APPOINTMENT OF DIRECTORS TO BE VOTED INDIVIDUALLY (SECTION 162): -
Section 162 of the Companies Act,2013 prohibits appointment of directors by passing a single resolution. Electing more than one person as a director through a single resolution deprives the shareholders from exercising their choice to reject a specific individual. In such a situation, either they will have to vote against or in favour of all the prospective directors i.e. it shall be difficult for them to reject a particular person as director unless they reject such resolution in toto, thus not appointing all the persons specified in that resolution. That is why, section 162 requires every individual to be voted individually for appointment as director. As stated in the box below, if certain conditions are satisfied this provision shall not apply to a Government Company and its wholly owned subsidiary. Further, a private company is also exempted from this provision.
In a nutshell, provision of Section 162 are as under:
Two or more directors of a company cannot be elected as directors by a single resolution. It implies that each person shall be appointed as director by a separate resolution.
As an exception, two or more persons can be appointed as directors by a single resolution if a proposal to move such a resolution (i.e. appointing two or more persons as directors by a single resolution) has first been agreed to at the general meeting without any vote being cast against it.
A resolution moved in contravention of the provisions of stated in point (ii) above shall be void, whether or not objection thereto was raised at the time when it was so moved.
A motion for approving a person for appointment, or for nominating a person for appointment as a director, shall be treated as a motion for his appointment.
EXEMPTIONS U/S 162
Non-applicability of Section 162 of the Act of 2013:
1. Notification No. GSR 463(E), dated 5th June 2015 as amended by Notification No. GSR 582(E), dated 13th June 2017 states that Section 162 requiring appointing of each person as director by a separated resolution, shall not apply to:
(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.
However, above exemption is applicable only if such Government Company has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar.
2. Similarly, Notification No. GSR 464(E), dated 5th June 2015 as amended by Notification No. GSR 582(E), dated 13th June 2017 exempts a private company from the application of Section 162. However, this exemption is applicable only if such private company has not committed a default in filing its financial statements under Section 137 or Annual return under Section 92 with the Registrar.
APPOINTMENT OF PROPORTIONAL REPRESENTATIONS (SECTION 163)
As a general rule, the directors in a company are appointed by simple majority. It implies that the shareholders having voting rights just equal to 51 percent can easily negate the choice of other minority shareholders who have substantial voting rights as high as up to 49 percent in the matter of appointment of directors. Thus, minority shareholders though having sizeable voting rights may not find it possible to appoint even a single director of their own on the Board of Directors. To counter this kind of unpleasant situation which may create confrontation in a company and adversely affect the managerial efficiency. Section 163 chalks out a system by which directors may be appointed by way of proportional representation. The provisions of Section 163 are stated as under:
(i) Section 163 starts with the phrase ‘Notwithstanding anything contained in this Act’ which implies that this section has overriding effect i.e. it overrides all other provisions of the Companies Act, 2013.
(ii) The articles of a company need to contain provisions for the appointment of directors by proportional representation. The procedure as contained in the articles must be capable enough to enable the minority shareholders to have a proportionate representation on the Board of Directors.
(iii) The articles need to provide for the appointment of not less than two-third (i.e. minimum 2/3rd or more) of the total number of the directors in accordance with the principle of proportional representation.
(iv) Such appointments to be made in accordance with the principle of proportional representation, may use following methods of voting:
Voting according to the single transferable vote. It means, a candidate gets elected if he secures the requisite votes fixed as quota
Voting according to a system of ‘cumulative voting’
Otherwise i.e. adoption of any other transparent and effective method of voting if it ensures that the Board shall have fair representation of the minority interest, in case methods stated at (a) or (b) are not adopted.
(v) Such appointments may be made once in every 3 years.
(vi) Casual vacancies of such directors shall be filled as provided in Section 161 (4) i.e. such casual vacancy shall be filled as per the provisions of the articles; and if there is no such provision, then the Board of Directors may fill the vacancy through a board resolution. Later on, such appointment may be regularized by the shareholders at the immediately held general meeting.
