Nominee directors under the Companies Act, 2013

It has, for a long time, been a common practice for investors to appoint nominee directors on the boards of their investee companies. Nominee directors were an investor’s preferred method of participating in the governance of investee companies. Nominee directors were also often empowered to exercise certain veto rights whereby investee companies could not undertake certain critical actions without their consent. Investment agreements and articles of association relating to many investments made before the enactment of the Companies Act, 2013, contain such provisions with continuing effect.

Under the Companies Act, 1956, directors had a fiduciary duty to act in the best interests of the company. This principle was imported from common law through judicial precedent, but was not codified, permitting some flexibility in interpretation, especially in relation to non-executive directors.

Non-executive directors were seen to be primarily responsible for oversight and governance and were generally liable only where a company did not have executive directors. Given the uncertainty regarding the liability of non-executive directors, the Ministry of Corporate Affairs (MCA), in a circular dated 25 March 2011, clarified that for non-executive directors to be subject to criminal prosecution, the burden of proof was on the registrar of companies (ROC).

Joyjyoti Misra is an associate partner and Arjun Rajgopal is a senior associate at Khaitan & Co. Views of the authors are personal and should not be considered as those of the firm.