Nominees still appointed as independent directors

Some well-known Indian firms continue to classify nominees of institutional shareholders as independent directors on their board -- a practice opposed by the Institute of Company Secretaries of India (ICSI).

At present, Clause 49 of the Listing Agreement allows firms to classify nominee directors as independent directors. However, the new Companies Bill, is likely to be tabled in the coming (winter) session of Parliament, has proposed to disallow this practice, considered unfair to small shareholders. In the final draft of the new Bill, an independent director in relation to a company means a non-executive director of the company other than a nominee director.

Companies like Grasim, Jaiprakash Associates, Bhusan Steel, Aditya Birla Nuvo and Jindal Steel and Power have classified nominees of institutional shareholders as independent directors on their board, according to data available from InGovern Research Services, a Bangalore-based proxy advisory and corporate governance research firm.
 

THE QUESTION OF INTEREST
Name	On board of	Nominee of	Status
A K Dasgupta	Grasim Ind	LIC	Independent
Viney Kumar	JP Associates	IDBI	Independent
A K Sahoo	JP Associates	LIC	Independent
Sunita Sharma	Bhushan Steel	LIC	Independent
T Chattopadhyay	Aditya Birla Nuvo	LIC	Independent
S Ananthakrishnan	Jindal Steel & Power	IDBI  Bank	Independent
Source:  InGovern Research Services

The controversial practice, though allowed at present, has raised eyebrows. Experts believe nominee directors represent the interests of the institutions they represent and not all the minority shareholders.

“Companies must regard nominee directors as non-executive, non-independent directors, and not count them when considering the number of independent directors on board,” says Shriram Subramanian, founder and managing director of InGovern Research Services. “Nominee directors represent the interest of the institution they represent -- be it a financial institution or bank. There could be situations where they may not act in the best interest of the company and shareholders. ICSI’s recommendation to modify Clause 49 is a step in the right direction.”

ICSI is of the view that representatives of financial institutions on the board of a company should not be considered as independent directors, as they are more concerned about safeguarding the interest of the institution they represent.

“Why should companies wait for the laws to change? For better corporate governance practices, they should classify nominee directors as non-independent directors on their own,” notes AP Bakliwal, president of the Bombay Shareholders’ Association. “Even investors should be careful in putting money in this type of companies which are taking shelter of the law and not following the good corporate governance practice.”

The Companies Act, will replace the existing law passed in 1956 . It is expected to come into force from FY13.