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Appointment of Director elected by Small Shareholders

The manner and conditions for appointment of small shareholder’s director in listed company in accordance with section 151 of the Companies Act, 2013.

Small shareholders of a listed company may elect one director or a listed company may opt to have a director representing small shareholders on suo motu action i.e. on its own motion. A director may be elected by the small shareholders of listed company in accordance with section 151 read with Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

Section 151 of the Companies Act, 2013 (CA 2013) has come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27-03-2014. Section 151 of CA 2013 corresponds to section 252 of the Companies Act, 1956 i.e. minimum number of directors.

Definition of Small Shareholder:

In accordance with the explanation given under section 151, small shareholders means a shareholder holding shares of nominal value of not more than ₹20,000 or such other sum as may be prescribed.

Requirement of Small Shareholders’ Director:

According to section 151 of the Companies Act, 2013, 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. A person shall not be appointed as small shareholders’ director of a company, if the person is not eligible for appointment in terms of section 164 of CA 2013.

Procedure for Appointment of Small Shareholder’s Director

The manner along with the terms and conditions of appointment of small shareholder’s director has been prescribed under Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

A) Director elected by Small Shareholders:

In compliance with sub-rule (1) of Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014, a listed company, may upon notice of not less than:

i) 1,000 small shareholders; or
ii) 1/10 of the total number of small shareholders,
whichever is lower, have a small shareholders’ director elected by the small shareholders.

14 Days Notice by Small Shareholders:

The small shareholders shall leave a notice with the company at least 14 days before the meeting to propose a person as a candidate for the post of small shareholders’ director.

Such notice shall contain 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.

However, 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.

Statement together with Notice:

The notice shall also 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 Companies Act, 2013; and
(c) his consent to act as a director of the company.

B) Suo moto appointment by Company:

A listed company may also opt to have a director representing small shareholders suo motu and in such a case the details along with signatures as mentioned above shall not apply for appointment of small shareholders’ director.

Independence of Small Shareholders’ Director:

Small shareholders’ director shall be considered as an independent director if he satisfies the conditions mentioned u/s 149(6) and gives a declaration of his independence in accordance with sub-section (7) of section 149 of the Companies Act, 2013.

Tenure and re-appointment of Small Shareholders’ Director:

The appointment of small shareholders’ director shall be subject to the provisions of section 152 of CA 2013. Small shareholders’ director shall not be liable to retire by rotation. The tenure of such director shall not exceed a period of 3 consecutive years and on the expiry of the tenure, such director shall not be eligible for re-appointment.

A small shareholders’ director shall not, for a period of 3 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.

Vacate the Office before Tenure:

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.

Holding Position in more than 2 Companies:

No person shall hold the position of small shareholders’ director in more than 2 companies at the same time. Only if, 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.

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