INDIA BUSINESS WORLD - APRIL 2007
The Month that was ...

NOMINEE DIRECTORS ARE NOT INDEPENDENT

In order to improve the regulatory framework for corporate governance in India, based on the suggestions of the NR Narayana Murthy Committee on corporate governance, Sebi brought into effect revised clause 49 in the listing agreement. The new clause prescribed exhaustive definition of "independent director". A sitting director who comes to occupy the position of a director by whomsoever and by whatever mode he does that, is supposed to act in the paramount interest of the company as a whole. But this principle, although very sacrosanct, may in practice be compromised if the director is appointed, under an agreement of finance, by a financing, or investing institution, while enforcing a condition of finance, or investment, provided to the company. Such a director is called a nominee director. Once the principle of 'paramount interest of the company' is compromised as precedence is given to the interest of the financial institution, or the nominating body, over the paramount interest of the company, the independence of judgment of the nominee director may be treated as lost.

While evaluating companies for the annual ICSI National Award for Excellence in Corporate Governance, the Institute of Company Secretaries of India has always held the above view and has treated nominee director not as independent director for the purpose of checking compliance with clause 49 of the listing agreement, whether before or after January 1, 2006, when the revised clause 49 was brought into effect by Sebi.

ICSI's view was firm and clear although Sebi had decided to regard nominee directors as independent for the purpose of compliance with clause 49. Now, what is a welcome change is Sebi has decided to take the view that nominee directors would not be considered as independent directors and consequently, the provision which allows nominee director appointed by institutions to be considered as independent directors would be deleted. This proposal is welcome. Sebi has also received views from several quarters that nominee directors represent the interests of the lending, or investment institutions, who have provided finance to the company.

Sebi also holds the view that government nominees on the board of directors of a government company will not be independent directors. It is necessary that the interest of the company as a whole is always paramount and that there is no conflict in the mind of the independent director vis-à-vis the interest of any particular stakeholder in the corporate entity. If and when the interest of a given stakeholder takes precedence over the interest of the company, the director loses his independent judgment, for he considers his dependence on the interest he represents as paramount. This may jeopardize good governance in the corporate as good governance demands equity, justice and fair play towards all the stakeholders pari passu.

While Sebi has proposed to introduce the welcome change in Clause 49 regarding independent status of nominee directors, a reference is invited to the new guidelines on corporate governance for central public sector enterprises. The guidelines regard institutional directors as independent directors except in government companies.

This is surely not in consonance with the puritan's or practical concept of independence of a director. In the eyes of a puritan, any interest direct or indirect, close or remote, other than the interest of the company as a whole, that influences the thinking of the director while sitting on the board will be considered inimical to the concept of independence. Qua director an individual must have the interest of the company as a whole paramount in his mind.

This view expressed in the Guidelines on Corporate Governance for the Central Public Sector Enterprises regarding nominee directors may require re-consideration. It may be pointed out that Sebi, in respect of government companies, has taken the view that government nominees in government companies would not be treated as independent directors since they have a material pecuniary relationship with government, receiving salary and other perks from the government. From newspaper reports about the new guidelines, it appears that in respect of government companies' directors, who are nominees of lending or investing institutions, will not be treated as independent directors while such nominees in other central public sector enterprises will be regarded as independent.

Yet, the position regarding nominee directors, in all quarters, in all corporate, and in consistent national view, should be that they are not independent directors.