Small Shareholders Director (Section 151 Companies act 2013)

The concept of Small Shareholders Director was introduced into Section 151 Companies Act 2013, to protect the interests of Minority in a company. According to section 151 of the Act every listed company may have one director elected by such small shareholders in such manner and on such terms and conditions as may be prescribed.  “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. Also Read our earlier posts on Director Retirement by Rotation, Directors Appointment Procedure, Share and Debenture Differences, Borrowing Powers of a Company, Red Herring Prospectus, Shelf Prospectus, Bonus Issue of Shares, Issue of Shares with Differential Voting Rights,  Section 189 of Companies Act 2013, Reduction of Share Capital and the concept of Right Shares under the Companies Act 2013.

Here, the ‘nominal value’ of shares is relevant. It does not matter how much is the ‘paid up value’ or ‘market value’ of shares. However, a small shareholder may be a holder of equity shares or preference shares or both.

For example: Mr. A holds 5000 equity shares of Rs. 10 each (Rs. 5 paid up) in XYZ Ltd. However, Mr. A cannot be considered as small shareholder since the nominal value of shares held by him (i.e. Rs. 50,000) exceeds Rs. 20,000.

Terms & Conditions for Small Shareholders Director

Rule 7, Companies (Appointment and Qualification of Directors) Rules, 2014 laid down the following terms and conditions for appointment of small shareholder’s director, which are as under:

Election of small shareholders director

A listed company, may upon notice of not less than

  1. One thousand small shareholders; or
  2. one-tenth of the total number of such shareholders,

which ever is lower; have a small shareholder’s director elected by the small shareholder.

A ‘Small shareholders Director’ may be elected voluntarily by any listed company. Thus, a listed company, may, on its own, act to appoint a Small shareholders Director. In such a case, no notice from small shareholder(s) is required.

Notice of intention to propose a candidate:

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 the their details and proposed director’s details. The details include name, address, shares held and folio number etc. If the proposer does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.

Shareholders eligible to give notice:

The notice shall be given by at least-

  1. 1000 small shareholders; or
  2. 1/10th of the total number of small shareholders, which ever is lower.

Statement by the proposed small shareholders director:

The notice shall be accompanied by a statement signed by the proposed director for the post of small shareholders director stating

  1. his Director Identification Number;
  2. that he is not disqualified to become a director under the Act; and
  3. his consent to act as a director of the company.

Small shareholders director to be an independent director:

Small shareholders director shall be considered as an independent director, if-

  1. he is eligible for appointment as an independent director as per sub-section (6) of section 149; and
  2. he gives a declaration of his independence as per sub-section (7) of section 149.

Tenure of office and no retirement by rotation:

The tenure of small shareholders director shall not exceed a period of 3 consecutive years and he shall not be liable to retire by rotation. Further he shall not be eligible for re-appointment after the expiry of his tenure.

Grounds of disqualification of small shareholders director:

Disqualifications of a small shareholders director are the same as that of any other director specified under section 164 of the Act.

Grounds of vacation of office of small shareholders director:

A Small shareholders director shall vacate the office if –

  1. he ceases to be a small shareholder, on and from the date of cessation;
  2. he incurs any of the disqualifications specified in section 164;
  3. the office of the director becomes vacant in pursuance of section 167;
  4. he ceases to meet the criteria of independence as provided section 149 (6).

Number of small shareholders Directorship:

A person shall not hold the office of small shareholders director in more than two companies. If second company is in competitive business or is in conflict with business of the first company, he shall not be appointed in second company.

No association with the company for next 3 years:

He shall directly or indirectly not be appointed or associated in any other capacity with the company either directly or indirectly for a period of 3 years from the date of cessation as a small shareholder’s director.

Important points to note relating to small shareholders director:

A small shareholders director may be removed by passing an ordinary resolution in the general meeting in accordance with the provisions of section 169 of the Act. At the time of voting on such resolution, every equity shareholders shall have a right to vote irrespective of the fact as to whether he is a small shareholder or not.

A small shareholders director shall be included in the ‘total number of directors’ as prescribed under section 152 (6) of the Act.