Small shareholders director

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Tarun Kumar (Querist)
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01 December 2015 Is it mandatory for listed company to have small shareholders' director u/s 151 of Co.s Act 2013 ? In sec. 151 word "may" have been used.

Arpit Shah

Arpit Shah (Expert)
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02 December 2015 Small Shareholders’ Director under Companies Act, 2013

Section 151 read with Rule 7 of Companies Appointment & Qualification of Directors Rules, 2014
Section 151 –Appointment of director elected by small shareholder.
What is ‘small shareholder’?
Explanation of section 151(1) defines ‘small shareholder’ as a shareholder holding shares of nominal value of not more than twenty thousand.
Here person elected by small shareholder as ‘director’ may or may not be a shareholder of a company but a person electing such ‘director’ shall be the ‘small shareholders’.
Subsection (1) states that a listed company ‘may’ have one director elected by such small shareholders in such manner as may be prescribed (i.e. Rule 7).
The term ‘may’ makes it clear that there is no mandatory requirement for a listed companies to have a director elected by such small shareholders on its Board.
Rule 7 (Appointment and qualification of directors)
Sub rule (1) – A listed company , may upon a notice of at least 1000 small shareholders or 1/10th of total number of ‘such’ shareholder (.i.e.1/10th of total no. of small shareholders ), whichever is lower, have a director elected by the small shareholders.
Proviso to sub rule (1) makes it clear that company may suo moto appoint a director representing small shareholders and in such case sub rule (2) shall not apply which is nothing but the procedure for the appointment of person as director by the small shareholders.
Sub rule (2) requires that the small shareholders intending to propose a person as a candidate for the post of small shareholder shall leave a notice of their intention with the company at least 14 days before the meeting under their signatures specifying the name, address, shares held, folio no. 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.
Proviso to sub rule provides that if the person being proposed does not hold any shares in the company, the details regarding shares held, folio no. need not be specified in the notice. The above proviso makes it clear that the person being proposed need not to be a shareholder of the company.
Sub rule (3) – The notice given under sub rule (2) shall be accompanied by the statement signed by the person whose name is being proposed for the name of small shareholders’ director stating-
a) His DIN;
b) That he is not disqualified to become a director under the Act;
c) His consent to act as a director.
Sub rule (4) states that if the director elected by small directors fulfills the criteria of independent director laid down under section 149(6) and gives the declaration of his independence in accordance with section 149(7) then such director shall be considered as independent director. In nutshell, we can say that a small shareholders’ director shall be considered as independent director subject to 2 conditions-
a) If he fulfills the criteria of independent director specified under section 149(6);and
b) If he gives the declaration under section 149(7).
Sub rule (5) – All the provision of section 152 shall apply for the appointment of small shareholders’ director except 3 given below-
a) Such director shall not be liable to retire by rotation;
b) Tenure of such director shall not exceed 3 consecutive years ;and
c) On the expiry of the tenure, such director shall not be eligible for re-appointment.
Sub rule (6) – A person shall not be appointed as small shareholders’ director if person is not eligible for appointment in terms of section 164.
Sub rule (7) deals with the vacation of office of small shareholders’ director. It states that a person appointed as small shareholders’ director shall vacate the office if-
a) He incurs any disqualification specified under section 164.
b) The office of director becomes vacant in pursuance of section 167.
c) The director ceases to meet the criteria of independence as provided under section 149(6).
Language of Clause (c) of sub rule (7) above makes it general that every small shareholders’ director shall vacate his office if he cease to meet the criteria of independent director even if he is not considered as independent director as stated above in sub rule (4). If we assume that clause (c) of sub rule (7) only deals with the small shareholder’s director which are considered as independent director then it make sense but if we analyze this a bit more we will find that still there is an uncertainty which I would like to explain with an example given below-
Mr. A is appointed as small shareholders’ director of ABC ltd. By satisfying the condition laid down under sub rule (4) he is considered as independent director. After a while he ceases to meet the criteria of independent director and according to clause (c) of sub rule (7) he has to vacate his office as small shareholders’ director but logically he should vacate his office as independent director and continue to hold his office as small shareholders’ director.
We can say that under the Companies Act, 2013 there are two classes of independent directors.
1st- Those who are appointed under section 151 as small shareholders’ director and fulfill the conditions given under Rule (7) (4) of Appointment and qualifications of director. Tenure of such directors is maximum of 3 years and are not eligible for re-appointment.
2nd-Those who are appointed under section 149(4) as independent directors. Tenure of such director is 5 years and are eligible for re-appointment for further period of 5 years
Sub rule (8) – No person shall hold office of small shareholders’ director in more than 2 companies at same time.
Whereas proviso states 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 first company.
However it is important to mention that if a small shareholders’ director accepts appointment in any other company which is in competition with the 1st company or he accepts the appointment in more than 2 companies then he does not automatically vacate office as this ground is not mentioned under sub rule (7) although he may be removed on this ground.
Sub rule (9) – After the completion of tenure as a small shareholders’ director, such director shall not be appointed or be associated with such company in any other capacity, either directly or indirectly for a period of 3 years.