Section 163 of the Companies Act, 2013

Option to adopt Principle of Proportional Representation for Appointment of Directors in the General Meeting of the Company

The appointment of directors is normally done through a simple majority in the general meeting of the company. As such, majority shareholders are in a position to select all the directors and a significant minority shareholder as large as 49 percent may not be able to appoint even a single director. To mitigate this disadvantage of the minority shareholders, section 163 of the Company Act, 2013 had provided that the minority shareholders could have an opportunity of placing their representatives on the Board of Directors where the concerned company adopts the system of proportional representation in their ‘Articles of Association’.

METHOD OF APPOINTMENT OF DIRECTORS UNDER THE SYSTEM OF PROPORTIONAL REPRESENTATION

Proportional Representation is a method of stockholder voting, giving individual shareholders more power over the election of directors than they have under statutory voting. The method of appointing a director under this section are:

1. Single Transferable Vote: In this system of voting, all the names of the candidates for election as directors are entered in the ballot paper. Each voter has only one vote. However, he is permitted to indicate his first preference, second preference, third preference, and so on… in the ballot paper. The candidate gets elected if he receives the required number of votes fixed as quota (minimum number of votes required to win the election). If any such elected candidate gets more votes than the quota, the excess votes are transferred to other candidates proportionally based on their next preference. If no one exceeds the quota, then the candidates with the fewest votes are eliminated and those ballots are transferred to each voter’s next preferred candidate. This continues until winners for every seat is not found.

The formula for calculating the Quota = (Valid votes cast/ Seats to fill+1)+1

Formula to transfer surplus votes = (Votes for next preference belonging to the original candidate/ Total votes for the original candidate) x surplus vote

For Example: Name of the candidates are A, B, C, D, E &F. If 4 directors out of the 6 candidates are to be elected, the voter writes his/her preference against them in the ballot paper. If the total number of votes is 100. Therefore, the quota will be (100/4+1) +1 = 20+1=21. If B gets over and above 21 votes the excess votes are to be redistributed to the rest of the candidates. In the second step, if C gets the least vote, those votes are again redistributed among the rest in terms of their preference. This continues until all the 4 seats are not found.

2. Cumulative Voting: In this system, each shareholder is entitled to one vote per share multiplied by the number of directors to be elected. In a case where multiple candidates are being considered for multiple positions, each shareholder has the option of placing all of his votes toward one seat or he can also choose to split his votes across multiple options. In general, one shareholder is equal to one vote but in case of cumulative voting one shareholder is equal to as many votes as the number of directors to be elected.

For example:

Total No. of Shareholders = 100
One Shareholder =10 shares
Minority shareholders in numbers = 45
Majority Shareholders in numbers = 55
Each shareholder = 10*3= 30 votes
Minority shareholders= (45*10) *3=1350 votes
Majority shareholders = (55*10) *3=1650 votes
Minority shareholders nominate Mr. Shekar & Mr. Rahul for the office of director

In the above example, it is very clear that although Shekar & Rahul are nominated by the minority shareholders but are elected as Director of the company. Hence if the company adopts the system of proportional representation even the minority shareholders will also get a chance to have their nominated directors in the Board.

3. Other methods– The company may adopt methods other than the above two, as provisioned in its articles of association.

TENURE OF DIRECTORS: The appointment of directors may be for as long as 3 years or as may be decided by the shareholders since the term for the appointment of directors under this system is nowhere specified in the act. However, the appointment of directors under this provision may be made once every three years. The use of the term ‘may’ indicates that the stipulation of three years tenures is not mandatory.

NUMBER OF DIRECTORS THAT CAN BE APPOINTED UNDER THIS PROVISION: The minimum number of directors to be appointed through this system shall be 2/3rd which can even go beyond 2/3rd of the total number of the directors. Thus, it mandates that where a company adopts proportional representation, it shall appoint at least 2/3rd of its directors by this method. However, there is no cap on the maximum number of directors that can be appointed through this system of proportional representation.

CASUAL VACANCIES OF DIRECTORS APPOINTED UNDER THE SYSTEM OF PROPORTIONAL REPRESENTATION: Casual Vacancies of such directors shall be filled as provided in subsection (4) of section 161 which states that in default of and subject to the regulations in the articles, the vacancies shall be filled by the Board of Directors at its meeting and the person so appointed shall hold office only up to the date up to which the original director would have held office if his place had not been vacated.

SALIENT FEATURES OF PRINCIPLE OF PROPORTIONAL REPRESENTATION FOR APPOINTMENT OF DIRECTORS IN A COMPANY

1. The provision of the section is optional.
2. This section if adopted by the company in its Articles has the overriding authority over all other sections in the Act.
3. The intention behind the insertion of this section is to look after the interests of minority shareholders and giving them a fair chance to nominate their directors on the Board.
4. This section is applicable only for the appointment of directors and not for any other matter.
5. If Directors are appointed according to the principle of proportional representation, then they cannot be removed in terms of section 169 of the Companies Act 2013 regarding the removal of directors. They are also not liable to retire by rotation.
6. This Section is applicable for both Private as well as Public Company.
7. Exception: The provision of this section does not apply to Government Company:

• in which entire paid-up share capital is held by the Central Government or by any State Governments or by the Central Government and one or more State Governments.
• A subsidiary of the above-mentioned Government Company.

The elaboration of above section can also be viewed on my video linked below:

The author can also be reached at sclghyy@gmail.com

Disclaimer: The entire contents of this article have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. We assume no responsibility for the consequences of use of such information. This is only a knowledge sharing initiative and the author does not intend to solicit any business or profession.