The appointment of a Nominee Director enables the nominating entity to monitor its investment, financing arrangements, or statutory interests while ensuring participation in key strategic decisions of the company.
For listed entities, the appointment of a Nominee Director is governed by the provisions of the Companies Act, 2013 and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("SEBI LODR Regulations").
Meaning of Nominee Director
A Nominee Director is a director appointed to the Board of a company pursuant to a statutory right, contractual arrangement, financing agreement, investment agreement, shareholders' agreement, debenture trust deed, or by virtue of government shareholding.
Although nominated by a specific stakeholder, a Nominee Director owes fiduciary duties to the company and is required to act in good faith and in the best interests of the company, its shareholders, employees, the community, and the environment in accordance with Section 166 of the Companies Act, 2013.
Who May Nominate a Nominee Director?
Pursuant to Section 161(3) of the Companies Act, 2013, and subject to the Articles of Association (AOA), the Board of Directors may appoint a Nominee Director. Such a director may be nominated by a financial institution or any other institution under applicable law. A person or entity may also nominate a Nominee Director under an agreement. In the case of a Government Company, the Central Government or State Government may nominate a director by virtue of its shareholding.
Requirements for Appointment
- A Nominee Director can be appointed only if the company's Articles of Association allow such an appointment. If there is no enabling provision in the Articles, they must be amended before the appointment is made.
- A Nominee Director is generally required to retire by rotation. However, the Articles of Association, shareholders' agreement, investment agreement, financing documents, or any applicable law may provide otherwise.
- The proposed Nominee Director should not be disqualified from being appointed as a director under Section 164 of the Companies Act, 2013.
- Details of existing interests and directorships should be disclosed as required under the Companies Act, 2013.
Procedure for Appointment of Nominee Director
Step 1: Review Articles of Association
The Articles of Association should permit the appointment of a Nominee Director. If there is no such provision, the Articles must be amended before the appointment is made.
Step 2: Obtain Nomination Letter
A nomination letter should be obtained from the institution, investor, lender, government authority, or other stakeholder entitled to nominate a director.
Step 3: Obtain Necessary Documents
The necessary documents should be obtained, including Form DIR-2 (consent to act as a director), Form MBP-1 (disclosure of interest), Form DIR-8 (declaration of non-disqualification), DIN particulars, and any other declarations required under applicable laws. In the case of insurance companies, the prescribed declaration relating to Fit and Proper Criteria should also be obtained.
Step 4: Recommendation of Nomination and Remuneration Committee
Where applicable, the recommendation of the Nomination and Remuneration Committee should be obtained in accordance with Section 178 of the Companies Act, 2013 and Regulation 19 of the SEBI LODR Regulations.
Step 5: Convene Board Meeting
A notice of the Board Meeting should be issued, and the proposal for appointment should be placed before the Board for consideration.
Step 6: Approval by the Board
The Board shall consider and approve the appointment of the Nominee Director by passing the requisite Board Resolution.
Step 7: Issue Letter of Appointment
A formal Letter of Appointment should be issued, setting out the terms and conditions of the appointment.
Step 8: Update Statutory Registers
The necessary entries should be made in the Register of Directors and Key Managerial Personnel, the Register of Contracts and Arrangements in which Directors are interested, and other statutory records maintained by the company.
Step 9: Update Minutes
The appointment should be recorded in the minutes of the Board Meeting.
Step 10: Filing of Form DIR-12
The appointment should be reported to the Registrar of Companies by filing e-Form DIR-12 within 30 days, along with the prescribed fees and supporting documents.
Additional Compliances in case of a Listed Company
Firstly, the appointment should be disclosed to the Stock Exchanges as soon as reasonably possible and not later than 30 minutes from the closure of the Board Meeting at which the appointment is approved. The disclosure should be made in accordance with Regulation 30 and Schedule III of the SEBI (LODR) Regulations, 2015, along with applicable SEBI Circulars and Industry Standards. It should include the reason for the change, the date of appointment, a brief profile of the appointee, details of the appointee's relationship with directors, and such other information as may be prescribed by SEBI.
Secondly, the disclosure should also be submitted in XBRL mode in accordance with the requirements of the stock exchanges.
Thirdly, the disclosure should be uploaded on the company's website within two working days of the change and maintained in accordance with Regulation 30(8) read with Regulation 46(3) of the SEBI LODR Regulations.
Lastly, the newly appointed director should disclose his or her holdings in the company's securities within seven days of the appointment in accordance with the SEBI (Prohibition of Insider Trading) Regulations, 2015.