Understanding Potential Risks For Nominee Directors In India

Such directors should consider adopting adequate measures to safeguard the interests of private equity investors and avoid any undue liability on themselves

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Buoyed by a vibrant economy and high returns, the private equity (PE) and venture capital space in India was on a rising track to record an all-time high investment of more than $33 billion in 2018. With an over 35% year-on-year increase, it remained a landmark year for the sector.

Whether the foreign investor interest and PE investment tally of 2019 would outdo the highs of 2018 would not only depend on factors such as global economic trends, an outcome of the upcoming national elections, but also on the increasing scope of liability and stringent national and international regulatory pressure imposed by various government authorities and international organizations.

Protecting Investments Through Affirmative Rights – ‘Controlling Dilemma’ For Nominee Directors

For any PE investor, an appointment of nominee director(s) on the board of the investee company remains one of the paramount ways of participating in the management and governance of such companies. For protecting the investment made, certain key matters pertaining to the operations of a company are listed down as affirmative vote matters in the contractual arrangements, the passing or approval of which remains conditional to receipt of an affirmative vote from such nominee director. However, such an appointment also exposes the nominee directors to risks and poses several challenges.

The aspect of exercising ‘indirect control’, notably in respect of the power to determine the outcomes of a board meeting or shareholders meeting, has been discussed at vast length in various judicial precedents. Taking reference from the case of Century Tokyo Leasing Corporation/Tata Capital Financial Services Limited, the Competition Commission of India had held that affirmative rights relating to certain items would be considered ‘control’ for the purposes of the Companies Act, 2013 (“