewer expects each guarantee declared:

  For each onethe borrowerthe facilitythe amount outstanding
• Default history

  This is checked independently of what is declared.

  A classification follows the person across entities; no declaration format will bury it.

• Pending proceedings

  These are declared as pending, not as decided. Each takes its own line:

  Criminal proceedingsRegulatory ordersRestraint ordersTax demands under appeal

  Understating here is treated far more seriously than the underlying matter, because it goes to integrity rather than solvency.

• Director disqualification

  A separate question from net worth.

  A director can be wealthy and disqualified

  or

  of modest means and fully eligible

Renewal and Annual Reconfirmation Duties

The obligation does not end at appointment.

1. On joiningA declaration when a director joinsBoards usually obtain one at appointment.
2. At regular intervalsAgain, commonly each year The annual one either confirms nothing has changed or sets out exactly what has.
3. In betweenWhen something changesThe duty to report a change in between sits with the director, not with the secretarial team collecting forms.

Some events cannot wait for the annual cycle. Each of these should trigger an update when it happens:

• a new personal guarantee;
• a default on a facility;
• a new directorship;
• an adverse regulatory order or a charge sheet;
• a material change in the position already declared.

A director of a company whose capital is gone will be asked about it at the next committee meeting, not at the next renewal.

Where a declaration rests on a financial figure, the evidence behind it ages at the same rate as the figure.

Refreshing it on the annual cycle keeps the two in step, and the certificate is what a committee reads beside the signed form.