To pave the way for small groups of shareholders to nominate a director on the board of listed companies, the Ministry of Corporate Affairs is set to bring in more clarity to a provision in the Companies Act 1956.A senior government official said the provision was dropped in the Companies Bill 2009 but may find place in the revised Bill.
Other emerging economies, including China and Brazil, already have a set procedure in place to empower small shareholders.
Ministry of corporate affairs is expected to specify the procedure to be followed by small shareholders to elect their nominee in the revised Companies Bill 2011.
The Act of 1956 allowed a group of 1,000 or more small shareholders to appoint their nominee on the company board, but it lacked clarity.
Small shareholders, according to the Act, are individuals or entities owning shares with a nominal value of Rs. 20,000 or less.
The official said the exact procedural details may still not be there as the ministry feels India's small shareholders are yet to evolve as a unified group.
Officials said the ministry might limit the tenure of these nominated directors to one year and may not allow
them to represent small shareholder interests in more than one company at a given time.
Welcoming the government move, Manoj Kumar, managing partner of Delhi-based corporate law firm Hammurabi and Solomon, said it was very logical for the government to plan it in a phased manner.
"Even our companies need time to adapt to this provision," he said.
While Brazil allows small shareholders to claim a board position if their cumulative strength touches 10 per cent of the company's equity base, China has a similar provision as part of its corporate governance initiative.
Developed nations, such as Italy and the US, allow a system of cumulative proposal where even a single minority shareholder can nominate a candidate to the director's post.
Other small shareholders can support the proposal and once the support base crosses a certain threshold, the person is eligible for directorship.
In Italy, for instance, the government has set the upper limit for the threshold at 2.5 per cent of the total paid-up equity.
The companies have the freedom to lower it. Similarly, several other countries have defined preferred shareholders and small shareholders in two different brackets with specific rights attached to each section of investors.
