NOMINEE DIRECTORS AND CONFLICT OF INTEREST 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 corpo rate scenario. The background is the financing methods. Companies have to borrow amounts sometimes even larger than the amount of paid--up share capital. They h ave to depend for this purpose on lending institutions like Banks, Mutual Funds, Public Financial Corporations etc. All such providers of money stipulate for sa feguarding their financial involvement in the company that the company should ap point 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 t hey 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 m ake unauthorised disclosures to his nominator. Liabilities under Companies Act, 1956: A nominee director like any other directo r is liable for the default committed in Companies Act. For example, there are t wo basic documents, Balance Sheet and Annual Return, are required to be filed ev ery 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. APPOINTMENT AND ROLE OF NOMINEE DIRECTORS IDBI, IFCI, ICICI and IRCI should create a separate Department/Cell with offici al at the level of GM and Dy. GM, whose exclusive and whole-time function will b e to represent the institutions on the Boards of Companies. In this way, the wor k of nominee Directors will become an integral part of the operations of the ins titutions. The proposed Department/Cell should function like any other departmen t of the institution with normal rotation of official from one department to ano ther. Outsiders should be appointed as nominee directors only as additional dire ctors on Boards where the institution wishes to have more than one nominee direc tor. Nominee directors should be appointed on the Boards of all MRTP companies, assis ted 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 crore s. Nominee directors should be given clearly-identified responsibilities in a few a reas 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, nomi nee 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 wh ich 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 mat erials, 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 Au dit Sub-committee of the board of directors for the purpose of periodic assessme nt of expenditure incurred by the assisted company, in all cases where the paidup capital of the company is Rs. 5 crores or more. The institutional nominee dir ector 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 Divisio n), dated March 2, 1984. Refer (1984) 55 Com cases (St) 158.]