Who is a Nominee Director?
A Nominee Director is an individual nominated by an institution, including a bank/ financial institution/ private equity firm etc, on the Board of a company in which such an institution has some ‘interest’. The ‘interest’ can be in the form of financial assistance, such as in the form of a loan, or an investment in shares of the company. The Nominee Director is a Non-Executive Non-Independent Director on the Board. He/she does not usually get remuneration from the company on whose Board he/she is appointed.
Why is a Nominee Director appointed?
Since the interest of the nominating institution is to be safeguarded, it appoints a Nominee Director, in order to facilitate the monitoring of operations and business of the investee company, to safeguard its exposure in the form of equity and/or debt.
Role and responsibilities of a Nominee Director
The Nominee Director has the same role and responsibility as any other Director on a Board. In particular, the Nominee Director should,
- act in good faith and with honesty in the company’s best interests. He/she should consider the interest of the company on whose Board he/she is a Director while deciding on issues before the Board.
- avoid conflict of interest. There could be situations when there could be a perceived or actual conflict between the interest of the company and the interest of the nominating institution. In such cases, he/she should attempt to harmonise the interests of the nominating institution and the company.
- not exploit the power/ influence derived from his/her position on the company’s Board. He/she should not use the position of a Director to further his/her interest.
In addition to the roles and responsibilities of a Director, he/she should
- Not unduly get in the way of the company’s management by asking for information that need not be legitimately provided to him/her.
- Not create a situation by which he is privy to any information which other Board members do not know.
- Not create a situation by which he is privy to any information which other shareholders do not know.
Conflict of Interest
A nominee, being a representative of an investing institution, has a dual, and sometimes conflicting position. On the one hand, as the Director of the company, he has to serve the company and take actions which are in the best interest of the company. At the same time, since he has been appointed to protect the interests of the investing institution, he has to also make sure that the investor’s interests are safeguarded. This is never an easy choice. Section 166 of the Companies Act, 2013 lays down that “A Director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.”
The Director should always remember that as a Director, he/she should not be a party to any decision which is against the interest of the company.