Company LAw query regarding treatment of Nominee directors

This query is : Open

Querist : Anonymous

Querist : Anonymous (Querist)

21 December 2010 Hi All,

My query is regarding the Nominee directors appointed by the wholly owned subsidiaries of Financial Institutions, where the wholly owned subsidiaries are incorporated under the provisions of Companies Act, 1956.

Whether such directors will be governed according to the provisions of Companies Act or whether the Agreement with which they have been appointed supersede all other acts and provisions.

If the answer is in Negative, then please do tell me how can these companies override the provisions of Companies Act while functioning under it.

CA.RAJIV SHUKLA FCA

CA.RAJIV SHUKLA FCA (Expert)
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21 December 2010 Dear Sir,

Pls understand that Nominee Direcotr apponted under the Specail Act such UTI, LIC, any other investors treated as Specael category Nominee Direcotrs and they are out of perview of companies act due to thier apponittee has speacial act or agrrement.

Other Nominee Direcots are governed by Companies act by which you can offer your candidature in any Company as Nominee Directors.

Querist : Anonymous

Querist : Anonymous (Querist)

22 December 2010 Dear Mr. Shukla,

Thanks for your response but I think that you didn't understood the essence of my query. Request you to please go through the same again as what you are responding is available everywhere.

Regards,
Anonymous.

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CA.RAJIV SHUKLA FCA

CA.RAJIV SHUKLA FCA (Expert)
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22 December 2010 Dear Qurriest,

Extract your answer from the notes as in my opinion ND cant overrule Companiest Act 1956

There may be occasions when directors represent certain parties in the Board in addition to their directorship. This usually happens when foreign collaborators holding companies etc. nominate a director to represent them on the board.

The phenomenon of nominee directors has an important feature of the modern corporate scenario. The background is the financing methods. Companies have to borrow amounts sometimes even larger than the amount of paid--up share capital. They have to depend for this purpose on lending institutions like Banks, Mutual Funds, Public Financial Corporations etc. All such providers of money stipulate for safeguarding their financial involvement in the company that the company should appoint as members of its Board of Directors cine or two persons nominated by them. This creates an important problem as to the role of such directors.

Liability of nominee directors: Nominee directors are in the same position and they owe same duties to the companies as any other director.

Nominee directors right to corporate information: A nominee director , like any other directors is bound by the rules of confidentiality. He is not allowed to make unauthorised disclosures to his nominator.

Liabilities under Companies Act, 1956: A nominee director like any other director is liable for the default committed in Companies Act. For example, there are two basic documents, Balance Sheet and Annual Return, are required to be filed every year, with Registrar of Companies (ROC), within stipulated time. Apart from the fine, that shall be charged by ROC, every director may also be prosecuted

IDBI, IFCI, ICICI and IRCI should create a separate Department/Cell with official at the level of GM and Dy. GM, whose exclusive and whole-time function will be to represent the institutions on the Boards of Companies. In this way, the work of nominee Directors will become an integral part of the operations of the institutions. The proposed Department/Cell should function like any other department of the institution with normal rotation of official from one department to another. Outsiders should be appointed as nominee directors only as additional directors on Boards where the institution wishes to have more than one nominee director.
Nominee directors should be appointed on the Boards of all MRTP companies, assisted by the institutions. As regards non-MRTP companies, nominee directors should be appointed on a selective basis, especially in cases where one or more of the following conditions obtain

(a) The unit is running into problems and is likely to become sick;

(b) Institutional holding is more than 26%; and

(c) Where the institutional stake by way of loans/investment exceeds Rs. 5 crores.

Nominee directors should be given clearly-identified responsibilities in a few areas which are important for public policy. The illustrative lists of these are:

(a) Financial performance of the company;

(b) Payment of dues to the institutions;

(c) Payment of Government dues, including excise and customs duty, and statutory dues. Where the company feels that a particular tax demand is unjustified, nominee directors should satisfy themselves about the prima facie reasonableness of the company’s case;

(d) Inter-corporate investment in and loans to or from associated concerns in which the promoter group has significant interest;

(e) All transactions in shares;

(f) Expenditure being incurred by the company on management group; and

(g) Policies relating to the award of contracts and purchase and sale of raw materials, finished goods, machinery, etc.

The nominee directors should ensure that the tendencies of the companies towards extravagance, lavish expenditure and diversion of funds are curbed. With a view to achieve this object, the institutions should seek constitution of a small Audit Sub-committee of the board of directors for the purpose of periodic assessment of expenditure incurred by the assisted company, in all cases where the paid-up capital of the company is Rs. 5 crores or more. The institutional nominee director will invariably be a member of these Audit Sub-committees.

The above guidelines relating to the convertibility clause and nominee directors will come into effect from March 1, 1984.

(Issued by the Minis of Finance, Department of Economic Affairs (Banking Division), dated March 2, 1984. Refer (1984) 55 Com cases (St) 158.]

Querist : Anonymous

Querist : Anonymous (Querist)

22 December 2010 Dear Mr. Shukla,

Please try to understand that I am not interested in knowing the structure of IFCI or the manner in which they function. My query is still unresolved as in the excerpt you quoted, that is just explaining the role of Nominee director and not the procedure to be followed for their appointment via different channels.

Regards,
Anonymous.