Nominee directors play an essential part in the structure of corporate governance for an organization. They are the individuals chosen by a particular entity for example, an financial institution, a shareholder, or government agency for the purpose of representing their interest on the boards of a different company.
The article we’ll examine the notion of nominee directors as well as their responsibilities and roles and the legal framework that governs their appointment, and the significance in the law of companies.
Nominee Director
A nominee director as defined by Company Law is an individual appointed by the shareholder bank, financial institution or other government agency in order to be a representative on the boards of directors of a different company. The nominee director serves as the liaison between the appointing entity as well as the company, and ensures that the interests of the entity appointing them are taken into consideration when making board decisions.
Although the nominee director might have a fiduciary obligation to the entity appointing them however, they are also bound to do what is in the best interest of the business in general. Nominee directors can be found in situations in which one entity has an investment or stake in another business however, it does not wish to manage its affairs directly.
Nominee Director definition under the Companies Act, 2013
As per the provisions of Section 149(7) of the Companies Act, 2013,”nominee director” is defined as “nominee director” is a director who is appointed by an institution of finance conformity with the provisions of an applicable agreement or law, or appointed by a state or any other organization to represent the interests of the institution.
It is crucial to remember that a nominee director cannot be considered an independent Director within a company as per section 149(6) of the Companies Act, 2013.
161(3) empowers the Board to appoint any director. 161(3) authorizes the Board to nominate any person as a director who is nominated through an organization in compliance with requirements in any law, agreement or other applicable statute, or through any of the Central Government or State Government due to their participation in a company owned by the Government.
In addition the Debenture Trustees are required to nominate director nominees to the company’s board to protect the interests of holders of debentures and resolve their complaints in accordance with the rules of 18(3)(e) of the Companies (Share Capital and Debentures) Rules, 2014.
Purpose of Nominee Director
The nominee director is selected to safeguard the interest of financial institutions concerned. In addition nominated directors are charged with responsibilities to the company of the borrower and its shareholders. Nominated directors are accountable to the investor or institution, and supervise the actions of the borrower’s company or investor.
Conditions for Appointing a Nominee Director
The following requirements have to be met in order to appoint nominated directors in accordance with the Companies Act:
- The appointment should be conducted in accordance with the laws in force or provisions of any agreement signed by the company in the event that a financial institution is considering or chooses to appoint an unqualified director.
- The appointment may be done through an official of Central/State Government or any other authorized person under the relevant legal rules.
- The nominee director appointed must represent the interests of the institution or organisation who appointed them.
Nominee Director of Special Financial Institutions
Directors who are nominees of financial institutions that were established pursuant to a specific statute of the legislature and in complying with Companies Act and the Articles of Association (AOA) of assisted companies is required. The company has to acknowledge these appointments in an annual board meeting, and then submit the required information about directors in the form DIR-12. Nominated directors from banks like IDBI, IFCI, LIC, SFCs and UTI can be appointed directors on the boards of assisted businesses, even without observing the requirements that are in Articles of Association or the Companies Act, 2013.
Features of a Nominee Director
The characteristics of a Nominee Director can be described in the following manner:
Protecting the interests of the person who nominated The nominee director supervises the business’s operations to make sure that decisions regarding policy are in accordance with sound commercial principles and logic as well as having adequate safeguards in place to safeguard interest of the nominee.
Information bridge The nominee director acts as a bridge between the investment company and the person who nominated them to provide regular circulation of details. It is worth noting that sharing sensitive information by the nominee director may raise concerns. The law suggests that, while the director who is nominated is entitled to access information about the business but they are not required to divulge information to the nominee solely because of their nomination. Any obligation to share information could be derived from a separate contract between the nominee and the nominee, as was demonstrated by the decision of Hawkes v. Cuddy.
Participation in decision-making: The nominated director is actively involved in discussions concerning the financial performance of the company and future plans, fundraising, etc. The goal is to use their knowledge to safeguard those interests that are important to the nominee.
Maintaining confidentiality: While nominated directors have allegiance to the nominee however, they must respect rules of conduct that governs directors and other key personnel in the management. This obligation increases when the entity investing them is a listed entity as there are strict compliance requirements pertaining to non-publication of price sensitive information. When it came to Harkness the case of Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543 It was decided that the confidentiality obligation of directors was higher than the duty of confidentiality owed to the nominee.
Is a Nominee Director Independent?
In accordance with section 149(6) in the Companies Act, 2013, an independent director is a person that is not managing director, full-time director or nominee who is not in any relationship of any kind with the directors of the company or director and who meets other requirements. So, it is obvious that nominated directors are not independent directors in the Act.
Procedure for the Appointment of Director Nominee pursuant to the Companies Act, 2013
The nomination of a nominee Director may be accomplished in two methods:
By Passing a Resolution in a Board Meeting
Distribute a Notice about Board Meetings to Directors in the Company at minimum 7 days prior to the date of the meeting (shorter notice may be possible in the case of important business).
Conduct a Board meeting to discuss the agenda and choose the Director nominee.
Make an Board Resolution to nominate the Director nominee.
Provide a letter of nomination to the Nominee Director detailing the conditions of appointment as well as compensation.
The Company Secretary or any Director is authorized by Company Secretary or any Director to authorize Company Secretary or director to sign the resolution and file the necessary documents to the Registrar of Companies and to adopt the necessary steps to carry out the Board’s resolution.
Create the Draft Minutes to all Directors to be reviewed within 15 days of the Board Meeting.
Through the passage of a resolution through Circulation
Before sending the proposed Resolution to Directors everywhere The chairman of the Board or, in his absence the Managing Director, or any Director, if not an interested Director, must determine if Board approval is obtained through Resolution by means of distribution.
Create the Resolution along with any relevant documents, and mail the Resolution and related papers to all Directors at their registered postal addresses in accordance with approved procedures.
The Resolution should outline all the aspects of the proposal, such as important facts, its the purpose, scope and implications.
Directors are given seven business days in which to reply within seven days of the date of distribution.
If at minimum 1/3 of Directors wish to vote on the Resolution during the Board Meeting The Chairman should take the Resolution in the midst of the Board Meeting.
If a majority of the directors who are eligible to vote on the Resolution the Resolution is deemed to be approved.
Recognize the Resolutions that were circulated at a subsequent Board meeting. Record the resolution’s wording into the Minutes.
Once the resolution has been accepted, the next actions should be followed:
Consent and a Declaration from the proposed Director:
The Director who is proposed must file Formula DIR-2 (Consent to Become Director) and Form DIR-8 (Intimation of Director’s exclusion) for the Company.
Filing of Returns using the ROC:
Within 30 days of at least 30 days following the Board meeting, you must submit the Return of Appointment for directorship (Form DIR-12) together with the Registrar and an official Copy of the Board Resolution Consent, Declaration and Consent.
Request Form MBP-1 at the Director appointed by the director:
within 30 days after being appointed or at the very first Board Meeting at which he is a participant as a Director the Director’s appointment declaration on Form MBP-1 that outlines the percentage of his shares in other businesses.
Making Necessary Entries in Register of Directors:
Include the correct entries into The Register of Directors and Key Managerial Personnel.
It’s crucial that you follow the steps carefully to ensure that you are in compliance to the Companies Act, 2013, concerning the nomination of a nominee Director.
Significance of Nominee Directors in Company Law
Nominee directors play a crucial function in ensuring transparency as well as the accountability of corporate governance. They bring a variety of viewpoints to boards and aid in an informed decision-making process. Their presence is also helpful to maintain an equilibrium of power between management and shareholders and thereby improving the overall structure of governance of the business.
Conclusion
Nominee directors form an integral component of the corporate governance system in India. Their selection and function is controlled by the Companies Act, 2013 and they play an important function as they represent the interest of the entity that is nominated as well as helping to determine the direction of the business. Understanding the significance and role of directors who are nominees is crucial to ensure efficient corporate governance practices within businesses.