lawyers in India

Nomination by Shareholders of A Director From The Promoter Company

Written by: Anando Mukherjee - student of fifth year of 5yr integrated law course of BBA.LL.B from Symbiosis Law School, Pune
International law
Legal Service
  • With the advent of various national and multinational companies in India, the Companies Act has gone through several amendments. Further, after various national and international scams taking place like that of Harshad Mehta, Enron and World Com, the importance of corporate governance has attained a paramount position. In India, SEBI has taken the initiative to deal with the aspect of corporate governance by introducing Clause 49 of the Listing Agreement. This has resulted in multiplicity of laws and the complexities involved in them.

    One such complexity arises from the fact that when the shareholders of the Promoter Company nominates a person as director from such Promoter Company, whether such person such qualifies as Promoter Director?

    For answering such a query, we have to analyse the various possibilities which such a person would gain. There are several questions which we need to raise and answer before we could really conclude something on the given query at hand.

    These questions include as to who are Promoter Directors? What is the position of Nominee Directors? Can the shareholders appoint Nominee Directors?
    There are basically three possibilities where shareholders nominate a person from the Promoter Company as director. Such a person can be a Promoter Director or a Nominee Director or both. So first of all we try to ascertain as to what the term Promoter Director mean.

    The term Promoter Director is not defined in the Companies Act nor does it find a place in SEBI's definition. It is a very general concept based on the concept of Promoter. It basically means in its very common and general parlance, a Promoter who also acts as a Director of the company. So we now look at what does the term Promoter means. Again the term Promoter is not defined in Companies Act. SEBI has defined the term Promoter as a person or persons who are in overall control of the company, who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as promoters. It may be noted that a director/officer of the issuer company or person, if they are acting as such merely in their professional capacity are not to be included in the definition of promoter.

    Thus taking the above definition and analyzing them leads to a general proposition that a Promoter Director is a Non Executive but a Non Independent Director. Therefore if a person is independent, he can't be a Promoter Director.

    Taking a look at the other possibility i.e. Nominee Director, we find that usually the Articles of Association of some companies would contain a clause to say that some interested Promoter Group or foreign collaborator or the financial institutions have the right to nominate some persons as their nominees on the board of the company and such directors shall not be liable to retire by rotation. This was held in British Murac Syndicate Ltd. V Alperton Rubber Co. Ltd and Somesh Chandra Manilal Nanavati V Jivanlal C. Chinai

    It must be noted here that Promoter Group includes a Promoter Company.

    But we have to look whether shareholders have the right to nominate or appoint a Nominee Director. In my opinion, they can. This proposition would be clear by looking at the following definition of Nominee Director:-
    Person who acts as a Non Executive Director on the Board of Directors of a firm, on behalf of another person or firm such as bank, investor or lender.
    It is submitted that the above definition includes 'investors' which includes shareholders.

    It was further held in Somesh Chandra Manilal Nanavati V Jivanlal C. Chinai that where under the Articles the specified shareholders has a right to nominate directors and under this power he nominates one or more persons as his nominee on the Board, the nominated persons become directors then and there and subsequent cessation of the shareholders as a member of the company will not affect the tenure of office of the nominated directors.

    This implies that where shareholders nominate, the nominated person can be a Nominee Director.

    The next most important analysis is to determine the status of a nominated person as director with respect to his independence. We have already seen the definition of Nominee Director and the position of shareholders in respect of the right to appoint Nominee Directors. Our subject of query definitely fulfils the basic requirements of a Nominee Director. However, the next important question is whether a Nominee Director can also be a Promoter Director. This question can only be determined on the basis of independence of directors. We have already seen that a Promoter Director is always non independent. If we prove that a nominated person (Nominee Director) are independent then the possibility of such a person to be a Promoter Director extinguishes.

    But the independence of Nominee Directors continues to be a vexatious issue. For this we have to look into the definition of the term 'Independent Directors'.

    This has been defined by the Kumar Mangalam Birla Committee constituted by SEBI. The Narayan Moorthy Committee has also taken the same definition which follows as:-
    Independent Directors are directors who apart from receiving director's remuneration do not have any other material, pecuniary relationship or transaction with the company; its Promoters, its management or its subsidiaries, which in the judgement of the board may affect their independence of judgement. It is significant to mention here that that the Irani Committee specifically recommended that the Nominee Directors appointed by any institution or in pursuance of any agreement or by the government should not be deemed to be independent members. It took the view that such nominees represented specific interest and could not, therefore, be rightly termed as independent. This recommendation was made to propose an amendment to the proposition in clause 49 that the Nominee Directors are deemed to be independent where they are appointed by the financial institution. However, even after this recommendation clause 49 remains unchanged.

    Also, in In Re Broad Casting Station 2 GB Pvt. Ltd., Jacobs J. expressed the view that a Nominee Director can follow the wishes of the nominator provided he bona fide believes that the interests of the nominator are identical with the interests of the company. This implies that they still retain independence. Though the debate is still open, the present position is that the Nominee Directors are independent.

    On the basis of the above discussion, it is submitted that a nominated person retains independence. In order to be a Promoter Director, the person has to non independent. Therefore, we can conclude that where shareholders nominate a person from Promoter Company as director, he qualifies as a Nominee Director. Further a Nominee Director cannot be Promoter Director since he is independent and Promoter Director is a Non Executive and Non Independent Director. Until any amendment is made in clause 49 as regard the independence of Nominee Director, such a person cannot qualify as Promoter Director.

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