“Small Shareholders’ Director” under Companies Act, 2013 : Detailed Study

CS Shruti Patwardhan

Section 151 of the Companies Act, 2013 read with the Companies (Appointment and Qualification of Directors) Rules, 2014 (Chapter 11) deals with the appointment of director elected by Small Shareholders.

According to Section 151 of the Companies Act, 2013 every listed company may have one director elected by “small shareholders”. For the purpose of this section, “small shareholder” means a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.

Rule 7 of companies act 2013 laid down the terms and conditions for appointment of Small Shareholder’s Director. Let’s critically evaluate eligibility, qualification, procedural requirements, duties, tenure and vacation of Small Shareholders’ Director.

Eligibility:

A listed company, may upon notice of not less than 1000 or one-tenth of the total number of small shareholders, whichever is lower, have a Small Shareholders’ Director elected by the small shareholders. A listed company may suo moto (on its own accord) opt to have a director representing small shareholders. Thus the Small Shareholder’s Director’s appointment is optional and made available to listed companies only.

Qualification / Industry Experience:

The Companies Act, 2013 does not prescribe any qualifications or minimum industry experience criteria for candidature as Small Shareholder’s Director of the applicable company.

Independence:

Such Director, directly or indirectly, should not be appointed or associated in any other capacity with the company for a period of 3 years from the date of cessation as a Small Shareholder’s Director.

Further it is stated that if proposed director is qualified under Section 149 (6) for appointment as an independent director and has given declaration for his independence under Section 149 (7) then such director shall be considered as an independent director.

Procedural requirements:

i) Notice: The small shareholders intending to propose a person as a candidate for the post of Small Shareholder’s Director shall leave a signed notice of their intention with the company at least 14 days before the meeting specifying their details and proposed director’s details.

ii) Contents of notice: The details include name, address, shares held and folio number etc. of small shareholders and proposed director. If the proposed director does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.

iii) Statement/ Declaration: The notice shall be accompanied by a statement signed by the proposed director for the post of small shareholders’ director stating :

a. proposed director’s Director Identification Number (DIN) :

For allotment of Director Identification Number (DIN) application in the Form DIR-3 pursuant to Section 153 of The Companies Act, 2013 & Rule 9(1) of The Companies (Appointment and Qualification of Directors) Rules, 2014 has to be made.

b. that proposed director is not disqualified to become a director under the Act;

Intimation in Form DIR- 8 in terms of Companies (Appointment and Qualification of Directors) Rules, 2014 to the effect that proposed director is not disqualified under sub-section (2) of Section 164 of the Companies Act, 2013 has to be provided to the company.

and

c. proposed director’s consent to act as a director of the company:

Consent in the form of Form DIR-2 pursuant to Rule 8 of the Companies (Appointment and Qualification of Directors) Rules, 2014 has to be submitted to the company.

iv) MBP- 1 in terms of Companies (Meetings of Board and its Powers) Rules, 2014:

Section 184 of the companies act 2013 cast duty on every director of the company to give a notice of his/her engagement in any other company or to disclose all interested entities in the first meeting of the board of director of the company of a financial year in prescribed format as MBP-1.

v) Digital Signature Certificate in Class II or Class III as per Information Technology Act, 2000 has to be obtained.

vi) The company has to file DIR- 12 (Particulars of appointment of directors and the key managerial personnel and the changes among them) in terms of Companies (Appointment and Qualification of Directors) Rules, 2014 within 30 days from the date of appointment of Small Shareholder’s Director.

Tenure:

Small Shareholder’s Director shall not be liable to retire by rotation. His/ her tenure as small shareholders’ director shall not exceed a period of 3 consecutive years. On expiry of tenure, such director shall not be eligible for re-appointment.

If the person is not eligible for appointment according to Section 164, then he/she can’t be appointed as Small Shareholder’s Director.

Duties and Liabilities:

The following duties and liabilities have been imposed on the directors of companies, by Section 166 of the Companies Act 2013: —

• A director of a company shall act in accordance with the Articles of Association (AOA) of the company.

• A director of the company shall act in good faith, in order to promote the objects of the company, for the benefits of the company as a whole, and in the best interests of the stakeholders of the company.

• A director of a company shall exercise the duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

• A director of a company shall not involve in a situation in which he/she may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

• A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself/ herself or to his/her relatives, partners, or associates and if such director is found guilty of making any undue gain, he/she shall be liable to pay an amount equal to that gain to the company.

• A director of a company shall not assign his/her office and any assignment so made shall be void.

• If a director of the company contravenes the provisions of section 166 of the Companies Act, such director shall be punishable with fine which shall not be less than Rs.1,00,000/- but which may extend to Rs. 5,00,000/-.

Vacation of Office:

Small shareholders’ director shall vacate the office if –

i. he ceases to be a small shareholder, on and from the date of cessation;

ii. he incurs any of the disqualifications specified in Section 164;

iii. the office of the director becomes vacant in pursuance of Section 167;

iv. he ceases to meet the criteria of independence as provided Section 149 (6) .

Maximum limit for holding office as Small Director

Such director shall not hold the office of small shareholders’ director in more than 2 companies. If second company is in competitive business or is in conflict with business of the first company then he/she shall not be appointed in second company.

Conclusion:
Previously as per Companies Act, 1956, public companies having paid up capital of Rs.5 Crores or more and having 1000 or more small shareholders had option to appoint director elected by small shareholder. Now as per Companies Act, 2013 only listed companies meeting same threshold criteria of paid up capital of Rs.5 Crores or more and having 1000 or more small shareholders can exercise option to appoint Small Shareholders’ Director.

(In case of any inconsistency or clarification/suggestions, Author can be contacted for further details at csshruti2007@gmail.com)

Disclaimer: The views and opinions expressed in this article are those of the author. The legal information is not advice and should not be treated as such.