Section 163: Option to adopt principle of proportional representation for 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 company in accordance with the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise and such appointments may be made once in every three years and casual vacancies of such directors shall be filled as provided in sub-section (4) of section 161."

According to the Companies Act, 2013, generally the appointment of directors in a company is usually done through simple majority by passing a resolution in the meeting of the board of directors or the shareholders, as the case may be. As such, a simple majority is in a position to elect all the directors, and a significant minority as large as 49 percent may not succeed in appointing even a single director. This may neglect the interests of minority shareholders in a company. To mitigate this disadvantage of the minority shareholders, section 163 of the Companies Act, 2013 had provided an opportunity to the minority shareholders of placing their representatives on the Board of Directors where the concerned company adopted the system of proportional representation by providing in its ‘Articles of Association’.  

Section 163 provides an overriding power over all other sections in the Companies Act, 2013.

• The articles of association of a company may provide for the appointment of not less than two-third of the total number of the directors of a company; however there is no compulsion on companies to have such provisions in their articles. But, if such provision is made, the minimum number of directors to be appointed through this system shall be two third which can even go beyond two third of the total number of the directors. 
• However, it is not made clear that whether such total number of directors would be the maximum permissible directors as mentioned in the articles or the actual total number of directors working in the company at a particular point of time. 
• The appointment shall be done in accordance with the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise. The term “otherwise” indicates that this section can be invoked even by any other process, other than by single transferable vote or cumulative voting. 
• This section is applicable only for appointment of directors and not for any other matter. 
• The appointments may be made once in every three years. The term "may” denote non-mandatory interpretation. 
• In case of casual vacancies of such directors, such vacancies shall be filled as provided in sub-section (4) of section 161 of Companies Act, 2013, which states that "in default of and subject to the regulations in the articles, the vacancies be filled by the Board of Directors at its meeting of the Board", not by circulation; and the person so appointed shall hold office only up to the date up to which the original director would have held office if it had not been vacated. 
• The Directors appointed as per the principle of proportional representation cannot be removed u/s 169 of the Companies Act 2013, which deals with regard to the removal of directors. 

Meaning of Single Transferable vote and system of Cumulative voting

In Single Transferable Vote all the names of the candidates for election as directors are entered in the ballot paper. Each voter has only one vote. The voter indicates his preference of vote for the respective candidates in a sequential order in the ballot paper. These preferences will be considered equal to the number of candidates to be elected. The voter's vote can be transferred to a second or further competing candidate (according to the order of preference given by the voter) if the candidate of first choice is eliminated during a succession of counts.

Cumulative Voting is a system of voting in an election where each voter is allowed a number of votes, and may give them all to one candidate or divide the votes among a part of the vacancies to be filled instead of straight voting or casting votes according to the number of shares held, for all the vacancies. This method allows a shareholder to accumulate votes for their preferred candidate on the nomination list and strengthens the ability of minority shareholders to elect a director. 

Exceptions:

 Section 163 does not apply to the Government Companies (Notification dated 5th June, 2015);

(a) A Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments;

(b) A subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by that Government company. 

References:

Companies Act, 2013

Contact:
CS Divyanshu Bansal
Email: divyanshubansal401@gmail.com