A director is an individual who directs, supervises, or oversees the company’s affairs. According to the Companies Act of 2013, a director is someone who is appointed to undertake the functions and duties of a company. Directors play a vital role in the management of a company’s operations. As a result, their hiring is important for a company’s growth and development. The company’s law allows for the appointment of directors to be made by a simple majority vote of the shareholders at a general meeting. As a result, only a simple majority has the right to elect all directors, and a significant minority may not be able to choose even a single director. Minority shareholders’ interests may be jeopardized as a result of this. To address this issue, section 265 of the former Companies Act 1956 stipulated that minority shareholders have the right to appoint a representative to the board of directors if the firm uses principle proportional representation system for director nomination by providing in its articles of association.
Section 163 of Companies Act, 2013
- Section 163 of Companies Act, 2013
- Features of principle of proportional representation for appointment of directors
- Method of appointing directors under Principle of proportional representation system
- Single transferable voting:
- Cumulative voting
- Other methods for appointing directors according to principle of proportional representation
- Exemption from the provisions of Section 163
- Removal of Directors
The Companies Act of 2013 contains rules relating to the principle of proportional representation in the nomination of directors. According to Section 163 of the Companies Act, a company’s articles must provide for the appointment of not less than two-thirds of its total number of directors according to the concept of proportional representation, whether by single transferable vote, cumulative voting, or other means.
Section 163 of the Companies Act 2013 replaces section 265 of the previous Companies Act. The latter section pertained to any public or private company that is a subsidiary of a public company, whereas the first section extended to all businesses. When we break down this section, we see that the articles of association require the appointment of at least two-thirds of the total number of directors, implying that provisions in the articles are required to invoke the section. It is crucial to highlight that such clauses in the articles of incorporation are not required. The principle of proportional representation permits minority shareholders to pick their directors, guaranteeing that minority shareholders’ interests are not harmed. The phrase “otherwise” is used in this section to indicate that it can be implemented using any method other than a single transferable vote or cumulative voting.
Features of principle of proportional representation for appointment of directors
- This system has overriding authority, which is one of its qualities. “Notwithstanding anything stated in this Act..,” says Section 163 of the Companies Act of 2013, which means that this section takes precedence over all other provisions of the Act. The overriding factor of this section will be enjoyed if a corporation adopts the provisions indicated in this section in line with the principle of a proportional representation system. The nomination of directors should be voted on individually under section 162, yet this contradicts the provisions of section 163. However, because of section 163’s overriding power, the provision in section 162 is not included.
- Another element of this system is that section 163 states that the appointment may be made by the articles of incorporation. This means they would only apply if the articles of incorporation allow for such an appointment clause. If a business’s article of association so specifies, the directors of the firm may be appointed using the proportional representation method. A corporation is not required to implement the provision. A firm can choose not to follow the idea of proportional representation when appointing its directors. It appears that the requirement for provisions in the articles is critical for invoking section 163 of the Companies Act, 2013.
- This method of appointing directors in a corporation ensures that minority shareholders’ interests are fairly represented. Minority shareholders may not be able to keep their nomination directors on the board to protect their interests in the normal course of events. This may cause people to be concerned about the company’s ability to function properly. The primary goal of this proportional representation system for appointing directors is to protect the interests of minority shareholders.
- The application of proportional representation for the appointment of directors is another element of the system. The provisions of this section apply to both public and private companies, whereas the previous Act of 1956 only applied to public corporations or private companies that were subsidiaries of public companies. As a result, the current provisions of the Companies Act 2013 can be argued to provide a broader scope in favour of minority shareholders.
- The appointment of directors is allowed once every three years under the proportional representation system. This statement implies that the three-year tenure requirement is optional.
- The number of directors who can be appointed is one of the section’s most prominent elements. According to the provision, a company’s articles of association may provide for the appointment of not less than two-thirds of the total number of directors. As a result, where a corporation follows the proportional representation concept, it must appoint at least two-thirds of its board of directors via this approach. However, this proportional representation method has no upper limit on the number of directors that can be selected.
- Casual vacancies in the board of directors shall be filled in accordance with subsection (4) of section 161 of the Act of 2013. It stipulates that the casual vacancy shall be filled by the Board of Companies Act Directors at the Board meeting, subject to any regulations in the company’s articles of incorporation or in the absence of such regulations. It is vital to highlight that such an appointment will not be made by the board’s approved resolution.
It also states that when a person is appointed, he will serve until the date on which the director in whose place he is appointed would have served if the position had not been vacated.
Method of appointing directors under Principle of proportional representation system
There are two ways which are followed for appointing directors of a company under principle of proportional representation system:
1. Single transferable voting
2. Cumulative voting
Single transferable voting:
Every shareholder, regardless of holdings, has one vote per board of directors to be appointed under single transferable voting. For example, five directorships have to be filled from a pool of eight candidates. In this instance, each shareholder can cast one vote in favour of up to five candidates, regardless of the number of shares he owns. The five candidates with the highest number of votes will be elected in order.
Minority shareholders can only vote for their selected candidate and cannot vote for anybody else. It may ensure that their nominated candidate receives the required number of votes to win, and other shareholders’ votes may be distributed among numerous candidates. Minority shareholders may be able to appoint a candidate director to the board of directors using this procedure.
Under this method, each shareholder is entitled to the number of votes that corresponds to his shareholding. For example, if a shareholder owns 500 shares in a firm, there are five directors to choose from among eight candidates. In this situation, he is entitled to vote in a total of 2500 ways. He has the option of casting all of his votes for a single candidate or dividing them among the candidates.
If a group of minority shareholders decides to vote for their nominated candidate with all of their votes, the nominated candidate has a good chance of being elected, as votes from other shareholders may be distributed in favour of other candidates to fill the remaining vacancy on the board of directors. Minority shareholders’ interests are protected in the corporation using either of these two ways.
Other methods for appointing directors according to principle of proportional representation
To appoint directors in accordance with the proportional representation system, a company might adapt to methods other than Single Transferable Voting or Cumulative Voting, as provided in the articles of association of a company and agreed by the majority shareholders in the general meeting.
Exemption from the provisions of Section 163
On June 5, 2015, the Central Government issued a notification exempting certain government entities from the application of section 163 of the Companies Act, 2013. Minority shareholders in such firms will not be able to choose their nominated directors based on the principle of proportional representation.
Section 169(1) of the Companies Act 2013 outlines the procedure for removing a company’s director, with the caveat that nothing in this subsection applies if the company has exercised the option to appoint not less than two-thirds of the total number of directors in accordance with the proportional representation system’s principle.
As a result, any director nominated pursuant to Section 163 of the Companies Act cannot be removed pursuant to Section 169 of the Companies Act (1). It is unclear how directors nominated using a proportional representation system can be removed.
The potential of proportional representation for director appointments appears to be extremely rational, as it appears to protect the interests of minority shareholders, although it is unclear how far this will be enforced. The requirements have been maintained optional, and it is up to the firms to decide whether or not to execute them.