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Procedure for Appointment of Small Shareholders’ Director

Procedure for Appointment of Small Shareholders’ Director

Background:

  • A listed company may appoint a small shareholders’ director suo moto or upon receiving notice from either one thousand small shareholders or one-tenth of the total number of small shareholders, whichever is lower.
  • Small shareholder has been defined as those holding shares of nominal value not exceeding twenty thousand rupees or such sum as prescribed.

Applicable Acts/Rules/Regulations:

  • Section 108, 110, 149, 151,152 and 173 of Companies Act, 2013
  • Rule 7, 8 of the Companies (Appointment and Qualification of Directors) Rules, 2014
  • Rule 20, Rule 22(16) and Rule 23 of the Companies (Management and Administration) Rules, 2014
  • Regulation 30,44, 46 of SEBI (LODR) Regulations, 2015
  • Clauses of Secretarial Standard on Board Meeting (SS-1)
  • Clauses of Secretarial Standard on General Meeting (SS-2)

Preliminary Requirements & Important Points:

  • As reiterated earlier, small shareholders’ director can be appointed suo moto by the company itself or on receipt of notice from Small Shareholders as detailed above.
  • 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: [Rule 7(2) of the Companies (Appointment and Qualification of Directors) Rules, 2014)
  • 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
  • The notice to 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;

(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)

(d) Declaration of independence as per Section 149(7) [As such Director shall be considered as Independent Director]

  • The appointment of a small shareholders director shall be subject to the provisions of section 152, with the following exceptions:
    • The director shall not be subject to retirement by rotation.
    • The director’s tenure shall not exceed three consecutive years.
    • Upon expiration of the tenure, the director shall not be eligible for reappointment.
  • A person shall not be appointed as small shareholders director if he is disqualified from being a Director U/s 164 of Companies Act 2013
  • Small Shareholders’ Director Shall Vacate the Office if:
    • The director becomes disqualified under section 164.
    • The office becomes vacant pursuant to section 167.
    • The director no longer meets the independence criteria specified in sub-section (6) of section 149.
    • No person shall simultaneously serve as a small shareholders director in more than two companies.
    • A small shareholders director shall not, for a period of three years after ceasing to hold office, be appointed in or associated with the same company in any capacity, whether directly or indirectly

Procedure:

Meeting of Board of Directors

  • As per Section 173 of the Companies Act, 2013 and Secretarial Standard-1:
    • Notice of the Board Meeting shall be issued to all Directors at their registered addresses by post or hand delivery or by electronic means at least 7 days before the date of the board meeting, with provision for shorter notice in case of urgent business.
    • The notice shall include Agenda, Notes to Agenda, and Draft Resolution.
    • The Board at its meeting shall pass resolutions for intimating the members for the proposed appointment of Small Shareholders Director and for fixing the day, date, time, and venue of the General Meeting, approve the draft AGM Notice along with Explanatory Statement as per Section 102 of the Companies Act, 2013.
    • Listed companies shall disclose the outcome of the Board Meeting to the Stock Exchange within 12 hours of Board Meeting/ 3 hours as applicable*[Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015] and also on website of the Company within 2 working days from the date of passing of resolution for the appointment. [Regulation 46 (3) of LODR 2015]. The listed entity may provide the exact link to the webpage of each of the recognized stock exchanges where such information has already been made available by the listed entity.

*If the Board meeting is concluded after normal trading hours but more than 3 hours before the beginning of the normal trading hours the outcome to be disclosed within 3 hours from the closure of the board meeting.

    • Draft Minutes shall be prepared and circulated within 15 days from the conclusion of the Board Meeting.

Steps to be Taken Upon Receipt of Notice

  • As per Section 110 the Companies Act, 2013 read with Rule 22(16) of the Companies (Management and Administrative Rules), 2014), a small shareholder’ director shall be elected by way of postal ballot
    • However, such item of business required to be transacted by means of postal ballot may also be transacted at a general meeting by a company which is required to provide the facility to members to vote by electronic means under section 108, in the manner provided in that section. (Proviso of Section 110(1) of the Companies Act, 2013)
    • Under Section 108 of the Companies Act 2013, the Central Government prescribes the class or classes of companies and manner in which a member may exercise his right to vote by electronic means. Classes of company so prescribed are – company which has listed its equity shares on a recognised stock exchange and every company having not less than one thousand members [Rule 20(2) of The Companies (Management and Administration) Rules, 2014]
    • Therefore, a listed company and a company having not less than 1000 members providing e-voting facilities may opt for appointment of small shareholders’ director at a general meeting or by way of postal ballot (Section 108 read with Rule 20 of the Companies [Management and Administrative Rules], 2014.).
  • For the companies conducting general meeting for appointment of small shareholders’ director upon receipt of special notice from members, the procedure as mentioned in Rule 23 of the Companies [Management and Administration] Rules, 2014 and Secretarial Standard-2 to be followed:
    • The company shall give its members notice of the resolution at least seven days before the general meeting, exclusive of the day of dispatch and day of the meeting.
    • Where direct notice is impracticable, the notice shall be published in:
      • English language in an English newspaper and in vernacular language in a vernacular newspaper, both with wide circulation in the State where the registered office is situated along with the company’s website, if any.
    • Published notices shall appear at least seven days before the meeting, exclusive of the day of publication and day of the meeting.
    • The notice shall specify the day, date, time, full address of the venue, and include a statement on the business to be transacted.
    • The General Meeting shall pass an ordinary resolution for the appointment of the Small Shareholders Director.
    • The company shall issue a letter of appointment to the director stating terms, conditions, and remuneration.
    • Listed companies shall disclose proceedings of the General Meeting to the Stock Exchange within 12 hours/ 3 hours as applicable* from conclusion (Regulation 30 of LODR 2015) and on the company website within 2 working days from the date of appointment (Regulation 46(3) of LODR 2015).

 * If the meeting is concluded after normal trading hours but more than 3 hours before the beginning of the normal trading hours the outcome to be disclosed within 3 hours from the closure of the board meeting.

    • Voting results shall be submitted to the stock exchange within two working days from the conclusion of the General meeting. (Regulation 44 of LODR 2015).
    • Provisions of Rule 20 of The Companies (Management and Administration) Rules, 2014 shall be taken into account for e-voting and Rule 22 for postal ballot

Post-Appointment Requirements

  • Form DIR-12 (Return of Appointment of Director) shall be filed with the Registrar within 30 days of appointment, accompanied by:
    • Certified True Copy of the Ordinary Resolution passed.
    • Form DIR-8 Declaration by Director.
    • Letter of Appointment.
  • For companies other than OPC and Small Company, the return must be certified by a Company Secretary/Chartered Accountant/Cost Accountant.
  • The appointed director shall disclose holdings of company securities as on the date of appointment within seven days as per Regulation 7 of SEBI (Prohibition of Insider Trading) Regulations, 2015.
  • Necessary entries shall be made in the Register of Directors and Key Managerial Personnel.
  • Required amendments shall be filed under applicable laws.

Penalties & Punishments

As per Section 172 of the Companies Act, 2013:

  • If a company is in default in complying with any of the provisions and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.

Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article. 

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