Five positions on nominee directors, and the questions still open
A nominee seat is created by contract but held under statute. Most disputes arise in the gap between the two.
Makarand Joshi | Founder Partner, MMJC
Nominee director disputes rarely begin at appointment. They begin when a nominator withdraws its nomination and the nominee stays; when a Board hesitates over a candidate it agreed to accept; when a reappointment resolution fails; or when someone asks whether the nominator has become a related party. By then, the answer lies in documents settled years earlier: the Act, the articles, the nomination agreement and the nominee’s terms with the nominator.
OUR POSITIONS IN BRIEF
- Section 161(3) serves institutions, not everyone. Others must use section 152(2) or 161(1).
- “May appoint” is not an unrestricted veto. The Board may decline a valid nomination only for a genuine legal impediment.
- A private company can make withdrawal end the office under section 167(4). A public company cannot assume this.
- A public company can keep a nominee out of rotation within the non-rotational third. Listed companies must also address Regulation 17(1D).
- Fees and related-party status turn on facts, not on the label “nominee”.
1. Who can use section 161(3)?
Section 161(3) lets the Board, subject to the articles, appoint a person nominated by “any institution” under a law or agreement, or by Government in a Government company. “Institution” is undefined. A public financial institution clearly qualifies, but it is unlikely to be the limit: had that been the intent, the defined term in section 2(72) was available. Whether a fund, trust or investment vehicle qualifies depends on its facts, including, for a trust-structured fund, who actually holds the right.
A person outside section 161(3) may still hold a contractual right to propose a director. The candidate must then be appointed by shareholders under section 152(2), or as an additional director under section 161(1).
2. Does “may appoint” give the Board a veto?
Nomination does not itself effect appointment; the Board must act, and eligibility, consent and filings must be addressed. But “may” should not be read apart from a valid nomination right embedded in the articles. If the Board could reject an eligible candidate for any reason, the agreed right would become a mere request.
Read together, the statute, the articles and the company’s undertaking support a narrower view. The Board must give effect to a valid nomination, declining only for a genuine legal impediment: lack of entitlement, ineligibility, fit-and-proper requirements, or conflict with the Act or articles. It should give reasons promptly and allow a replacement. We do not suggest the section reads “shall”; only that a permissive word should not release a company from an obligation it validly assumed. In a listed company, shareholder approval under Regulation 17(1C) remains a separate requirement.
3. How does a nominee’s office end?
Section 161(3) prescribes no tenure, but a private company has a tool a public company lacks. Section 167(4) allows its articles to add grounds for vacation of office, so a valid withdrawal of nomination can be made an express ground. Properly drafted, cessation then follows without a resignation, though the company must still record the event, complete filings and manage any dispute over validity or timing. The clause should state who may withdraw, how notice is delivered and when it takes effect. That is far more reliable than “at the pleasure of” the institution.
A public company should not assume the same route. Where its nominee will not resign, it ordinarily relies on the Act’s general removal provisions and their protections.
4. Can a public company keep its nominee out of rotation?
Section 152(6)(a) requires at least two-thirds of a public company’s directors, excluding independent directors, to retire by rotation. Under section 152(6)(b), the rest are appointed in general meeting “in default of, and subject to any regulations in, the articles”. Those words let the articles place an institutional nominee in a non-rotational seat, appointed by the Board under section 161(3). Nominees have no statutory exclusion from the count, however, so if the two-thirds proportion cannot otherwise be met, a nominee may have to rotate.
Listed companies face a second layer. Regulation 17(1D) requires shareholder approval for a director’s continuation at least once every five years. Its exemptions cover, among others, court or tribunal appointees, nominees of financial sector regulators, RBI-regulated lenders under a lending arrangement, and debenture trustees. A PE fund’s or AIF’s nominee does not obviously fall within any of them, so a “permanent” seat may still face a periodic vote.
5. Who keeps the fees?
Whether the company may pay a nominee depends on the applicable provisions, the articles and approvals. Whether the nominee may keep the payment depends on the nomination arrangement, their employment terms, the institution’s rules and, for a trustee, the trust’s rules on personal benefit. Fees belong automatically to neither party, so the entitlement should be documented before they accrue. No arrangement alters the nominee’s personal duties or liability[1].
6. Can the nominator become a related party?
Section 2(76)(vii) covers a person on whose advice, directions or instructions a director is accustomed to act, subject to a professional-capacity exception. A nomination right, or a legitimate exchange of views, is not enough. A habitual pattern of voting instructions may be. If so, transactions with the institution attract related-party approvals and disclosures, with a separate analysis under the Listing Regulations. Either way, the nominee must exercise independent judgment under section 166. Protocols on information, conflicts and recusal belong in place before a contested decision, not during one.
Where we expect the debate:
We would value the profession’s view on three open questions:
- In a trust-structured fund, is the “institution” the trust, the trustee or the investment manager?
- If a Board refuses a valid nomination without a legal impediment, is the remedy only contractual, or is the refusal relevant in oppression and mismanagement proceedings?
- Should the professional-capacity exception in section 2(76)(vii) extend to instructions issued under a formal stewardship or voting policy?
Most nominee director disputes are drafting problems that surface late. They are far cheaper to solve at the term sheet than in the boardroom.
This article sets out general views for discussion. It is not advice on any specific matter and does not refer to any particular company or dispute.
[1] In Dover coalfield extension ltd [1908] 1 Ch. 65 [1], the UK Chancery division held that the director was fully entitled to retain the remuneration for their services. The fees were legally characterized as payment for work done rather than a fiduciary windfall, meaning he did not have to account the same to the nominator. Whereas in Dallow vs Codd [1946] Ch 73 [2] the UK Chancery Division held that the directors were accountable for the entirety of the remuneration they received as they themselves were trustees of the nominator.