Small shareholders’ director - Will it be a reality? - Dr S. Chandrasekaran - Article published in Business Advisor, dated April 25, 2015 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XI Part 2 April 25, 2015 7 Business Advisor
Small shareholders‘ director: Will it be a
reality?
Dr S. Chandrasekaran
The Companies Act, 2013 (the Act), has made a
significant change in appointment of directors elected
by small shareholders (SS). The Companies Act, 1956,
had a provision for SS for all public companies and the
Act has now made its applicability only to listed
companies and taken away such concept for unlisted
public companies. The Act, in this provision, is not very
rigid and, therefore, has provided that a listed company
―may‖ have one director elected by small shareholders.
The Act defines a small company but has not defined the term ―small
shareholder‖; it has explained in the applicable section that ―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
sum as may be prescribed.‖ Companies issue shares, both equity and
preference. Preference Shares may be of different classes, and equity shares
may be of different voting rights. If a shareholder holds any kind of shares
in a particular company, all the nominal value of shares can be clubbed to
satisfy about his status as a small shareholder. However, persons holding
convertible debentures, exercisable stock options are not to be included
unless all such instruments are converted into share capital.
The concept of small shareholders‘ director has now been restricted only to
listed companies but the Securities and Exchange Board of India is silent on
such concept. This is one of the provisions in the Act and listing agreement
which needs same mind set from both the regulators.
Appointment of small shareholder director
The listed company is permitted to have a director representing SS suo-
moto and in such a case the small shareholders need not exercise their right
to identify and recommend their representative as an SS director. It is also
of interest to note that the person who is to be appointed as an SS director
need not be a shareholder of such company.
The SS of not less than one thousand in number, or one-tenth of the total
number of such shareholders, whichever is lower may join together and
identify a person for appointment of SS director. The shareholders of a listed

2. Volume XI Part 2 April 25, 2015 8 Business Advisor
company are spread over globally and identifying among them as SS is not
an easy task and that too for SS.
Basic requirement for eligibility to be a SS director
SS who join together may send a notice to the company at least fourteen
days before the date of shareholders‘ meeting to propose a person as SS
director. The notice shall be under the signature of all small shareholders
specifying the name, address, shares held and folio number and the person
whose name is being proposed as SS director for SS. If the proposed person
is not a shareholder, particulars of shares held and folio number need not
be specified in the notice. The proposed person need not hold the shares but
if he holds the shares then he should be a small shareholder and should not
hold shares more than the nominal value of rupees twenty thousand.
The notice shall be accompanied by a statement signed by the person whose
name is being proposed for the post of SS director stating:
a) His director identification number (DIN);
b) That he is not disqualified to become a director under the Act (DIR-8);
and
c) His consent to act as a director of the company (DIR-2).
Status of SS director
A listed company is to comply with the mandatory appointment of
independent directors (ID). The SS director, for all purposes, will be
considered as an independent director (ID) if he qualifies as ID under the
provisions of the Act. He shall also give a declaration of his independence
and shall at the first meeting of the Board in which he participates as a
director and thereafter at the first meeting of the Board in every financial
year or whenever there is a change in the circumstances which may affect
his status as an ID, give a declaration that he meets the criteria of
independence.
SS director needs to be an independent all the time of his tenure as SS
Small shareholders who join together may send a notice to
the company at least fourteen days before the date of
shareholders‘ meeting to propose a person as small
shareholders‘ director.

3. Volume XI Part 2 April 25, 2015 9 Business Advisor
director in the company.
Certain exemptions to appointment of SS director
The Act provides certain basic conditions for appointment of a director.
Appointment of SS director also requires to comply with the conditions of
appointment, such as, valid director identification number, declaration that
he is not disqualified for appointment of director, and consent to act as a
director. The Act, however, has provided certain exemptions to SS director.
They are:
a) Shall not be liable to retire by rotation;
b) Tenure of SS director shall not exceed a period of three consecutive
years; and
c) On expiry of the tenure, such director shall not be eligible for re-
appointment.
A duty is cast on the nomination and remuneration committee to identify a
person for consideration of appointment as a director in a company and in
the case of SS director the same is considered and recommended by a the
minimum number of SS as discussed above.
Vacation of SS director
The appointment of SS director is by the shareholders and for a maximum
period of three consecutive years. The term ―consecutive years‖ has not been
explained and in the absence of any such explanation, the year is to be
construed as three consecutive annual general meetings.
The Act has provided the circumstances at which a person appointed as SS
director shall vacate the office. He shall vacate if the SS director:
a) incurs any of the disqualifications specified in the provisions relating to
disqualifications of a director in the Act;
b) satisfies any of the conditions for vacation of office of director as per the
provisions provided in the Act; and
The term ―consecutive years‖ has not been explained and, in
the absence of any such explanation, the year is to be
construed as three consecutive annual general meetings.

4. Volume XI Part 2 April 25, 2015 10 Business Advisor
c) ceases to meet the criteria of independence as provided in Act.
Conditions for SS director
A person can be an SS director at best in a maximum of two companies at
the same time. The second company in which he is to be appointed shall not
be in a business which is competing or is in conflict with the business of the
first company. In addition, an SS director shall not, for a period of three
years from the date on which he ceases to hold office as an SS director in a
company, be appointed in or be associated with such company in any other
capacity, either directly or indirectly.
Duties of director
The Act has introduced a new provision casting duties on director. It has
been divided into two parts which may be classified as ―Dos and Don‘ts‖.
The provisions of duties of directors are also applicable to SS director.
An SS director is also to comply with all provisions relating to disclosure,
code of conduct and so on. SS director being an ID, shall enjoy all the
benefits, immunities provided in the Act. He is also entitled to the privileges
and receipt of information as a normal director in a company.
Conclusion
The concept of SS director is only in the Act and is not supported by listing
agreement which governs a listed company. The concept is also not
mandatory and only voluntary in nature. Majority of listed companies are
still promoter-driven with a maximum of 75% voting rights and, therefore,
expecting a suo moto appointment of SS director from the promoters is
remote. On the other side, the small shareholders are spread over the globe
and identifying and collecting them together to arrive at the minimum
number of such shareholders is again remote. Therefore, all said and done,
the provision of SS director will only be on paper and be nothing beyond.
(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi)
A person can be a small shareholders‘ director at best in a
maximum of two companies at the same time.