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Sec 265 of The Companies Act

FATEMA (CHARTERED ACCOUNTANT) (719 Points)

24 January 2011

Dear all,

What is meant by proportional representation and cumulative voting u/s 265 of The Companies Act?

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2 Replies

Sarita (Article) (154 Points)
Replied 24 January 2011

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.

section 262:-

262. FILLING OF CASUAL VACANCIES AMONG DIRECTORS.

(1) In the case of a public company or a private company which is a subsidiary of a public company, if the office of any director appointed by the company in general meeting is vacated before his term of office will expire in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of directors at the meeting of the Board.

(2) Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated as aforesaid.

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manoj (C.A. ) (43 Points)
Replied 24 January 2011

FATEEMA, THE PRINCIPLE HAS ITS ROOT IN ELECTORAL SYSTEM OF APPOINTING LEADERS.THE SYSTEM WAS ADOPTED IN EUROPE.I REPRODUCE SOME LINES AS UNDER:

Electoral system in which the share of seats held by a political party in the legislature closely matches the share of popular votes it received. It was devised in Europe in the mid-19th century to guarantee minority groups more representation than was possible under the majority or plurality systems. Its supporters claim that it creates a more accurate reflection of public opinion; its opponents argue that by allowing more parties in a legislature, it may result in weaker, less stable governments. Two methods for apportioning seats are the single-transferable-vote method, under which voters rank candidates by preference, and the list system, under which voters select a party's list of candidates rather than individuals. Some countries (e.g., Germany and Russia) use a combination of plurality and proportional methods for allocating seats in the lower house of the national legislature. See also legislative apportionment.

FURTHER IT HAS ITS APPICATION ON APPOINTMENT OF DIRECTORS IN COMPANY.HERE IT GOES LIKE THIS :

Method of stockholder voting, giving individual shareholders more power over the election of directors than they have under statutory voting, which, by allowing one vote per share per director, makes it possible for a majority shareholder to elect all the directors. The most familiar example of proportional representation is cumulative voting, under which a shareholder has as many votes as he has shares of stock, multiplied by the number of vacancies on the board, all of which can be cast for one director. This makes it possible for a minority shareholder or a group of small shareholders to gain at least some representation on the board. Another variety provides for the holders of specified classes of stock to elect a number of directors in certain circumstances. For example, if the corporation failed to pay preferred dividends, the preferred holders might then be given the power to elect a certain proportion of the board. Despite the advocacy of stockholders' rights activists, proportional representation has made little headway in American corporations.

FINALLY THIS CONCEPT EMERGED LOOKING THE EXPLOITATION OF "MINORTIY SHAREHOLDERS" IN COMPANIES EARLIER.BUT THEN THIS IS RECOMMNEDATORY IN NATURE AND NOT MANDATORY.USE O WORDS "MAY" IN THE SECTION SUGGEST THE SAME.THIS CONCEPT IS NOT PRACTICAL AT ALL UNLESS MADE MANDATORY BY STATUE.

IT PROVIDES THE DIRECTOR SO APPOINTED UNDER THIS SYSTEM THE SHIELD FROM REMOVAL U/S 284 LIKE "DIRECTORS APPOINTED BY CENTRAL GOVT." U/S 408.

I HOPE THIS ANSWERS UR QUESTION ON THE "PRINCIPLE OF PROPORTIONAL REPRESENTATION"