Small Shareholders Director Under The Companies Act, 2013

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 1/10^th 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:

1. The Rules provide that a small shareholder director shall hold office for a tenure of three consecutive years.

2. The Rules also provide that the small shareholder director cannot be re-appointed after the completion of three years tenure.

3. 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.

4. 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.

5. 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.

1. Rule 7 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 provides that either 1000 small shareholders or 1/10^th of small shareholders, whichever is less must provide a notice to a listed company to appoint a small shareholder director.

2. 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.

3. 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.

4. 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 –

(a) his Director Identification Number (DIN).

(b) that he is not disqualified to become a director under the Act(section 164); and

(c) his consent to act as a director of the company

5. 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.

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.

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.

Views are personal.

Reference

E-Book (mca.gov.in)

COMPANIES (AMENDMENT) ACT 2000 (commonlii.org)

Tata Consultancy Services Limited v/s Cyrus Investments Pvt. Ltd. & Ors

Small Shareholders’ Director under Companies Act, 2013 (taxguru.in)

Concept Of Small Shareholder Director (caclubindia.com)