[Opinion] Role and Responsibilities of Nominee Director – An Analysis

Rutuja Umadikar – [2024] 164 taxmann.com 688 (Article)

1. Introduction

If a company is an artificial person, then the board of directors can be called the brain of such person, as they are the natural persons through whom the company functions. For the convenience of better functioning of companies, the Companies Act 2013 allows for appointment of various types of directors. The explanation to sub-section 7 of section 149 defines nominee director as, “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” Subject to the article of association of the company the board of directors may appoint any person as a director nominated by any institution in pursuance of the provision of any law for the time being in force or of any agreement or by central government or state government by virtue of shareholding in the company.

From the above analysis, it is amply clear that nominee director is appointed on the board of the company to take care of someone else’s, that is his nominating institutions interest. Therefore, generally it is observed that the nominee directors are involved only in those matters which relate to the interest of the nominators and no other matters. This situation gives rise to a question that whether the nominee director is answerable only to the nominators or he should be concerned with the best interest of that company as well on whose board he is appointed as director?

In this article, we shall try to find an answer to this dilemma with the help of judicial pronouncements.

2. Provisions of section 166 of the act

Section 166(2) of the act requires all the directors to act in good faith and in the best interest of the company. This section does not provide any exception to nominee directors. Therefore, even if they are appointed by nominators and not by shareholders, ones appointed on the board of directors, they are required to adhere to provisions of section 166 which makes all the directors responsible for the wellbeing of the company. We shall now see judicial pronouncement in this regard.

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