Concept Of Small Shareholder Director

Introduction

The companies were generally run by the majority of shareholders and it was evident from court ruling that majority rule was accepted and the internal management of the company was not discussed or questioned. However, with the change in the business environment and the way the business was carried out, the external parties showed signs of deviation from the rigid majority rule so as to protect the interest of minority shareholders. Balance between the minority and majority shareholders of the company was needed with the changed environment.

The small shareholders were given importance in the company through Companies Amendment Act (2000) has bought the importance of small shareholders in the company & protect the interest of the minority shareholders and introduced the concept of 'Small Shareholder Director'. Companies (Second Amendment) Bill 1999, which ultimately led to Companies (Amendment) Act 2000, contained provision for small shareholder director (as proviso to section 252(1) of the Companies Act, 1956 i.e. clause 122 of the bill) for specified class of public companies on mandatory basis but while passing this bill this provision got converted from mandatory to optional basis.

The purpose of this section which is to protect the minority shareholders lost its significance to some extent as the provision was optional in nature. The Companies Act, 2013 has made one welcome change with regard to number of small shareholders proposing candidature for small shareholder director now 1000 small shareholders or 1/10^th of total number of such shareholders whichever is lower can propose a person for the post of small shareholders' director. Earlier in Companies Act, 1956 there was requirement of at least 1000 small shareholders who could have proposed candidature of small shareholder director.

The term Small Shareholders have been defined as persons holding shares of a nominal value of not more than INR 20,000 or such other sum as may be prescribed.

Section 151 of the Companies Act 2013 states that A listed company, may upon notice of not less than one thousand small shareholders or one-tenth of the total number of such shareholders, whichever is lower, have a small shareholders' director elected by the small shareholders. In the erstwhile Companies Act, 1956 under Section 252(1), the provision was applicable only to public companies with a paid-up capital of INR 5 crores or more and having one thousand or more small shareholders. Companies Act, 2013 have restricted the scope of the Small Shareholders by limiting their presence only in the listed companies.

Requirement of Companies Act, 2013 with respect to Small Shareholder Director

Section -151: Appointment of Director Elected by Small Shareholders [Notified Date of Section: 01/04/2014]

A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed.

Explanation.- For the purposes of this section 'small shareholders' means a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.

Detailed analysis of Section 151

Small shareholders mean persons holding shares of a nominal value of not more than INR 20,000 or such other sum as may be prescribed. A listed company, may upon notice of not less than one thousand small shareholders or one-tenth of the total number of such shareholders, whichever is lower, have a small shareholders' director elected by the small shareholders. Under Section 252(1) of the 1956 Act, the provision was applicable only to public companies with a paid-up capital of INR 5 crores or more and having one thousand or more small shareholders.

Sub rule (2) of Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014 states that the small shareholders intending to propose a person as a candidate for the post of small shareholders' director shall leave a notice of their intention with the company at least fourteen days before the meeting under their signatures specifying the 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. Provided that if the person being proposed does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.

Further, a listed company may opt to have a director representing small shareholders suo motu and in such a case the provisions of sub-rule (2) shall not apply for appointment of such director.

A person appointed as small shareholders' director shall vacate the office if –

(a) the director incurs any of the disqualifications specified in section 164;

(b) the office of the director becomes vacant in pursuance of section 167;

(c) the director ceases to meet the criteria of independence as provided in sub-section (6) of section 149.

A person cannot be appointed as small shareholders' director in more than two companies at the same time. Also, 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.

A small shareholders' director shall not, for a period of three years from the date on which he 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.

Exceptions provided to Small Shareholder Director

• Unlike the Independent Director, the Companies Act, 2013 does not specify any qualifications or minimum industry experience criteria for small shareholder director.
• There is no requirement for the candidate to be small shareholder or even shareholder of the concerned listed company.
• A person cannot become small shareholder director in more than 2 companies and second company in which he has been appointed as small shareholder director shall not be in a business which is competing or is in conflict with the business of the first company.
• Small shareholder director‘s tenure shall not exceed period of three consecutive years and after expiry of the tenure such director shall not be eligible for re-appointment.

Impact of Small Shareholder's Director in India

The Indian market is dominant by large promoter shareholding which makes it difficult for small and minority shareholders to contest management decision. Thus, the dominance of majority directors dampens the effects of shareholder activism in the Indian companies. The institutions and the legal redressal mechanism are not effective in providing timely and cost-effective litigation strategies to the small shareholders to counter managements when they act against their interest.

Although, Section 151 of Companies Act, 2013 has been introduced in favour of the minority shareholders, specifically to recognize their worth in the company's board however in India, the same has not been followed in full spirit and it is generally observed that no company wants to indulge in giving a seat to the small shareholders of the company.

Conclusion

Having small shareholders on the board is effective for a company since even the small shareholders are the investor of the company and therefore inclined to contribute to the welfare of the company. Having shareholders on the board will give rise to shareholder participation since more people will be willing to invest in a company where they have ownership and control, both simultaneously.