Introduction

With the advent of Companies Act, 2013, many new concepts and provisions have been introduced. Many old concepts have also been revisited and the provisions have been changed. This week we are going to elaborate on the concept of Small Shareholder’s Director and provisions relating to the same in Companies Act, 2013 (“the Act”) and its relevant rules.

Applicable sections and rules

Section 151 of the Act and Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014 deals with the appointment of director elected by small shareholder.

Who is a small shareholder?

A small shareholder means a shareholder holding shares of nominal value <= Rs. 20,000/-. The market value of the shares shall have no relevance.

Applicability of provisions relating to Small Shareholders’ director

1. A listed company, may upon notice of >= 1000 small shareholders or 1/10th of total number of shareholders, whichever is lower, have a small shareholders’ director elected by small shareholders.
2. A listed company may opt to have a small shareholders’ director suo moto.

Appointment of Small Shareholders’ Director

1. The Small shareholders shall send a notice of their intention for appointment of a small shareholders’ director atleast 14 days before the meeting
2. Contents of the Notice
   1. Name, address, shares held and folio number of the person whose name is proposed for the post of director
   2. Name, address, shares held and folio number of the small shareholders proposing the above mentioned person as director
3. Notice of intention shall be accompanied by a statement which states
   1. His Director Identification Number
   2. That he is not disqualified to be a director under the Act, and
   3. His consent to act as a director

Independent Director

Such director shall be considered as an independent director subject to, his being eligible to be an independent director under the Act and his giving a declaration of his independence in accordance with the provisions of the Act.

Tenure

1. Such a director shall not be liable to retire by rotation
2. His/ her tenure as small shareholders’ director <= 3 years
3. On expiry of tenure, such director shall not be eligible for re-appointment

Vacation of Office

1. Such a director shall vacate the office of a director if
   1. The director incurs any disqualification u/s 164 of the Act,
   2. The office of the director becomes vacant in pursuance of Section 167 of the Act,
   3. The director ceases to meet the criteria of independence as per Section 149(6).
2. A small shareholders’ director, on ceasing to hold the office of a director, shall not be associated in any capacity with such company for a period of 3 years.

Maximum no. of companies in which a person can be a Small Shareholders’ Director

1. of companies in which a person can be a small shareholders’ director <= 2.
2. If a person is a small shareholders’ director in two companies, such companies should not be in a business which is competing.

Major difference between the provisions of the Companies Act, 1956 and Companies Act, 2013

1. Under Companies Act, 1956, public companies with paid up capital of Rs.5 Crores or more and having 1000 or more small shareholders may have a director elected by small shareholder.
2. As per Companies Act, 2013 also appointment of small shareholders’ director applicable only for listed companies.
3. Hence, now the provisions of small shareholders’ director are not applicable on unlisted public companies.