Appointment of A Nominee Director by The Board - Some Legal Perspectives PDF

12/4/2017 Appointment of a Nominee Director by the Board - Some legal perspectives
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Appointment of a Nominee Director

by the Board - Some legal
perspectives
It is not uncommon for a financial
Institution to foist on the Board of a
Company, in exercise of its authority
contained in the terms and conditions
associated generally with a borrowing
arrangement contracted by the company.
Whereas under the erstwhile provisions of Clause 49 of the Listing agreement with the
Stock Exchanges, a Nominee Director representing an Institution which has invested in or
lent to the company was considered as an “Independent Director”, Section 149(6) of the
Companies Act, 2013(hereinafter “the Act”) states unequivocally that a Nominee director
would not be considered as an Independent Director in relation to the company. Further
unlike its predecessor (Companies Act, 1956), the Act also contains, a definition for the
term, which, albeit, is limited in scope for the purposes of section 149 only. In addition, the
present Act empowers under the aegis of Section 161(3) the Board to appoint a Nominee
director and such appointment shall not necessitate regularization by the Shareholders of
the company in compliance with the procedure laid down under Section 160 of the Act as
in the case of persons appointed as Additional Directors, to fill up casual vacancies in the
Board and the like.
https://www.caclubindia.com/articles/appointment-of-a-nominee-director-by-the-board-some-legal-perspectives-28477.asp 1/17
In this exposition, we shall throw light on the above issues and also bring to the fore
certain grey areas which need introspection.
Nominee Director - Not an Independent Director under the Act
The Explanation contained under Section 149(7) of the Act defines a "Nominee Director"
as under:
Quote
“For the purposes of this Section, “Nominee Director ”means 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”.
Unquote
From the above, it is clear that a person appointed as a Nominee director on the Board has
to have the following attributes:
a) He should be nominated by any financial Institution in pursuance of any law or in terms

of an agreement entered into by the company
b) He could be appointed by the Government or by any other person.
c) The person so appointed shall represent the interests of the organization /Institution
which he represents.
As stated above under the regime of the erstwhile listing agreement , the status of the
Nominee director was that of an Independent director. This status stands negated under the
Act in view of the express assertion contained under Section 149(6) of the Act.
The JJ Irani Committee constituted by the Ministry of Company Affairs in its Report had
expressed the view that Nominee directors appointed by any Institution or in pursuance of
any agreement or Government appointees representing Government shareholding should
not be deemed to be Independent directors. A view point was expressed that nominees of
Banks/Financial Institutions on the Boards of companies could be treated as “independent”
.After detailed deliberation , the Committee came to the conclusion that such nominees
represented specific interests and could not, therefore, be correctly termed as Independent
directors.
The sentiments expressed by the Committee have found place in the form of an assertion in
Section 149(6) to the effect that Nominee directors ought not to be considered as
independent directors.
Paradox in the Act-Directors’ representing small shareholders are independent

directors
Section 151 of the Act provides that in the case of a listed company , there may be
appointed a director to represent the interest of small shareholders. By definition “small
shareholders” would mean shareholders holding shares of a nominal value not exceeding
twenty thousand rupees or such other sum as may be prescribed.
Rule 7 of the companies (Appointment and Qualification of directors) Rules, 2014 lays
down, inter alia, the procedure to be adopted for the appointment of such a director.
Rule 7(4) stipulates that such director shall be considered as an Independent director
subject to his being eligible for the appointment in terms of Section 149(6) and also subject
to his giving a declaration of his independence in accordance with the provisions of
Section 149(7).
From the above, it follows that a director elected by small shareholders would be deemed
to be an independent director
A director appointed under Section 151 represents the constituency of small shareholders
and it is incumbent upon him to protect the interest of his constituency.
It is interesting to note that while expressing the view that nominee directors should not be
considered as independent directors, the JJ Irani committee had opined that as such
nominee directors represented specific interests they should not be deemed to be
independent. It is intriguing to note that despite the fact the small shareholders’ director too
represents a specific interest group in the company, he is considered as an independent
director by the law. This is an obvious contradiction which defies logic. When the
responsibilities of both classes of directors are identical, they should both stand on the
same pedestal. As the proverb goes, "what’s sauce for the Goose is sauce for the Gander"
or what is good for a man is equally good for a woman ! Unfortunately the Law maker
thinks otherwise .Until the law is suitably amended to set right the above contradiction, we
shall have to live with the statute as it stands, albeit, with a pinch of salt.
Does the Nominee Director retire by rotation
Having grudgingly accepted the position that a Nominee director is not an Independent
Director , the next question that comes up is that, given the fact that he is also a non-
executive director, does the nominee director retire by rotation in the manner contemplated
under Section 152(6) of the Act?
It is pertinent to note that there is nothing in the definition of a Nominee director as given
by the Explanation under Section 149(7) which suggests that he shall not be liable to retire
by rotation.
As we are aware, a Nominee director can be appointed by a financial Institution either in

pursuance of a statutory provision under any law for the time being in force or by an
agreement or he may be appointed by any Government or by any other person to
represent their interests.
Section 161(3) of the Act provides that subject to the Articles of a company, the Board may
appoint any person as a Director nominated by any Institution pursuant to 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.
Where such nominees have been appointed pursuant to any statutory provision
applicable to the financial Institution nominating the person , reference has to be made to
the relevant statute for determining their status. Under clause ( c ) of Section 19A(3) of
the Unit Trust of India Act, 1963, a Nominee is not liable to retire by rotation and he shall
not be taken into consideration in computing the number of Directors who are liable to
retire by rotation.
Section 19A(3) of the Unit Trust of India Act, 1963,provides as under:
Quote
Any director appointed as aforesaid shall-
a) hold office during the pleasure of the Trust and may be removed or substituted by any
person by order in writing by the Trust.
b)not incur any obligation or liability by reason of his being a director or for anything done
or omitted to be done in good faith in the discharge of his duties as a director or anything
in relation thereto
c) not be liable to retire by rotation and shall not be taken into consideration for
computing the number of directors liable to retire by rotation.
Unquote
There exist similar provisions in Section 30A of the Industrial Development Bank of India
Act , in Section 27 of the State Finance Act, under Section 6A of the Life Insurance
corporation Act, Section 35A of the state Bank of India Act, 1955,section 38A of the State
Bank of India (Subsidiary Banks) Act, 1959 and Section 10A of the Banking
companies(Acquisition and Transfer of Undertakings )Act, 1970.Those appointed under
statutory provisions such as the above, shall not be liable to retire by rotation under Section
152(6) and they shall continue to remain Directors as per the will and pleasure of the
Institutions nominating them despite not enjoying the status of Independent directors. The
authority conferred under the aforesaid legislations would have an overriding effect over
the provisions in the Act , thus making it possible for the person appointed as Nominee to
continue in office at the will and pleasure of the Institution nominating him and be excluded
from being considered for re-appointment by the process of rotation. He will also not be
taken into consideration for the purpose of determining the two-thirds and one-third limits
as provided in Section 152 (6) of the Act.
The above position also applied under the provisions of section 255 of the 1956 Act which
corresponds to section 152 of the 2013 Act.
Appointment of Nominee Director under an arrangement or agreement with the

company
It would be interesting to examine the legal position of a Nominee Director who is foisted
on the Board of a company in terms of any agreement between the company and a
particular stake holder which may be a Holding company also. Does the Nominee so
appointed qualify as one who is not liable to retire by rotation .Further does he continue to
be in office at the will and pleasure of the concerned stake holder. A pre-requisite to such
an appointment would be the existence of enabling provisions in the company’s Articles to
facilitate such an appointment. .It is pertinent to note that Section 161(3) in the Act begins
with the words ”Subject to the Articles of a company”. The above opening words make it
clear that the Articles should facilitate the appointment of a Nominee director in all
circumstances, be it through the force of a specific legislation or by agreement. In James
v EVE(1873)LR 6 HL 335 it was held that if the company’s articles provide for the
appointment of directors by recommendation of shareholders at the general meeting, a
contract by which the company purports to confer the rights on any other person to make
appointments to the Board in any other way is invalid.
It is also possible that the nomination agreement among the members may also be
embodied in the articles. The person empowered to make nominations in terms of the
agreement can exercise such authority as long as he is in the saddle and continues to hold
authority under the agreement. The related issue that , however, arises in such a case is
whether the nominee would have to be taken into consideration as one liable to retire by
rotation. In East Indian Produce Co. Ltd v Naresh Acharya Bhaduri(1988)64 Com Cases
259, 278(cal) , there existed a clause in an agreement between sellers who were
shareholders of the company and the purchasers of the shares of the company from the
sellers which provided , inter alia, that the sellers shall cause at least 4 directors to resign
and to get nominees of the purchasers to be appointed to the board of the company. The
Court held that the clause did not affect the provisions of Sections 255 and 256 of the
1956 Act governing rotation of directors.
Is the Holding Company’s right to appoint majority of directors consistent with

Section 152 of the Act which corresponds to Section 255 of the 1956 Act
Section 4 of the 1956 Act as also Section 2(87) of the 2013 Act which corresponds to the
above Section confers on the Holding Company the right to control the composition of the
Board of the Subsidiary by which process the latter becomes a subsidiary even without the
Holding company exercising control over more than half of the voting power in the
company. The question that comes up in such a case is whether the provisions of Section
2(87) in the new Act are compatible with Section 152(6) of the Act which corresponds to
Section 255 in the predecessor Act and whether in such a case the provisions of Section
152(6) are violated.
MCA vide its circular No 14 of 1974 dated August ,28, 1974 has stated , inter alia, that
.any amendment in a company’s Articles which has the effect of conferring on another
company the right to control the composition of the Board would be hit by the provisions of
Sections 255, 256 and 257 of the Act. Section 257 is a mandatory provision and a
person’s right cannot be taken away by virtue of any contract to the contrary by the
members passing a special resolution or under the Articles. Such an Article or special
resolution would be invalid under Section 9 of the Act.
Despite the above circular, the Delhi HC has held in Oriental Industrial Investment
Corporation Ltd v Union of India(1981)51 Comp Cas 487(Cal.) that control over the
composition of the Board of another company does not contravene the provisions of
Section 255, 256 and 257 of the 1956 Act because Section 255 excludes from its purview
cases which have been otherwise expressly provided in the Act and Section4(2) of the
1956 Act is an express provision for the appointment of directors on the Board of the
subsidiary by a holding company.
Similar views have been expressed by the Kerala HC in Velayudhan(M)v Registrar of

Companies(1980)(50 Comp Cas 33).
From the above discussion it emerges that a person appointed as a Nominee on the Board
of a subsidiary would not be taken into consideration for determination of the number of
directors liable to retire by rotation nor would he be liable to retire by rotation as long as he
continues as a Nominee of the holding company in the subsidiary.
Position under the 2013 Act- Appointment of Nominee Director
Section 161(3) of the Act provides as under:
Quote
“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.”
Unquote .
From the above it follows that where the Articles of the company contain enabling
provisions, the Board can appoint as a Nominee director who is being nominated by any
Institution or person or by the Govt. as envisaged in the Section.
It is pertinent to note that Section 152(2) states as under:

Quote
“Save as otherwise expressly provided in this Act,(Emphasis supplied) every director

shall be appointed by the company in general Meeting.” .
Unquote
Meaning of the expression” Save as otherwise expressly provided in this Act”
The import of the expression “Save as otherwise expressly provided in this Act” has been
brought out as under in Wharton’s Law Lexicon:
“Section 10 of the Maintenance of Internal Security Act opens with the words ”Save as
otherwise expressly provided in this Act”. These words mean that the Section would apply
only to cases not expressly provided for in the Act ,that is to say, it would not apply to
cases “otherwise expressly provided” in the Act.( Sambhu Nath Sarkar v State of West
Bengal(AIR 1973 SC 1425 (1973) “.
The general Rule laid down by Section 152(2) is that every director shall be appointed by
the company in general Meeting subject to exceptions as expressly provided in the Act.
Section 161 sets out the situations under which the Board is empowered subject to the
company’s Articles , to appoint directors .These are :
a)Appointment of any person who has not failed to be appointed in General Meeting as
Additional Director.
b)appointment of a person who does not hold any alternate directorship for any other
director in the company, to act as an Alternate director for a director during his absence
for a period of not less than three months from India.
c)to appoint any person as a director nominated by any Institution/ by any agreement as a
Nominee director
d)in the case of a public company to fill up a casual vacancy in the office of any director
who has been appointed in general meeting and whose office stands vacated before the
expiry of his term in the normal course.
As an additional director holds office under law only up to the date of the next annual
general meeting, his appointment has to be regularized in the manner set out in Section
160.
The Alternate director’s tenure automatically comes to an end upon the return to India of
the original director.
The person who holds office to fill up a casual vacancy will hold office till the conclusion of
the term of the person whose void he has filled up.
Where the person has been appointed by the Board as a Nominee director in terms of
either a statutory provision or an agreement, there does not exist in the Statute any
provision by which the appointment has to be regularized in the manner provided in section
160 nor is it necessary to obtain the approval of the shareholders after the appointment has
been made by the board.
Again the Act is silent on the point whether the nominee director is liable to retire by
rotation. There is also no express provision in the statute which stipulates the tenure of his
appointment.
In as much as the Act is silent on the issues stated above, one has to take a view that once
the person has been appointed by the Board as Nominee director , there is no requirement
to seek approval of the shareholders. It would also not be appropriate to subject the
Nominee to the process of retirement by rotation . He will also be in office as per the will
and pleasure of the Institution appointing him. If the appointment is by virtue of an
agreement , the term may be specified in the agreement .in the absence of any such
stipulation, his appointment shall be for an indeterminate period.
Need for structuring Board as per Section 152(6) consequent upon appointment of
Independent director
As a Nominee director does not retire by rotation nor is he an Independent director

,consequent upon his appointment the company should ensure that the Board continues
to remain structured in the manner contemplated under subsection(6).Furthermore, listed
and other companies which are under obligation to appoint Independent directors under
Section 149 should ensure that they continue to have the required number of Independent
directors even after a Nominee has been foisted on the Board.
Does the Nomination and Remuneration Committee have any role to play in the
appointment of the Nominee Director
Under Section 178 those companies which meet with the criteria laid down in Rule 6 of the
companies (Meetings of Board and its powers)Rules, 2014 have to constitute a Nomination
and Remuneration Committee.
Section 178(2) provides that it is incumbent on the Committee to , inter alia, identify
persons who are qualified to become directors and recommend to the Board their
appointment. Thus the recommendation by the Committee is a pre-requisite to the
appointment of any person as a director by the Board. Where it comes to the nominee
director, the committee has no role really to play , given the fact that the candidate has
been appointed by the Institution under a Statute or an agreement .All that the Committee
should do by way of procedure to simply take note of the appointment and inform the
Board accordingly.
Viewed against the above perspective, it must be stated that the provisions of Section 178
are not in sync with Section 161(3).
Board’s Role and appointment of Nominee Director
As the Nominee automatically stands appointed through the authority of the Institution, the
Board’s role too is only cosmetic in this matter. The Board will have to only ensure that the
incumbent provides his for the appointment under Section 152(5) which should be filed with
the Registrar in Form DIR-12 within thirty days from the date of appointment. The Nominee
should also furnish a declaration that he is not disqualified to become a director on the
lines laid down under Section 152(4).
The Board will have to record in the Minutes the fact that the incumbent has been
nominated as director at the behest of an Institution in terms of a statutory provision or
agreement appointment and direct the company Secretary to ensure that necessary
formalities in connection with the appointment of the director.
Intimation to Stock Exchanges
In case of a listed company, pursuant to the requirements of Regulation 30 of the SEBI

(Listing Obligations Disclosure Requirements) (LODR)Regulations 2015, the company must
inform the stock exchanges as soon as it gets information about the appointment of a
Nominee director .It should be clarified also that such appointment has been by the
specific Institution in terms of the agreement entered into by the company with it. The
intimation should also indicate the tenure of the appointment if any tenure has been stated
by the nominating institution.
Conclusion
In the above exposition we have tried to bring to the fore the issues that emerge from the
appointment of a nominee Director. The Statute as it stands is bereft of any clarity on the
point as to whether a Nominee is liable to retire by rotation or whether his appointment is
subject to regularization by members thus allowing scope for myriad interpretations and
speculative conjectures on these issues. Further the role of the Nomination Committee and
the Board also stands marginalized substantially in view of the provisions contained in
Section 161(3). Besides, we have to live with the inherent contradiction that while a
Nominee is not an Independent director, a director for small shareholders is one. As is
often said, no law can ever be perfect given that it is a creation of man. Our wish list would
be endless for an ever elusive law. Hence, we have to accept the reality of the Statute
stoically and learn to grapple with its nuances.
Recommended Read
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Ramaswami Kalidas
on 09 December 2016
Published in Corporate Law Other Articles by - Ramaswami Kalidas

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ABHIJEET CHOWDHURY  17 December 2016

excellent analysis . there are two subjects where 2 plus 2 may not be equal to four . the
subjects are LAW AND MEDICINE . ABHIJEET CHOWDHURY . MBA(INTERNATIONAL
TRADE ) , ARIZONA STATE UNIVERSITY , U S A . ACS . ACMA.
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12/4/2017 Appointment of a Nominee Director by the Board - Some legal perspectives

Home / Articles / Corporate Law

Appointment of a Nominee Director

Nominee Director - Not an Independent Director under the Act

a) He should be nominated by any financial Institution in pursuance of any law or in terms

b) He could be appointed by the Government or by any other person.

Paradox in the Act-Directors’ representing small shareholders are independent

Does the Nominee Director retire by rotation

As we are aware, a Nominee director can be appointed by a financial Institution either in

Section 19A(3) of the Unit Trust of India Act, 1963,provides as under:

Any director appointed as aforesaid shall-

Appointment of Nominee Director under an arrangement or agreement with the

Is the Holding Company’s right to appoint majority of directors consistent with

Similar views have been expressed by the Kerala HC in Velayudhan(M)v Registrar of

Position under the 2013 Act- Appointment of Nominee Director

Section 161(3) of the Act provides as under:

It is pertinent to note that Section 152(2) states as under:

“Save as otherwise expressly provided in this Act,(Emphasis supplied) every director

Meaning of the expression” Save as otherwise expressly provided in this Act”

As a Nominee director does not retire by rotation nor is he an Independent director

Board’s Role and appointment of Nominee Director

Intimation to Stock Exchanges

In case of a listed company, pursuant to the requirements of Regulation 30 of the SEBI

Published in Corporate Law Other Articles by - Ramaswami Kalidas

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ABHIJEET CHOWDHURY  17 December 2016

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