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Meaning and concept of a nominee director
A nominee director is a person appointed to the board of directors of a corporation by an institution, such as a bank or a financial institution, in which the institution has an interest. This ‘interest’ could take the form of financial aid, such as loans or stock purchases, which could have a direct effect on a nominator’s profitability. As a result, the appointment of a nominee director is important to enable the control of the investee company’s activities and business. The main aim of appointing such people is to protect the nominator’s interests while adhering to his or her fiduciary responsibility as a director. A Nominee Director serves as a link between the Nominator and the Investee Business. A nominee director has a range of roles and obligations, including adequate conflict of interest disclosure, reporting to the nominator, and protecting the company’s overall interests.
Definition of Nominee Director under Companies Act, 2013:
Explanation to Section 149 (7) of the Companies Act, 2013 defines “nominee director” as a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.
A director nominated by any financial institution in accordance with the provisions of any law currently in force, or of any arrangement, or appointed by any Government, or any other person to represent its interests is specified in the Explanation to Section 149 (7) of the Companies Act, 2013.
A nominee director in a company cannot be considered as an independent director under Section 149(6) of the Companies Act, 2013.
Under Companies Act, 2013, the appointment of a nominee director is made in accordance with section 161(3):
“(3) Subject to the articles of a company, the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.”
A nominee director is usually “nominated” by a nominator. The nominator has full power over appointment, dismissal, resignation, and cessation, and the terms and conditions of appointment are incorporated into a long-term agreement or a shareholders’ agreement with the investee company. Since a nominee director is usually appointed on the nominator’s terms, unless otherwise specified in the shareholder’s agreement, his office is subject to rotation.
In addition, under Rule 18(3)(e) of the Companies (Share Capital and Debentures) Law, 2014, the Debenture Trustees shall nominate nominee directors to the board of directors in order to protect the rights of debenture investors and to resolve their grievances.
Purpose of appointment of a nominee director
The prime objective of appointing a nominee director is to represent the nominator’s interests and to protect those interests unless they conflict with the interests of the company as a whole. Such a director serves as a “watch dog” for the nominator, keeping an eye on the company’s operations, events, and developments, which the nominator might be unable to do.
Key points for appointing the Nominee Director-
a) Each financial institution should appoint the nominee director in compliance with any law or the terms of an agreement entered into by the company.
b) The director’s appointment by the government or some other person.
c) The person named as a Nominee director is responsible for representing the organization/institution he represents.
Office of a Nominee Director
According to section 152(6) of the Companies Act, 2013, at least two-thirds of the directors of a public company must be those whose positions are subject to rotation. At each Annual General Meeting of the Company, one-third of these directors must retire.
As a result, the power of nomination is limited to 1/3 of the total number of directors of the investee company. Alternatively, the nominator can simply recommend the appointment of its preferred director designate, and such recommended person’s appointment shall be made only by shareholders in general meeting. In any circumstance, the right to appoint must be acquired from the investee company’s articles of association or any shareholders’ agreement between the shareholders.
Role of nominee director General roles and responsibilities
• Represent and protect the nominator’s interests by making correct recommendations to the investee company’s Board of Directors, and ensuring that the suggestions are taken into consideration when making decisions, at all times during his appointment.
• Act as a “watchdog” for the investee company’s activities. He must make his presence known by putting his knowledge at the disposal of the investee company’s board of directors.
• Play an important role in the policymaking of investee companies by participating in consultation with other members of the investee company’s Board of Directors and taking an active role in the enhancement of the investee company’s vision, mission, and values.
• While a nominee director is a non-executive director, he must be actively involved in decisions affecting the investee company’s financial performance, fund-raising plans, including debt-raising, investments, and so on.
• Must not abstain from voting on proposals considered at meetings of the Board of the investee company concerning the nominator, unless the proposal includes the personal interest of the nominee director.
• In consultation with the nominator, recommend appropriate corporate governance practises for the management of the investee business.
• Make sufficient disclosures as provided by section 184 of the Companies Act of 2013.
• In addition to the disclosure provisions set out in section 184 of the Companies Act, 2013, the nominee director must report to the nominator any personal interest in the investee business that conflicts with/is likely to interfere with his fiduciary duties as a director and as a nominee of the nominator before taking office as a nominee director, and as and when the situation changes. Report on a regular basis as directed by the nominator.
• All the functions and obligations enumerated under Section 166 of the Companies Act, 2013
• During the process of relinquishing his role as a nominee director, he must cooperate.
• In addition to the above, a nominee director must show reasonable caution and care while dealing with unpublished price sensitive information in case of a listed company and has come to know it or is in a role where it is likely to be known or aware of it. The nominee director must follow the listed entity’s Codes of Conduct to Regulate, Monitor, and Report Insider Trading at all times. He should stay informed on any recent policy developments and regulatory amendments that may have a direct or indirect effect on the activity of the investee business and/or the performance of his duties as a nominee director.
• He must ensure that the investee company’s policy decisions are based on sound economic principles and are backed by sufficient commercial reasoning and safeguards.
Responsibilities to the business and the nominator
A nominee director serves two purposes: first, as a nominee of the nominator, and second, as a representative of the shareholders, protecting the company’s overall interests.
Procedure for appointment of Nominee Director
Prior to appointing the Nominee director, the following procedure must be followed.
1. Verify that the company’s articles contain the authority to name a nominee director, as required by the Companies Act 2013. If the article does not already provide for this, amend it to allow the company to nominate the Nominee Director. The appointee Nominee director receives a confirmation letter in his or her favour.
2. To see if the person in question has both a DIN and a DIR-3.
3. Verify that the proposed director has given his or her written permission to serve as a director by way of Form DIR-2.
Documents required as an attachment for DIN-
- Identity Proof of the applicant
- Address Proof
- The proposed director must certify in form DIR-8 that he is not excluded under Section 164(2) of the Companies Act, 2013.
- 5. The Board of Directors may approve the appointment of the Nominee Director at a Board meeting after giving all directors notice by passing a resolution. The notice must be submitted to the directors at least 7 days prior to the meeting date.
- The meeting’s agenda will be disclosed.
- Pass a Board resolution to appoint a Nominee Director u/s section 161(3) for convening a Board meeting.
- Authorizing the Company Secretary, or the director in the absence of the Company Secretary, to sign the necessary documents and file them with the ROC.
6. Within 30 days of passing the Board resolution, file form DIR-12 with ROC as a return of appointment.
• The Nominee Director’s details, as well as the DIN, are included in the DIR-12 attachment list.
• The Nominee Director’s Consent
• Nominee director’s CTC (Certified true copies of the Board resolution passed for the appointment).
• As required, a letter of documents and other ancillary details
Following the appointment, the Nominee director is expected to make a disclosure, i.e., the Nominee director must notify the other companies of which he is a director of the appointment via form MBP-1.
MBP-1 should be dated no earlier than when he or she was appointed as director. However, if the director fails to report his or her interest in specified entities, form MBP-1 may be obtained afterwards when his interest is created.
To keep up with the changing demands of the business world and to ensure that the company’s activities are not jeopardised by a lack of funds, the majority of businesses are finding loans from financial institutions or banks to finance their business decisions.We also come across numerous scams in which corporations make decisions that are harmful to the interests of financial institutions / banks and, as a consequence, the general population is affected indirectly. In response to such scams, Financial Institution(s) / Banks now appoint Nominee Director(s) to the Borrower Company’s board of directors before approving loan applications to protect their interests. This is intended to ensure that none of the board’s decisions have adverse consequences for the Financial Institution(s) / Banks and the general public.