Open Access Research Article
SMALL SHAREHOLDERS DIRECTOR UNDER THE COMPANIES ACT, 2013
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SMALL SHAREHOLDERS DIRECTOR UNDER THE COMPANIES ACT,
2013
AUTHORED BY - ANISH RAJ SINGH,
BBA.LLB(H) 2020-2025
CO-AUTHOR - AYUSH KRISHN DIXIT,
BBA.LLB(H) 2020-2025
CO-AUTHOR - HIMANSHI SINGH,
BBA.LLB(H) 2020-2025
AMITY UNIVERSITY LUCKNOW UTTAR
PRADESH CAMPUS
Abstract
A minor shareholder is someone who owns shares in a public
corporation with a nominal value of less than INR 20,000. A listed company’s
small shareholders have the right to elect a director. A ‘Small Shareholders
Director’ is a director who is elected by these shareholders. In this article
we will discuss about Shareholders meaning, Section 151 Companies Act, and the
process to appoint Small Shareholder Director.
·
A person, organization, or
institution that owns a company’s stock or stock options.
·
Shareholders are, in fact,
proprietors of the company, and they profit from its success through increasing
stock prices and dividends. If the company is losing money, the portfolio of
the shareholders suffers as well.
·
The shareholders’
obligation is not a personal liability, and if the firm goes bankrupt, the
shareholders’ personal assets cannot be attached.
Introduction
The concept of small shareholder
director was introduced to safeguard the interests of small shareholders in a
company. The appointment of a small shareholder director is a measure taken to
ensure that the small shareholders of a company are adequately represented and
to prevent the board of directors from taking any decisions that are detrimental
to the interests of small shareholders.
According to the Companies Act, 2013
small shareholders are those who have relatively less shares and so are
vulnerable to the dominance of majority shareholders in the company, the
provision of small shareholder director was inculcated in the act to ensure
that the decisions of the Board meet the requirements of fairness and that
small shareholders through a Board presence would have their interests
effectively represented.
The Companies Act, of 1956 introduced
this concept with limited scope, which only dealt with the appointment of
directors and was appointed on an optional basis. However, the Companies
(Amendment) Act, of 2000 has bought the importance of small shareholders in the
company and introduced the concept of 'Small Shareholder Director'. As a
result, the Companies Act, 2013 provided a much wider scope to the provisions
of the small shareholder directors by expanding the role of the small
shareholder director beyond just the appointment of directors.
The wider scope of the 2013 Act
enabled the small shareholder directors to have a more significant role in the
company's decision-making process, which can help ensure that the interests of
minority shareholders are adequately represented. The provisions of small
shareholder director are dealt in section 151 of the Companies Act, 2013 and
the Companies (Appointment and Qualifications of directors) Rules, 2014.
Who Are Small Shareholders?
Section 151 of the Companies Act,
2013 deals with the provisions of small shareholders directors and for this
purpose defines the small shareholders as:
"Shareholders holding shares of
nominal value of not more than 20,000 or such other sum as may be
prescribed."
So, the small shareholders are those
shareholders whose share value is relatively less in the company.
WHICH COMPANIES MUST APPOINT A SMALL
SHAREHOLDER DIRECTOR?
The companies Act, 2013, or the rules
do not mandate or obligate any kind of company to appoint a small shareholder
director, however, the rules provide for an enabling provision in relation to
small shareholder directors.
Rule 7 of Companies (Appointment and
Qualification of directors) rules, 2014 says that: Any listed company can
appoint a small shareholder director on an application made by either 1000
small shareholders or 1/10th of the small shareholders whichever is lower.
However, the section also provides
that a listed company can opt to Suo moto (on its own) to appoint a small
shareholder director even if no application was made by the small shareholders.
Appointment
Of Small Shareholder Director:
Qualifications:
Neither the Rules nor the Act
provides for any minimum qualification criteria for the appointment of a small
shareholder director. In fact, a small shareholder director need not even be a
small shareholder o hold shares in the listed company. The small shareholders
may nominate any person to be the small shareholder, whether he owns shares or
not is immaterial in this case.
Disqualifications:
A small shareholder director is a kind
of director, hence the disqualification criteria as mentioned under section 164
of the Companies Act, 2013 applies to the small shareholder director as well.
Further, the provisions of vacancy of a director as mentioned under section 167
of the Companies Act, 2013 apply to small shareholder directors as well.
Further, the Companies Act, 2013
provides that if the small shareholder director at any time ceases to meet the
independence criteria as mentioned under section 149 of the Companies Act, then
the small shareholder director will be disqualified.
Tenure And Other Restrictions:
The Rules provide that a small shareholder director
shall hold office for a tenure of three consecutive years.
The Rules also provide that the small shareholder director
cannot be re-appointed after the completion of three years tenure.
A person may not occupy the position of small
shareholder director in more than 2 companies, and the second company in which
he has been appointed as such cannot be engaged in a line of business that is
in direct competition or conflict with the first corporation.
Further a small shareholder director cannot for a
period of three years from the date on which he ceases to hold the office as a
small shareholder director be appointed in or be associated with such company
in any other capacity, either directly or indirectly.
As per Rule 7(5) of the Companies (Appointment and
Qualification of Director) Rules, 2014 the appointment of small shareholders'
director shall be subject to the provisions of Section 152 of the Companies Act
2013 except that small shareholder directors are not subject to retirement by
rotation.
Procedure:
On Notice Of Small Shareholders:
Section 151 of the Companies Act,
2013 provides that a listed company may elect one small shareholder director in
the manner and in such terms and conditions as may be prescribed. Rule 7 of the
Companies (Appointment and Qualifications of Directors) Rules, 2014 provides
that either 1000 small shareholders or 1/10th of small shareholders, whichever
is less must provide a notice to a listed company to appoint a small
shareholder director.
Upon receiving such notice, the
company must appoint one small shareholder director.
In accordance with Subrule (2) of Rule 7 of the
Companies (Appointment and Qualification of Directors) Rules, 2014, small
shareholders who wish to nominate a person for the position of small
shareholders' director must notify the company in writing at least 14 days
prior to the meeting, with their signatures, and include the candidate's name,
address, number of shares held, and folio number.
The notice need not include the
specifics of the shares held and the folio number if the individual being
recommended does not own any shares in the company.
The notice shall be accompanied by a statement signed
by the person whose name is being proposed for the post of small shareholders'
director stating: his Director Identification Number (DIN).
that he is not disqualified to become a director under
the Act(section 164); and his consent to act as a director of the company[2]
The small shareholder director so
appointed under the section will be considered as an independent director and
so the small shareholder director must satisfy the criteria of independence as
mentioned under section 149 of the Companies Act, 2013 and must also provide a
declaration of independence.
Suo Moto Appointment By The Company:
Further, rule 7 of the Companies
(Appointment and qualifications of directors) rules, 2014 provides that a
listed company, if it feels that a small shareholder director needs to be
appointed may, without any notice by the small shareholders, appoint a small
shareholder director on its own. In such a case the provisions of sub-rule (2)
shall not apply to the appointment of such a director.
Role And Importance Of Small
Shareholder Director In A Company
The main aim of the appointment of a
small shareholder director is to ensure that he/she represents the interests of
the small shareholders of the company adequately. So, they play a
major role in protecting the rights
of minority shareholders in a company. To ensure that a fair and transparent
system is maintained in a company that does not infringe on the rights of small
shareholders, the appointment of a small shareholder director is
quintessential.
The role of small shareholder
directors is important, as they act as a bridge between the company's
management and the minority shareholders. Small shareholder directors help to
ensure that the company is being run in an ethical and transparent manner. They
promote good corporate governance practices within the company and help to
ensure that the board and management are accountable to all shareholders.
Shortcomings Of
Provisions Of Small Shareholders Directors In Companies Act, 2013 While the
Companies Act, 2013 has provided a wider ambit to the small shareholder
director, it lacks in providing a binding or obligatory nature to the
provision. Initially, when the Companies (amendment) bill, 2000 was introduced,
the provision of small shareholder directors was mandatory for a certain
specified class of public companies.
However, when the bill was passed,
the provision was made an optional requirement. Adequate representation of
small shareholder directors is essential for a company, by making it an
optional provision, it became a non-binding provision, unlike other provisions
like the independent director.
So the companies are not bound to
appoint small shareholder directors unless there is a notice by small
shareholders or the company itself on its own decides to appoint one. Further
another limitation or shortcoming of the provision is that it only specifies
the listed companies and has no mention of other public companies.
The provision of small shareholder
directors is essential to ensure that the small shareholders are not subdued by
the dominance of majority shareholders in all companies, by making it a non-obligatory
provision and limiting it to only listed companies, the scope and applicability
of the provision is narrowed down.
Further, the provisions as such do
not provide for any selection criteria for the small shareholder directors, in
fact, the rules also provide that a small shareholder director nominee need not
even be a shareholder of the company, so this may lead to arbitrary selection
of small shareholder directors. This is solely because a person who is not even
a shareholder of the company may not adequately understand the interests of the
small shareholders of the company.
The present provisions also do not
provide for any specific accountability mechanisms for small shareholder
directors. This can limit their ability to hold the board accountable for any
decisions that may adversely affect the interests of small shareholders. Hence,
through the present provisions of the small shareholder director is a positive
step towards enhancing shareholder democracy, there are several shortcomings that
need to be addressed to make it more effective in representing the interests of
small shareholders on the board.
Information on Section 151 Companies Act
Only listed companies are
eligible to opt for SSD (Small Shareholder Director) under Section 151 of the
Act. Under Rule 7 of the Companies (Appointment and Qualification of Directors)
Rules, 2014, 1000 small shareholders, or one-tenth of a listed company’s total
number of shareholders, may recommend the election of SSD. Furthermore, the
Rule states that small shareholders intending to propose a person as a
candidate for the post of SSD must notify the company at least 14 days prior to
the meeting, specifying the name, address, and any shares held by the person
whose name is proposed for the post of director, as well as the small
shareholders who are proposing such person as a candidate for the post of
director.
Process to Appoint Small Shareholder Director of a Company
A firm may appoint a small
shareholder director on its own initiative or in response to a small
shareholder’s request. A small shareholder director is unable to become a
company’s Whole-Time Director or Managing Director. Certain conditions must be
met before a small shareholders director maybe declared an independent
director.
A notice must be provided
at least 14 days before the general meeting if the small shareholders wish to
designate a Small Shareholders Director. Name, address, and a number of shares
held by the person sought to be nominated as a Small Shareholders Director
should all be included in the notice. A statement with the following
declarations must be issued along with the notice:
· The recommended candidate
is not ineligible to serve as a director.
· The suggested person’s
permission to act in the capacity of a director.
A resolution for the
appointment of a Small Shareholders Director should be passed at the general
meeting after the preceding formalities are completed. Finally, a postal ballot
will be used to elect the small shareholder nominee.
Reason for Vacation of Office
A small shareholder
director may resign if one of the following conditions exists:
· If a director is disqualified
for any reason.
· Due to the discovery of
flaws in their appointment, the office of directors becomes vacant.
· He/she refused to meet the
independence standards.
· A specific resolution is
passed to remove him/her from the position.
Conclusion:
The concept of the small shareholder
director on the board of listed companies is a laudable step towards enhancing
shareholder participation and democracy in India. The concept is essential for
shareholder democracy and to ensure that the small shareholders are safeguarded
from the dominance of majority shareholders.
The role of small shareholder
directors is important, as they act as a bridge between the company's
management and the minority shareholders. Small shareholder directors help to
ensure that the company is being run in an ethical and transparent manner. They
promote good corporate governance practices within the company and help to
ensure that the board and management are accountable to all shareholders.
As stated in the Statement of Objects and Reasons, the
purpose of including this concept in the Company Act of 2013 was to defend the
interests of small shareholders. Small shareholders who wish to propose a
candidate for the position of small shareholder director must give the company written
notice of their intention at least fourteen days prior to the meeting,
including the name, address, number of shares held, and other necessary
information of the person whose name is being proposed for the position of
director.
However,
the current provisions of the Companies Act, 2013 have several shortcomings
that impede its effectiveness. The lack of a specific process for the selection of small
shareholder directors, and the absence of special powers and accountability
mechanisms for them, are some of the issues that need to be addressed.
Therefore, it is incumbent on the
government and regulators to conduct a comprehensive review of the current
provisions and take remedial measures to ensure effective representation of
small shareholders on the board, promote transparency and accountability in
corporate governance, and safeguard the interests of all shareholders.
Article Information
SMALL SHAREHOLDERS DIRECTOR UNDER THE COMPANIES ACT, 2013
Authors: ANISH RAJ SINGH, AYUSH KRISHN DIXIT, HIMANSHI SINGH
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/04/20
- Volume 2
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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