Nominee Director under Companies Act, 2013

Nominee directors play an important role in the corporate governance structure of a company. They are individuals appointed by a specific entity, such as a financial institution, government body or shareholder, to represent their interests on the board of directors of another company.

In this article, we will discuss the concept of nominee directors, their roles and responsibilities, the legal framework governing their appointment and their significance in company law.

Meaning of Nominee Director under Companies Act, 2013

A nominee director under Company Law is an individual appointed by a shareholder, financial institution or government entity to represent their interests on the board of directors of another company. The nominee director acts as a liaison between the appointing entity and the company, ensuring that the appointing entity’s interests are considered in board decisions.

While the nominee director may have a fiduciary duty to the appointing entity, they also have a duty to act in the best interests of the company as a whole. Nominee directors are common in situations where one entity has a significant investment or interest in another company but does not want to directly manage its affairs.

Definition of Nominee Director under Companies Act, 2013

According to Section 149(7) of the Companies Act, 2013, a “nominee director” is a director appointed by a financial institution in accordance with the provisions of any applicable law or agreement or appointed by a government or any other entity to represent its interests.

It is important to note that a Nominee Director cannot be classified as an Independent Director in a company, as specified in Section 149(6) of the Companies Act, 2013.

Section 161(3) empowers the Board to appoint any individual as a director nominated by an institution in accordance with the provisions of any applicable law or agreement or by the Central Government or State Government due to their shareholding in a Government company.

Additionally, Debenture Trustees are required to appoint nominee directors to the board of a company to safeguard the interests of debenture-holders and address their grievances, as per Rule 18(3)(e) of the Companies (Share Capital and Debentures) Rules, 2014.

Purpose of Nominee Director

A nominee director is appointed to ensure the protection of the interests of the financial institution involved. Additionally, the nominee director is tasked with fulfilling responsibilities towards the borrower company and its stakeholders. The nominee director is accountable for the institution or investor and also oversees the activities of the borrower company or investee.

Conditions for Appointing a Nominee Director

The following conditions must be met for appointing a nominee director under the Companies Act:

• The appointment should be made in accordance with any applicable law or the terms of an agreement entered into by the company when a financial institution considers or decides to appoint a nominee director.
• The appointment can be made by the Central/State Government or any other person authorised under relevant legal provisions.
• The appointed nominee director should represent the interests of the organisation or institution appointing them.

Nominee Director of Financial Institutions

When a nominee director is appointed in financial institutions incorporated under the Companies Act, compliance with the provisions of the Companies Act is necessary. The nomination can be made if the Articles of Association (AOA) of the company allow for such nominations. Furthermore, the nomination must adhere to the provisions of the Companies Act, 2013. The nomination is restricted to one-third of the total number of directors of the investee company.

Nominee Director of Special Financial Institutions

For nominee directors of financial institutions established under a special act of parliament, compliance with the Companies Act and the Articles of Association (AOA) of assisted companies is necessary. The company must acknowledge such appointments at a board meeting and submit the necessary details of the directors in Form DIR-12. Nominees from banks like IDBI, IFCI, LIC, SFCs and UTI can be appointed as directors on the board of assisted companies, even without complying with the provisions of the Articles of Association or the Companies Act, 2013.

Features of a Nominee Director

The features of a Nominee Director can be outlined as follows:

Safeguarding the interests of the nominator: A nominee director oversees the company’s operations to ensure that policy decisions are made based on sound commercial principles and rationality, with adequate safeguards to protect the interests of the nominator.

Information bridge: The nominee director serves as a liaison between the investee company and the nominator for a regular flow of information. It should be noted that the sharing of confidential information by the nominee director raises questions. Judicial principles suggest that while the nominee director has the right to receive information about the company, they are not obligated to share information with the nominator solely by virtue of the nomination. Any duty to share information may arise from a separate agreement between the nominator and the nominee, as seen in the case of Hawkes v Cuddy.

Participation in decision-making: The nominee director actively participates in discussions regarding the company’s financial performance, future plans, fundraising, etc. The objective is to apply their expertise to protect the interests of the nominator.

Maintenance of confidentiality: Although a nominee director has allegiance to the nominator, they are expected to adhere to the code of conduct for directors and key managerial personnel. This responsibility increases when the investee company is a listed entity, as there are compliance requirements regarding unpublished price-sensitive information. In Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543, it was held that the duty of confidentiality of a director was greater than the duty owed to the nominator.

Is a Nominee Director Independent?

According to Section 149(6) of the Companies Act, 2013, an independent director is a director other than a managing director, whole-time director or nominee director who does not have any material or pecuniary relationship with the company/directors and fulfills other specified criteria. Therefore, it is explicitly clear that a nominee director is not considered an independent director under the Act.

Procedure for Appointment of Nominee Director under Companies Act, 2013

The appointment of a Nominee Director can be done in two ways:

By Passing a Resolution in a Board Meeting

• Issue a Notice of Board Meeting to all Directors of the Company at least 7 days before the meeting date (shorter notice possible for urgent business).
• Hold a Board Meeting to consider the agenda and select the Nominee Director.
• Pass a Board Resolution to appoint the Nominee Director.
• Issue a letter of appointment to the Nominee Director, specifying the terms and conditions of the appointment and remuneration.
• Authorise the Company Secretary or any Director to sign and submit the required documents with the Registrar of Companies and to take necessary actions to implement the Board’s resolution.
• Prepare and distribute Draft Minutes to all Directors for comments within 15 days after the Board Meeting.

By Passing a Resolution through Circulation

• Before circulating the draft Resolution to all Directors, the Chairman of the Board or in his absence, the Managing Director or any Director other than an Interested Director, shall decide whether the Board’s approval shall be obtained by Resolution through circulation.
• Prepare the Resolution and relevant papers and deliver them to all Directors’ registered postal addresses by approved methods.
• The Resolution should describe all aspects of the proposal, including material facts, purpose, scope and ramifications.
• Directors have seven days to respond from the date of distribution.
• If at least 1/3rd of Directors desire to decide the Resolution at a Board Meeting, the Chairman should hold the Resolution under consideration at a Board Meeting.
• When a majority of eligible Directors accept the Resolution, it is considered approved.
• Acknowledge the Resolutions passed by circulation at a later Board meeting and record the wording of the resolution in the Minutes.

After the resolution is approved, the following steps should be taken:

Consent and Declaration from the Proposed Director

The Proposed Director must submit Form DIR-2 (Consent to Act as a Director) and Form DIR-8 (Intimation by Director regarding his disqualification) to the Company.

Filing of Returns with the ROC:

Within 30 days following the Board meeting, submit a Return of Appointment of Directorship (Form DIR-12) with the Registrar, along with a copy of the Board Resolution, Consent and Declaration.

Obtain Form MBP-1 from the Appointed Director:

Within 30 days of appointment or at the first Board Meeting in which he participates as a Director, obtain the Appointed Director’s declaration on Form MBP-1 detailing his stake in other companies.

Making Necessary Entries in Register of Directors:

Make the appropriate entries in the Register of Directors and Key Managerial Personnel.

It’s important to follow these steps diligently to ensure compliance with the Companies Act, 2013, regarding the appointment of a Nominee Director.

Significance of Nominee Directors in Company Law

Nominee directors play an important role in ensuring transparency and accountability in corporate governance. They bring diverse perspectives to the boardroom and contribute to informed decision-making. Their presence also helps in maintaining a balance of power between the shareholders and the management, thereby enhancing the overall governance structure of the company.

Conclusion

Nominee directors are an integral part of the corporate governance framework in India. Their appointment and role are governed by the Companies Act, 2013 and they play a vital role in representing the interests of the nominating entity while contributing to the strategic direction of the company. Understanding the role and significance of nominee directors is essential for ensuring effective corporate governance practices in companies.