Wednesday, September 24, 2014

Proportional representation for appointment of directors

This is one of the method of electing a director in a company.. Previously it was oly for public cos. As per new Act, its applicable for all cos but still remains as non mandatory provision..
The rationale behind this section is to instill the democracy in corporates as well
Its genesis is from UK parliament and of course in our parliament.. And thereby they have incorporated the same in CA 1956 vide sec. 265..
Let me give eg to understand this..
As the section states there are 2 methods mainly- Single transferable voting and Cumulative voting.. U can also employ any other method but everything sld b authorised in articles..
Suppose if u hold 300 shares in a company and there are 4 directors to b elected.. Then you are eligible to put 300*4 = 1200 votes .. U can use all these votes for single candidate or u can divide ur votes among the candidates.. This is as per cumulative voting
So there is reduced scope for promoters or majority shareholders' clout to nominate their persons as directors..
As per single transferable voting u r eligible for 1 vote per person irrespective of shareholding..
: These methods can b done only once in 3 years and pls note that the respective director cannot b removed during his tenure..
So under single voting system , as stated earlier if there are 4 directors to be elected.. And there are 2 shareholders A and B in that company means A is eligible to appoint 2 directors and B is eligible to appoint 2 directors.. Under cumulative means if A holds 76% and B holds 24% means- A can appoint 3 directors and B can appoint 1 director..
: Thereby under both the methods the minority interests are protected n democracy is upheld..
Also pls note that the election sld b for minimum of 2-3 rds of directors..
Section 163 of the Companies Act, 2013.

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The above article is written by Mr.Annirudh, ACS, LLB, Corporate law expert from Chennai.