As a small shareholder, your path to a company's board is blocked

Though Section 252 of the Companies Act allows it, it has remained only on paper

Navin Pandya wanted to join the Mahindra & Mahindra (M&M) board as a representative of minority shareholders and had even sent letters to the company stating the provision for this under the Companies Act, 1956. Since his demand was rejected by the board, Pandya, a former junior officer in the company, raised the issue in the annual general meeting held last week.

The resolution was put to vote – and predictably, Pandya lost. It’s not known how much backing Pandya had from M&M’s small shareholders, but the provision he referred to in his letters to the M&M management was Section 252 of the Act, which says a group of 1,000 or more small shareholders can appoint their nominee on the company board. That nominee can be anyone who is a small shareholder.

 

The Act defines a small shareholder as anyone holding less than Rs 20,000 worth of shares in a publicly-listed company. Any company having paid-up capital of more than Rs 5 crore and having more than a 1,000 small shareholders can appoint the representative of small shareholders on its board. The shareholders will have to leave a notice of their intention with the company at least 14 days before the AGM with the signature of at least 100 small shareholders along with the details of the person they want to be nominated as director. The election will be conducted through postal ballot. Such directors are elected for a maximum of three years or until you remain a small shareholder. The director so appointed shall be treated at par with other directors, except for appointment as whole-time director or managing director.
 

WHAT SECTION 252 SAYS

The Act defines
Small shareholder – Shareholders with shares worth less than Rs 20,000 
Company – A paid-up capital of more than Rs 5 crore and more than 1,000 shareholders 

• Shareholders have to give a notice of intention at least 14 days before the annual general meeting (AGM) with signatures of at least 100 small shareholders 
• Election will be done through postal ballot 
• If you are elected, you become a director for a maximum of three years or until you remain a small shareholder 
• The director so appointed shall be treated at par with other directors, except for appointment as whole-time director or managing director

 

GETTING ELECTED, HOWEVER, IS TOUGH SINCE

• Even after the shareholders have approved the nominee, the final say remains with the company
• Logistical issues of getting the shareholders together is an important issue
• Getting majority votes is a tricky matter
• The nominated person may not have the wherewithal of taking decisions on behalf of the small investors

All this may sound like a good deal if you wish to represent small shareholders on a company board. But the reality is harsher: there are no examples of anyone actually being nominated to a board.

There are many reasons for this. Sharad Abhyankar, Partner, Khaitan & Co, says that contrary to popular belief, under Section 252 of the Act and the Rules, the discretion solely lies with the company to appoint such a director on its board even after the shareholders have approached the company with their proposal in accordance with the rules. That explains the fate of Pandya.

There are logistical issues as well, preventing small shareholders from exercising this option in India, says Shriram Subramanian, promoter, Ingovern Research Services, a proxy advisory and corporate governance firm. “Shareholders are spread across the country and getting them all together is near-impossible for an AGM,” he says. AGMs are usually attended by promoters and the management of the company.

Take the example of the Coal India AGM last year. The name of Ramji Lal Chaudury was proposed to represent the small shareholders on the Board. At the AGM, however, Ramji himself was not present and there was no seconder or proposer, which meant that the resolution was not taken up.

Subramanian adds that getting majority vote is also a tricky issue. “There could be disagreement with the shareholders due to which you will not see someone getting majority votes.” For instance, at the Godrej Industries AGM last year, the name of Shyamsunder Jaipuria was proposed for the Board post. However, at the AGM, none of the shareholders present seconded the proposal, and the resolution was not taken up.

Some like Prithvi Haldea, CMD, Prime Database, says this is a good practice just in theory. “It is not a feasible option. Only the government and institutional investors can protect the rights of the small investors. How does one ensure that a small shareholder, so elected, has the wherewithal or the understanding to take decisions on behalf of fellow shareholders?” he asks.

Experts say the new Companies Bill, which is likely to be passed soon, could improve the situation as it will allow class action suits. Investors and depositors can also claim damages or compensation or demand any other suitable action for improper conduct, misleading statements and fraudulent or illegal acts by the company or its directors. Such suits can also be filed against auditors and any expert, advisor or consultant associated with the company.But then Section 252 existed all this while…