Matters regarding appointment of directors

The board of directors is entrusted with the management and direction of the company to carry out its objects as contained in its memorandum and on the basis of the provisions in the act and in the articles of association. No company can function without a validly constituted board at its helm. The directors in a company are collectively called the “Board of directors”.

Strength of board

The board in a private limited company shall consist of not less than two directors and a public limited company not less than three directors.

New entity of producer company

A new entity known as “Producer Company” can be formed as per the terms and conditions prescribed in Part IX A of the act as per the second amendment act 2002. Such a company shall have atleast five directors.

Option to elect a director by small shareholders in certain public companies

The companies (Amendment) Act, 2002 has provided that a public limited company having paid-up capital of not less than Rs.5 crores or more than 1000 or more small shareholders may have a director elected by such small shareholders in the manner as may be prescribed.

A small shareholder means a shareholder holding shares of national value of ₹20,000 or less in a public limited company. A shareholder holding any number of shares up to ₹ 20,000 will be able to participate in the election. Both the conditions about a public limited company as stated above must be satisfied.

Election of a director by small shareholders

The central government has notified the companies (Appointment of the small shareholders director) Rules, 2001 vide notification GSR 168(E), dated 9-3-2001.

Above Provision Optional on the park of the company

The election of a director by small shareholders is not mandatory. Where a company of the prescribed size desires, it may give this opportunity to the small shareholders of the company.

Provision in the articles

Where the company proposes to implement this option, it is desirable to make a provision in the articles also.

Rules not quite precise

Some of the provisions in the rules have not been spelt out clearly. While the provision in section 252 regarding election of a director by small shareholders is optional, some aspects of the rules appear as if the provision is mandatory, which is not the case.

Provision in Rule 4 (1)

Sub-rule (1) of rule 4 provides that a company on its own may take necessary action or it may act on a notice from not less thane 1/10th of the total small shareholders proposing the name of a person for election who shall himself be a small shareholder. The right given to 1/10th of the said shareholders to give such notice adds  a new element to the provision contained in the proviso to section 252(1) which appears to be optional. This notice confuses the issue of notice under sub-rule(2).

Notice to be given to the company proposing a name

In terms of sub-rule (2) at least 100 small shareholders may leave a notice with the company proposing the name of a small shareholder as their nominee for election as director. The notice signed by them shall be given to the company at least 14 days before the meeting. The notice shall contain the following particulars of the person proposed :

  • Name
  • Address
  • Shares held and Folio No.
  • Particulars of shares with differential rights as to dividend and voting, if any.
  • The above particulars in respect of the signatories of the notice shall also be given.

Consent to act as director

Along with the notice the person, who has been proposed shall sign and give his consent to act as director if appointed.

Unlisted company

It is prescribed in sub-rule (5) of rule 4 that an unlisted company may elect the nominee of small shareholders at their meeting by a resolution passed by a majority of votes.

Tenure of office

The nominee of small share holders can remain in office for three years but if so desired by the small shareholders he can be elected for another period of 3 years – in all 6 years.

Re-election subject to same procedure

If at least 100 small shareholders give notice to the company of their intention to elect the same person on expiry of his tenure for another term. The company shall follow the same procedure as outlined above in respect of his re-election.

Director of small shareholders need not retire by rotation

A director elected by small shareholders will retire on the expiry of his tenure but he need not have to retire by rotation. It therefore follows that small shareholders director need not be taken into account for computing directors for rotation.

Number of directorship for such a nominee

A small shareholder appointed as director by small shareholders of a company can act as director as such nominee in not more than two companies.


A person shall not be capable of being appointed as small shareholders director for the reasons given in rule 5. A person appointed as such director shall have to vacate his office on account of any of the grounds stated in rule 6. One of the grounds for automatic vacation of directorship is when he holds voting shares of more than Rs.20,000.

Filing of returns with the ROC

Where a small shareholder is elected as a director, revised form in duplicate, will be filed with the ROC within 30 days of election in accordance with the amended provision in general rules and forms.

Directors shall be individuals

Only natural persons can become directors of a company.

Practice largely in vogue in a public company as regards first directors

When the articles are registered at the time of registration, the articles include the names of first directors of the company. On registration they become the first directors till they or some others are appointed directors at the first general meeting held after registration.

Where articles do not provide for continuance of first directors till first AGM

Where the first directors are named in the articles, then in terms of section 255, the said first directors or others shall be appointed at the first general meeting held after the date of registration.


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