A Complete Analysis of Section 151 of the Companies Act 2013

As per Section 151 of the Companies Act 2013, small shareholders mean a shareholder who owns shares in a Public Corporation or Company with a nominal value of less than Rs. 20,000/-. Small Shareholders of a listed company have the exclusive right to elect a Director. A Small Shareholders Director (SSD) is a Director who is selected by these shareholders. In this blog, we shall discuss Section 151 of the Companies Act 2013.

What is the Meaning of Shareholder?

• An Organisation, an individual or an institution that owns a Company’s stock/stock options;
• In fact, Shareholders are the proprietors of the Company & they profit from its success through increasing stock prices & dividends. If the Company is losing money, then the portfolio of the shareholders suffers as well;
• The obligation of a Shareholder is not a personal liability & if the firm goes bankrupt, the personal assets of the Shareholders cannot be attached.

A Brief on Section 151 of the Companies Act 2013

Only listed Companies or entities are eligible to opt for Small Shareholder Director (SSD) under Section 151 of the Companies Act 2013. Under Rule 7 of the Companies (Appointment & Qualification of Directors) Rules, 2014, 1000 small shareholders, 1/10^th of the listed Company’s total no. of shareholders, may recommend the election of SSD. Moreover, the Rule states that small shareholders intending to propose an individual as a candidate for the post of SSD must notify the Company or entity at least 14 days prior to the meeting, stating the name, address & any shares held by the individual whose name is proposed for the post of Director & the Small Shareholders who are proposing such person as a candidate for the Director’s post.

Requirements of Shareholders’ Director as prescribed under Section 151 of the Companies Act 2013

Under Section 151 of the Companies Act 2013, a listed Company may have only one Director opted by such small shareholders in such a manner & with such terms & conditions as we mentioned below. An individual or a person shall not be appointed as SSD or Small Shareholders’ Director of a Company if an individual is not eligible for the appointment as per Section 164 of the Companies Act, 2013.

Terms and Conditions for Small Shareholders’ Director

Rule 7 of the Companies (Appointment & Qualification of Directors) Rules, 2014 laid down some terms & conditions for the appointment of Small Shareholders’ Director (SSD), which are as under:

• Election of Small Shareholders Director (SSD): A listed company or entity may, upon notice of not less than:
  • 1000 small shareholders;
  • 1/10^th of the total no. of such shareholders,

Whichever is lower, have an SSD, or a Small Shareholder’s Director opted by the small Shareholder. A Small Shareholder’s Director (SSD) may be opted for voluntarily by any listed Company. Hence, a listed Company may, on its own can, appoint a Small Shareholder’s Director. In such an instance, no notice from Small Shareholder(s) (SS) is required.

• Small Shareholders’ Director (SSD) to be an independent director: SSD or Small Shareholders’ Director shall be regarded as an independent Director, if:
  • He or she is eligible for appointment as an independent director in accordance with sub-section (6) of Section 149 and;
  • He or she gives a declaration of their independence director in accordance with sub-section (7) of Section 149.
• Tenure of Office & no retirement by rotation: The total tenure of Small Shareholders’ Director (SSD) shall not exceed a time period of 3 consecutive years & he or she shall not be liable to retire by rotation. Moreover, he or she shall not be eligible for re-appointment after the expiry of their tenure.
• Grounds of Disqualification: Disqualifications of a Small Shareholders’ Director (SSD) are the same as that of any other Director as prescribed under Section 164 of the Act.
• Statement by the Proposed Small Shareholders’ Director (SSD): The notice shall be followed by a statement signed by the proposed Director for the Small Shareholders’ Director post stating:
  • His or her DIN (Director Identification Number);
  • He or she is not disqualified or eligible to become a Director under the Act;
  • His/her consent to act as a Company’s Director.
• No association with the Company or entity for the next 3 years: A Small Shareholders’ Director (SSD) shall not serve for a period of 3 years from the date on which he/she ceases to hold Office as a Small Shareholders’ Director (SSD) in a Company be appointed in/be associated with such Company or entity in any other capacity, either indirectly or directly.
• Grounds of Vacation of Office: A SSD or a Small Shareholders’ Director shall vacate the Office, if:
  • He or she ceases to be a small shareholder on & from the cessation date;
  • Ge or she incurs any of the disqualifications prescribed under Section 164;
  • The Office of the Director becomes empty in pursuance of Section 167;
  • He or She ceases to meet the criteria of independence as mentioned in Section 149.
• No. of Small Shareholders’ Directorship: An individual shall not hold the Office of SSD or Small Shareholders’ Director more than 2 Companies at the same time.

The process to Appoint a Small Shareholder Director of a Company under Section 151 of the Companies Act 2013

A firm may appoint a Small Shareholder Director (SSD)  on its own initiative/in response to a request of a Small Shareholder. A Small Shareholder Director is unable to become a Company’s Managing Director or Whole-Time Director. Some conditions must be met before a Small Shareholders Director may be declared an independent Director.

A notice must be provided at least 14 days before the general meeting if the Small Shareholders want to designate a Small Shareholders Director. The name, address & number of shares held by the individual sought to be nominated as a Small Shareholders Director should all be mentioned in the notice. A Statement with the following declarations must be issued along with the notice:

1. DIN or Director of the prospective person;
2. The recommended candidate is not ineligible to serve as a Director;
3. The proposed person’s or individual’s permission to act in the capacity of a Director.

A resolution for the appointment of a Small Shareholders Director (SSD) should be passed at the General Meeting (GM) after the preceding formalities are completed. Then, a postal ballot will be used to opt for the Small Shareholder Nominee.

Conclusion

So it is concluded that the purpose of Section 151 of the Companies Act 2013^[1] is to defend the interests of Small Shareholders. Small Shareholders who want to propose a candidate for the position of Small Shareholder Director or (SSD) must give the Company written notice of their intention at least 14 days prior to the meeting, comprising the name, address, no. of shares held & other vital details of the person or individual whose name is being proposed for the position of Director.

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