Guest Post: Are Govt. Nominee Directors Independent?

The below guest post on the issue as to whether Directors nominated by the Government in Boards of  Government Companies are Independent Directors has been penned by Ms. Roshni Rajiv. Ms. Rajiv has completed her BSL LLB from ILS Law College, Pune (2011) and Company Secretaryship Professional Level Exams. She is currently working in a PSU.

Clause 49I(A)(i) of the Listing Agreement provides that Board of Directors of a company should have an optimum number of both Executive (full time) and Non-Executive (part-time) directors with not less than fifty percent of the Board comprising of non-executive directors. Usually the non-executive directors comprise of both independent and nominee directors. In the case of a Government company, the Board would also consist of Govt. nominee directors. These Govt. nominees are employees of the Government.

What is the position of these Govt. nominee directors under clause 49 of Listing Agreement?

Clause 49 defines independent directors but does not specifically state the position of Govt. nominee directors. However, it clarifies that nominee directors appointed by a public financial institution or bank which has invested in or lent to the company shall be deemed to be independent directors. Hence, can a view be taken that a Govt. nominated director is also independent?

A clarification is vital as the fundamental purpose of having independent directors on Board is to provide unbiased opinions and take decisions in the best interest of stakeholders. The Kumara Mangalam Birla Committee report which led to the incorporation of the Clause 49 in the Listing Agreement doesn’t address the position of Govt. nominee directors. Whereas, the Narayana Murthy Committee Report on Corporate Governance suggested that nominee directors should be excluded from the definition of independent directors in Clause 49 (Para 3.8). The Mandatory recommendation of the committee was that nominee of the Government on public sector companies should be elected by the shareholders and shall be subject to the same responsibilities and liabilities as other directors.

Later in 2005, J.J. Irani Committee had also suggested in their report on company law that nominee directors appointed by any institution or in pursuance of any agreement or Government appointees representing Government shareholding should not be deemed to be independent directors (Para 8.4, Chapter IV). The committee took a view that such Govt nominees represented specific interest and could not be correctly termed as independent.

SEBI took this matter forward in 2007 and proposed an amendment in Clause 49 to stipulate that nominee directors would not be considered as independent directors . Further, SEBI also clarified that government nominees in Government companies would not be treated as independent directors since they have a material pecuniary relationship with the Government as they receive salary among other perks from the Government.

By now, it was clear that SEBI and committee reports had unanimously held the same view. However, when the time came in 2008 to incorporate the same in Clause 49, surprisingly, SEBI did not implement its point of view. It is interesting to note that except for this proposed amendment relating to nominee directors, all other proposed amendments to Clause 49 were incorporated vide SEBI Circular dated 8th April 2008.

Attempts are still made to implement this view and the latest one is contained in Section 149(5) of the Companies Bill 2011. This section defines Independent director as a director other than a managing director, whole time director or a nominee director. Explanation to this section clarifies that a nominee director is a director nominated by any financial institution or appointed by any Government or any other person to represent its interests.

Enactment of the Companies Act will clear the air of confusion and provide a definite answer. Then there may be a need to reconstitute the Boards of Directors of some of the PSUs.