Chambers don’t want small shareholders on co boards

Small investors welcomed the government move, saying that it will bring in more transparency. “Businessmen who are against the government move have vested interests. As shareholders we are also responsible for the running of the company. We can curb mismanagement and fund diversion if we are involved in the running of the company,” said a small investor.

CII has said that it will have serious ramifications on the functioning of the board of directors of companies. "There is no need to introduce a separate section exclusively for small shareholders," the chamber said in a letter to the Minister of Law and Company Affairs Arun Jaitley and added that if Section 252 of the Companies Act was amended, it would affect the functioning of the board of directors.

Said a small investor, “In many companies the combined equity holding of small shareholders is more than the stake of the promoters. Trade bodies feel threatened because promoters were running their companies as their private clubs or family business. Nominees of financial institutions have not been able to check the mismanagement by promoters.”

The amended clause proposes that a public company having a paid-up capital of Rs five crore or more and having 1000 or more shareholders, shall have at least one director elected by small shareholders as prescribed. The Cabinet has already cleared the proposed amendment which will be presented to the Parliament as part of the Companies (second amendment) Bill.

"The Bill was silent as to the number of directors which were to be elected by small shareholders. It is also not clear what will happen if there is a downward change either in the paid-up capital or in the number of small shareholders," CII added. Ficci feels that the proposal is unwarranted and uncalled for. The Companies Act expressly bars the creation of any class/classes of shares other than those mentioned in the Act, they being equity and preference shares.

Ficci feels that by granting the minority shareholders a right to appoint a director on the board merely because of the fact that they are in minority, would, in fact create an entirely distinct class of shareholders as it would be giving this particular form of shares additional rights.

The board of directors represent and guard the company’s overall interest in a fiduciary capacity and do not represent any section of shareholders.

CII has further said that the amendment could be misused by certain groups of shareholders. "There have been several instances where the companies have been coerced by certain individuals/associations of shareholders to meet their financial demands in return for peaceful conduct of annual general meetings", CII said.

CII pointed out that at present two-thirds of the directors are elected on a rotational basis by the shareholders and Section 257 of the Act also gives an opportunity to the shareholders to propose any name for the office of director.

In addition, Section 265 of the Companies Act provides an opportunity for representation of minority shareholders on the board of directors of a company through the mechanism of proportional representation, CII said.