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Sunday, October 2, 2011

How to get elected as a small shareholders director of India

Below is a checklist for the same, reflecting my understanding after reading the relevant rules(http://www.mca.gov.in/Ministry/actsbills/rules/TCAotSSDR2001.pdf) and some analysis.
  1. Does this apply to the company? If the company has paid up share capital(excluding reserves & surplus but including preference shares) of 5 crore or more OR it has 1000 or more small shareholders. The first criteria(5 crores) can be seen from balance sheet but only the company will know about the 2nd criteria(1000 or more small shareholders) because the quarterly shareholding reports those with shareholding
  2. Are YOU a small shareholder? Check the face value of the share(say Rs 5). As you should not hold more than Rs 20,000 nominal value, that means that you should not own more than 4000 shares(viz Rs 20000/Rs 5). Even if the market price is Rs 1000 and your value of shares is Rs 40 lakh, then also you are termed as small shareholder! This is the vagaries of law.
  3. Are YOU eligible to be a small shareholder director:- If you are already a small shareholder director on Board of 2 companies, you cannot take this additional post. The routine disqualifications(insolvency, ceasing to hold ownership, court orders etc) apply.
  4. Get the support of 100 such shareholders - note that even 100 shareholders holding ONE share each can nominate one person as their small shareholder director. In practice, unless you are in an investor association OR investors are unhappy with dividend/share price return as in case of Geodesic, this will be difficult in practice.
  5. These 100 small shareholders should sign the notice to be sent to the company, nominating another 'small shareholder'. They should leave a notice of their intention with the company at least  14 days before the meeting under the signature of at least 100 small shareholders specifying name, address, shares held and folio number and particulars of share. The proposed nominee should file his consent with the company, to stand for election.
  6. The company sends postal ballot to investors(http://mca.gov.in/Ministry/notification/pdf/G.S.R_30may2011.pdf), To save the cost, it will well decide to appoint the director nominee in case nobody else is interested. As mentioned in the Section 252(1), 0nly small shareholders can vote on this matter, so the company would only need to send them the ballot
 PROS:- Way to get on the Board, and be informed of key decisions and push for transparency, creating this nuisance value. Also, not reelected each year, so continuous 3 year stint. For public sector banks, a similar rule applies and there are candidates who contest those elections well. So no reason why this should not happen here also.
CONS:-From the angle of the company, the nuisance value may go up for those who may try blackmailing the company to pay them off!
Disclaimer:- I do not know of any small shareholder director, despite the provision being around for 10yrs+> Maybe the investors do not care/are not aware. This post will help the latter, not former.

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