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Companies Act, 2013

Procedure for Appointment of Small Shareholders Director

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Aakanksha Singhal Aakanksha Singhal
Aakanksha Singhal

Published on: Dec 2, 2020

Khushboo Sharma
Khushboo Sharma

Updated on: Sep 30, 2023

★★★★★(9 Rating)
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Introduction

A Listed Company, may upon notice of not less than one thousand small shareholders or one-tenth of the total number of such shareholders, whichever is lower, have a Small Shareholders’ director elected by the Small Shareholders. [Rule 7(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014]

Here, Small Shareholders means a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed. [Explanation of Section 151]

A Listed Company may also appoint a Small Shareholders’ Director suo moto where there is no need to give notice to the Company. [Proviso of Rule 7(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014]

Mandatory Requirements

  1. The individual who will be appointed as a Director shall have an Active DIN. [Section 152(3)]
  2. 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. [Rule 7(2) of the Companies (Appointment and Qualification of Directors) Rules, 2014]
  3. Small Shareholders’ Director shall be considered as an Independent Director. He shall be eligible to be appointed as an Independent Director and give a declaration of his Independence. [Rule 7(4) of the Companies (Appointment and Qualification of Directors) Rules, 2014]
  4. A person shall not be eligible for appointment as a Director of a Company, if he is disqualified from being appointed as a Director in the Company as per Section 164(1). [Rule 7(6) of the Companies (Appointment and Qualification of Directors) Rules, 2014]
  5. No person shall hold the position of Small Shareholders’ director in more than two companies at the same time and 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. [Rule 7(8) of the Companies (Appointment and Qualification of Directors) Rules, 2014]
  6. The appointment of small shareholders’ director shall be subject to the provisions of section 152 except that
    • such director shall not be liable to retire by rotation
    • such director’s tenure as small shareholders’ director shall not exceed a period of three consecutive years
    • on the expiry of the tenure, such director shall not be eligible for re-appointment. [Rule 7(5) of the Companies (Appointment and Qualification of Directors) Rules, 2014]

Following Procedure is to be followed

  1. Notice to the Company by Small Shareholders
    • 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.
    • Notice shall have 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.
    • But 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 shall be accompanied by a statement signed by the person whose name is being proposed for the post of small shareholders’ director stating
      • his Director Identification Number
      • that he is not disqualified to become a director under the Act in Form DIR-8
      Company shall examine that the same meets the requirements.
  2. Convene a Meeting of Board of Directors [As per section 173 & Secretarial Standard-1 (SS-1)]
    • Issue Notice of Board Meeting to all the Directors of Company at their addresses registered with the Company, at least 7 days before the date of Board Meeting. A shorter notice can be issued in case of urgent business.
    • Attach Agenda, Notes to Agenda and Draft Resolution with the Notice.
    • Hold a meeting of Board of Directors of the Company and pass Board Resolution:
      • to intimate the members for the appointment of Small Shareholders’ Director to be elected by small shareholders
      • to fix the day, date, time and venue of the General Meeting and to approve the draft notice convening the General Meeting along with explanatory statement annexed to the notice as per requirement of the Section 102 of the Companies Act, 2013 and authorize the Director or Company Secretary to sign and issue notice of General Meeting.
    • Prepare and Circulate Draft Minutes within 15 days from the conclusion of the Board Meeting, by Hand/Speed Post/Registered Post/Courier/E-mail to all the Directors for their comments. [Refer the Procedure for Preparation and Signing of Minutes of Board Meeting]
  3. Convene General Meeting (Section 96, 100, Rule 23 of the Companies (Management and Administration) Rules, 2014 and Secretarial Standard-2 (SS-2)]
    • The company shall immediately after receipt of the notice, give its members notice of the resolution at least seven days before the meeting, exclusive of the day of dispatch of notice and day of the meeting, in the same manner as it gives notice of any general meetings.
    • Where it is not practicable to give the notice as stated above, the notice shall be published in English language in English newspaper and in vernacular language in a vernacular newspaper, both having wide circulation in the State where the registered office of the Company is situated and such notice shall also be posted on the website, if any, of the Company.
    • The notice shall be published at least seven days before the meeting, exclusive of the day of publication of the notice and day of the meeting.
    • Notice shall specify the day, date, time and full address of the venue of the Meeting and contain a statement on the business to be transacted at the Meeting.
    • Hold the General Meeting on fixed day and pass an ordinary resolution for appointment of small shareholders’ director by small shareholders. Also check the Quorum and check whether auditor is present, if not. Then Leave of absence is Granted or Not.
    • Issue letter of appointment to the Director of the Company mentioning terms and conditions of appointment and salary to be payable to the Director.
    • Listed Companies shall disclose the proceedings of General Meeting to the Stock Exchange within 24 hours from the conclusion of General Meeting and same shall be posted on the website of the company within 2 working days. [Regulation 30 and 46(3) of the SEBI (LODR) Regulations, 2015]
    • Listed Companies shall submit to the stock exchange the details of the voting results within two working days from the conclusion of the meeting and post the same on the website of the Company. [Regulation 44 of the SEBI (LODR) Regulations, 2015]
    • Prepare the minutes of General Meeting, get them signed and compile accordingly. [Refer the Procedure for Preparation and Signing of Minutes of General Meeting].
  4. Filing of Returns with the ROC [Section 152(2) and Rule 8 of the Companies (Appointment and Qualifications of Directors) Rules, 2014]
    • After the General Meeting, a Return of Appointment of Directorship (Form DIR-12) is required to be filed with Registrar within 30 days of appointment with copy of Ordinary Resolution along with Consent to Act as Director and Declaration about his disqualifications. In case of Companies other than OPC and Small Company, the return is also to be certified by a Company Secretary/Chartered Accountant/Cost Accountant.
    • Person appointed as a small shareholder director of the company shall disclose his holding of securities of the company as on the date of appointment to the company within seven days of such appointment. [Regulation 7of the SEBI (PIT) Regulations, 2015]
  5. Following documents will be required as an attachment with Form DIR-12
    • Certified True Copy of the Ordinary Resolution passed
    • DIR-8 Declaration by Director
    • Letter of Appointment.
  6. Making Necessary entries in Register of Directors
    Company should make necessary entries in the Register of Director and Key Managerial Personals.
  7. File Necessary Amendment Application under following Acts
    • Goods and Services Act
    • Shops & Establishment Act
    • Factories Act
    • Foreign Exchange Management Act
    • Inter-State Migrant workmen Act
    • Private Security Agency Act
    • EPF
    • ESI
    • Other Labour Laws
    • Industry Specific Laws

Note: A new sub-clause in the declaration column of Form DIR-2 and Form DIR-3 has been inserted vide Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 (dated: 1st June, 2022) which states that the Director shall check the declaration as to whether he/she is required to obtain the security clearance from the Ministry of Home Affairs, Government of India before seeking appointment as director or the same has been obtained and is attached, as may be the case.

Note:
The Ministry of Corporate Affairs had notified Companies (Appointment and Qualification of Directors) Amendment Rules, 2023 (dated: 20th January, 2023) by which in form DIR-12:

  1. attachment DIR-2 is not require to be separately attached to the form rather to be certified in the form DIR-12 itself by the director
  2. in attachment DIR-8. Now, the Director shall be to inform about personal disqualifications u/s 164(1) alongwith company related disqualifications u/s 164(2) and Company shall file Form DIR-9 with RoC within 30 days of receipt of DIR-8.
  3. purpose of DIR-12 shall be selected as appointment due to disqualification of all the existing directors or appointment by liquidator/IRP/RP added in addition to the existing purposes as the case may be and SRN of INC-28 to be mentioned and order of NCLT to be attached, if applicable.

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