When can a small shareholder appoint a director on the board?

Alembic's board room has witnessed a drama with small shareholders pushing for a seat on the board

Legal experts say there is no provision under law that gives an “automatic” right to any shareholder to appoint a director on the board, based on certain threshold shareholdings. However, Section 151 of the Companies Act allows a listed company to have one director elected by small shareholders. Such a director is appointed by an ordinary resolution at a general meeting, for a single term of three years. 

Under the Act, a small shareholder refers to “someone holding shares of nominal value of not more than Rs 20,000”. To elect a director, small shareholders need the support of at least 1,000 such shareholders or 10 per cent of the total number of small shareholders, whichever is lower. 

However, a listed company — without the need to meet any prescribed requirement — can on its own have a small shareholders’ director on the board, said Lalit Kumar, partner, J Sagar Associates. 

Section 151, read with the relevant rules, provides for such appointment through postal ballot, said Bhavin Gada, partner, Economic Laws Practice.

A small shareholders’ director can be considered as an independent director, provided the person satisfies the conditions of independence listed in Section 149 (6) of the Companies Act, said Sai Venkateshwaran, partner and head, accounting advisory services at KPMG in India. 

It may not be possible for an existing independent director to be considered as a small shareholders’ director if the person was not appointed as one. “However, every independent director is required under the Act to safeguard the interests of all stakeholders, particularly the minority shareholders,” said Venkateshwaran. 

Gada is of the view that the statute does not clearly provide for re-designation of a present independent director as a minority shareholders’ director.

Legal experts point out that it is common for minority shareholders, in cases such as a joint venture investor or a private equity investor, to appoint directors on a board.  “These would be by way of a contractual agreement — generally through a shareholder agreement — but no such right is conferred by law,” noted Kumar.