Understanding the Section 265 of the company act in the practical manner:
First of all, we check that what the section 265 says:
Section 265 : Option to company to adopt proportional representation for the appointment of directors
Notwithstanding anything contained in this Act, the articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a public company or of a private company which is a subsidiary of a public company, according to the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise, the appointments being made once in every three years and interim casual vacancies being filled in accordance with the provisions, mutatis mutandis, of section 262.
Now, understand the Logic behind the Proprtional system for Director.
From Centuries, People are doing business in the Partnership.
After the "Company" came into the existence. That Concept also embedded into the Company Act, 1956.
I am clarifying the whole situation as a example:
Mr. A from India and Mr. B from Japan entered into the Joint Venture and Incorporated the Company. Because of the Restriction of FEMA Mr. B holds the 24% Equity share capital of the company. Mr. A holds the 76% Equity share capital of the Company.
The Business runs well for 3 years, then after because of the Misunderstanding between Mr. A & Mr. B, the conflict arises. Both of them are not ready to sell the Shares at the Market Value/Net Assets Value. Both of the person wants very high amount to sell the shares.
As, the Mr. A has 76% shareholding, He can do anything in the Company. Because he can pass Special as well as Ordinary Resolution in the company.
Because of the Conflict Mr. B's director retires by rotation in the Annual General Meeting. Though Mr. B wants to continue the Directors. They can not do so, because they have only 24% Share holding, they can not go against the Mr. A.
Now, Mr. B can not go to CLB in order to appoint the Director for Small Shareholder, because he is not small shareholder.
Mr. B can not go to CLB under Oppression & Mismanagement.Mr. B can only do one thing that is sell the shares at the price offered by Mr. A.
Mr. B can do anything in that situation except selling the shares at very less value.
But the Situation will be inverse if there is Proportional Representation System in the Company.
Proportional System means the Appointment of Director as per shareholding.
So, If the Company has 4 Directors, then Mr. A can appoint only 3 directors and 1 director will be appointed by the Mr. B.
Cummulative Vote
e.g. Suppose the Company has the Cummulative voting system then, Mr. A can appoint 3 Directors as he has 76% Voting in the company and Mr. B can appoint 1 director as he has 24% Voting in the company.
Single Vote
e.g. In the Single Vote system Mr. A can appoint 2 Directors and Mr. B can appoint 2 Directors.
The Legislator has applied this provision for Public Companies only.
Because In 95% private Companies most of the Shareholding is divided between the Brothers/Family.
And It is general rule that Every family has certain dispute, And If the Legislator gave the power to the Private Company also, then they will use this section for their personal benefits.
And as the Company Act, 1956 is created for the purpose of Regulisation of the Companies and not as a medium for Family wars. The legislator has not given the power to Private Companies.
Imagine the Ambani Brothers Dispute with this section.
Ankur Shah
Contact: +91-9427633901
Email: ankurjewel @ gmail.com
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