Mumbai, Aug 18: Financial institutions have sewed up a 19-point agenda that will enable nominee directors to play the role of "active interventionists" and protect shareholders' interests. Institutions have circulated the agenda to nominee directors to ensure corporate governance.According to Industrial Development Bank of India (IDBI) officials, effectiveness of nominee directors is circumscribed by sundry factors like board composition, frequency of board meetings, quality of information provided to board meetings and responsiveness of promoters in charge of executive management.
To enhance nominee directors' effectiveness, institutions have suggested that there should be a proper balance between the strength of promoter directors vis-a-vis independent directors, including institutional directors in the board.
Other suggestions include frequency of board meetings should be increased from four to six, companies should constitute board-level committees to monitor and determine important matters like project implementation, internal audits and share transfer.
Institutions have identified the following areas where nominee directors would have to pay special attention to:
financial performance of the company;
payment of dues to institutions, government, statutory dues, intercorporate investments and deposits;
investment in subsidiaries;
loans to subsidiaries;
award of contracts;
mergers and acquisitions, expansion and diversification, hiving off or transfer of divisions, subsidiarisation and de-subsidiarisation;
changes in articles of association;
appointments of chairmen/managing directors and/or re-appointment or change in terms of appointment;
setting up of joint ventures;
framing dividend and bonus policy;
framing preferential issue of equity to promoters group;
raising of funds through rights issues or term loans/debentures; and
appointment of committees such as audit review committee, management committees and appointment of concurrent auditors.Institutions have also decided to discuss the issue of corporate governance at a meeting of investment institutions. They have also started sending reminders to nominee directors whenever reports on proceedings of board meetings are not received in time.
IDBI has also said non-executive directors should not be made liable for offences committed by companies without their knowledge or concurrence. To improve the standard of corporate governance, the board composition should be appropriately balanced with a majority of independent professionals, it said. Internal and external auditors would need to be more professional in discharging their responsibilities, the term-lending institution said.
Many official nominee directors, appointed by IDBI on assisted companies' boards, are subjected to judicial proceedings for certain offences of management under various laws like the Negotiable Instruments Act, the Factories Act and the Fera, though they are not involved in day-to-day operations, it said.
The institution reviews nominations--official as also non-official-- after a period of about three to four years so that vested interest are nipped. Till March, 1998, IDBI had 579 nominees on 1062 companies, and out of these 40 were retired officials.
Industrial Finance Corporation of India (IFCI) feels the effectiveness of nominee directors depends on the ownership structure of corporates, board constitution and responsiveness of promoters. "Where promoters are cooperative, nominee directors can play a constructive role. And where promoters are not amenable to financial discipline, nominees cannot be very effective," the term-lending institution said.
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