Role of Promoters, Nominee Directors and Mismanagement

A promoter is someone, who has been connected with the business from the start. He can also be referred to as the starter of a business or the founder. He is responsible for raising capital from various sources and entering into the first agreements for the start of a business and incorporation of a company.

SEBI’s Substantial Acquisition of Share Takeover Rules state that a Promoter is

• He is someone at the cusp of a company
• A person whose name is there in any of the filing papers of the company or according to the shareholding pattern filed by the company.

The concept of promoters is explained in the Indian Companies Act, 2013. Before 2013 there was no legal position defined in the Old Version of the Act of 1956. In the Old Act, the subscribers to the M.o.A was regarded as the promoters since they had subscribed to the company from its inception.

Role of Promoters

1. Duty to disclose secret profits

He is allowed to make profits but not secretly which will be harmful to the company. He can profit only with the consent of the company which makes this a fiduciary relationship as that of a principal-agent.

2. The duty of Disclosure of Interest

He must also declare his interest in every transaction that the company and he himself enters into. He must also request the company’s consent when he shows his interest.

3. Duty under the Indian Contract Act

As said by the courts in due course of time, there is a business relationship between a company and a promoter, therefore a contract before incorporation with a promoter shouldn’t be depended upon. Thus his liabilities come within the purview of the ICA, 1872.

4. Termination of the Promoter’s Duties

The duty of a promoter doesn’t end even after he has appointed the Board of Directors or he himself is on the board. It ends when the capital has been acquired (First Call) and the BoD have taken the control and have started managing. That is when his fiduciary relationship with the company ends.

Nominee Directors

A nominee director is an individual nominated by an institution, including banks and financial institutions, on the board of companies where such institutions have some ‘interest’. The ‘interest’ can either be in form of financial assistance such as loans or investment into shares. Such strategic investment may have a direct bearing on the profitability of a nominator and therefore, the appointment of nominee director becomes essential to facilitate monitoring of the operations and business of the investee company.

The main purpose of appointment of such person(s) is to safeguard the interest of the nominator, without conflicting with his/ her fiduciary duty as a director. Such a director has several roles and responsibilities, including adequate disclosure of interest, reporting to the nominator and protection of the interest of the company in its entirety. In case of holding such a position in widely held companies or publicly listed/traded companies,, the person should act in accordance with the operations of such entities, guided by industry specific statutory provisions in addition to the general roles and responsibilities expected of them.

Roles and Responsibilities of Nominee Director

1. Act as a ‘watchdog’

A nominee director needs to oversee the operations of the investee company and ensure the policy decisions are based on sound commercial lines, rationale and adequate safeguards and also act as liaison between the investee company and the nominator.

2. Participation and decision making

A nominee director is a non-executive director; however, he should be actively involved in decisions pertaining to financial performance of the investee company, fund-raising plans including debt-raising, investments, etc. He should make his presence felt by placing his expertise at the disposal of the Board of the investee company and actively participate in such meetings, which have a bearing on the interests of the nominator. He should also not abstain from voting on resolutions considered at the meetings of the Board of the investee company, involving the nominator, unless involving any personal interest of the nominee director.

3. Maintain Confidentiality

A nominee director should exercise adequate care and caution while dealing with unpublished price sensitive information, in case of listed entity, having come to know of the same or being in a position where he is likely to be aware of such information. The nominee director is always required to abide by the code of conduct to regulate, monitor and report trading by insiders framed by the listed entity.

4. One who safeguards the interests of the nominator

A nominee director oversees the operations of the company, to ensure that the policy decisions are based on sound commercial lines and rationality, with adequate safeguards such that the interests of the nominator are not jeopardized;

5. An Information Bridge

The nominee director also acts as liaison between the investee company and the nominator for regular flow of information. Here, it must be noted that the question of confidential information being shared by the Nominee Director would crop up.

In this regard, reference may be made to guiding judicial principles which suggest that while the Nominee Director has the right to receive information about the Company, a nominee director is not bound to share information with the nominator merely by virtue of such nomination; rather, such duty of sharing information may arise out of separate agreement entered into between the nominator and the nominee. The said principle was also appreciated in Hawkes v Cuddy.

6. Participation in decision making

The nominee director actively involves in discussions pertaining to the financial performance of the company, future plans, fund raising, etc. The objective is to apply his/her expertise on the matters placed before the board with the intent to protect the interests of the nominator.

7. Maintenance of confidentiality

Though a nominee director has allegiance towards the nominator, the nominee director is always expected to abide the code of conduct for directors & key managerial personnel. The responsibility adds up where the investee company is a listed entity, as there are compliance requirements in respect of un-published price sensitive information.

Mismanagement

The process or practice of managing ineptly, incompetently, or dishonestly.

The value of the firm’s stock fell precipitously when word leaked out that officers of the company were under investigation for gross mismanagement.

Corporate governance has been defined as “a set of systems, processes and principles, which ensure that a company is governed in the best interest of all stakeholders.” Its objective is to ensure commitment to values and ethical conduct of business, transparency in business transactions; statutory and legal compliances, adequate disclosures and effective decision making to achieve corporate objectives. Good governance is simply good business, but, the moot question is as to whether the Indian companies are really, in spirit, committed to corporate governance or it is only a superficial compliance in letter and cost. The regulators are forcing the corporate governance regulations on the Indian Companies without measuring its benefits and advantages commensurate the cost in terms of resources of money, man hour and paper consumption. Importance, necessity and quality of corporate governance that Indian Companies needs cannot be undermined. Indian Companies are very intelligent and comply with all requirements of corporate governance in full, in letter, without meaning it in most cases. Ministry of Corporate Affairs, SEBI or stock exchanges have not yet put any mechanism in place to weigh and measure the effectiveness, usefulness or benefits of compliance of corporate governance commensurate with cost spent on its compliance.