The N R Narayana Murthy panel on corporate governance has drawn a clear distinction between independent directors and nominee directors.
In its recommendations to the Securities and Exchange Board of India (Sebi), the panel has said that nominee directors should be excluded while computing the number of independent directors on the board.
This means that if the recommendations are accepted, the nominee directors of financial institutions on the boards of various companies will not be considered as independent directors.
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The panel argues that the loyalty of the nominee directors is towards the financial institution that they represent.
They are not responsible for the management of the company and neither do they have fiduciary responsibility towards the shareholders.
Their presence on the board is ensured through clauses in the loan agreements. Consequently, they should not be treated as independent directors.
The panel has however added that there should be no distinction between nominee directors and independent directors as far as discharging responsibilities towards shareholders goes.
Further, liabilities of nominee directors should be the same as those applicable to the non-executive directors.
Lending financial institutions shall have the right to nominate observers on the board of a company subject to the same code of conduct as other members of a company