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.
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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.
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.
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
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.
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.
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.
Also read
The Companies (Appointment and Qualification of Directors) Third Amendment Rules, 2018
What is Director’s report – Meaning and Contents