Appointment of Small Shareholders’ Director- An analysis

Who is a small shareholder:

Small shareholder means a shareholder holding shares of nominal value of not more than Rs. 20,000/- (Rupees Twenty Thousand Only) or such other sum as may be prescribed.

Objective:

In order to protect interest of small shareholders.

Provisions:

Section 151 of the Companies Act, 2013 (hereinafter refer as “the Act”) read with Rule 7 of Companies (Appointment and Qualification of Directors) Rules, 2014.

Applicability:

Applicable only to listed companies having not less than 1,000 small shareholders.

This provision is not mandatory as the Act indicates the word “may”. But if the required number of small shareholder give notice to the company to appoint a small shareholder’s director, the company is bound to act upon the same.

Who can be appointed as small shareholder’s director:

By way of notice of not less than 1,000 small shareholders or one-tenth of such total number of small shareholders, whichever is lower specifying name, address, shares held and folio number of the person whose name is being proposed for the post of director and of the small shareholders who are proposing such person for the office of director which should be given at least 14 (fourteen) days before the date of meeting.

A person may be appointed as small shareholder director, even if he doesn’t hold any shares in the company as provided in the proviso to sub-rule 2 of Rule 7.

A listed company may also suo moto appoint a small shareholder’s director .

Eligibility

• He/she should have valid DIN (Director Identification Number)
• He/ She is not disqualified to become a director under the Act
• His/ Her consent to act as a director of the company
• Such director shall be considered as an independent director subject to, his being eligible under sub-section (6) of section 149 and his giving a declaration of his independence in accordance with sub-section (7) of section 149 of the Act.

Restrictions and non-applicability of some of the provisions to small shareholder’s director:

• The appointment of small shareholders’ director shall be subject to the provisions of section 152 except that-
• such director shall not be liable to retire by rotation;
• such director’s tenure as small shareholders’ director shall not exceed a period of three consecutive years; and
• on the expiry of the tenure, such director shall not be eligible for re-appointment in same company. However , it was permitted in the erstwhile Companies Act 1956.
• A person shall not be appointed as small shareholders’ director of a company, if the person is not eligible for appointment in terms of section 164.
• A person appointed as small shareholders’ director shall vacate the office if –
• the director incurs any of the disqualifications specified in section 164; (In the erstwhile Companies Act, 1956, a small shareholder’s director doesn’t incur disqualification if the company fails to file Annual Return and Balance Sheet for a period of three consecutive financial years)
• the office of the director becomes vacant in pursuance of section 167;
• the director ceases to meet the criteria of independence as provided in sub-section (6) of section 149.
• No person shall hold the position of small shareholders’ director in more than two companies at the same time:

Provided that the second company in which he has been appointed shall not be in a business which is competing or is in conflict with the business of the first company.

• Cooling Period: A small shareholders’ director shall not, for a period of three years from the date on which he/she ceases to hold office as a small shareholders’ director in a company, be appointed in or be associated with such company in any other capacity, either directly or indirectly . However he can be appointed in any other company any time after his/her cessation.