Section 163 Option to adopt principle of proportional representation for appointment of directors – Companies Act 2013

Amended and updated notes on section 163 of Companies Act 2013. Option to adopt principle of proportional representation for appointment of directors.

Amended and updated notes on section 163 of Companies Act 2013. Detail discussion on provisions and rules related to option to adopt principle of proportional representation for appointment of directors.

Chapter XI (Sections 149172) of the Companies Act, 2013 (CA 2013) deals with the provisions related to appointment and qualifications of directors. Section 163 of CA 2013 provides for option to adopt principle of proportional representation for appointment of directors.

Recently, we have discussed in detail section 162 (Appointment of directors to be voted individually) of CA 2013. Today, we learn the provisions of section 163 of Companies Act 2013.

The provisions of section 163 are effective from 12-Sept-2013. You may refer Notification No. S.O. 2754(E) issued dated 12.09.2013. In this article, you will learn detail of the provisions of section 163 of the Companies Act 2013.

Section 163 of CA 2013 corresponds to the section 265 of the Companies Act, 1956 i.e. option to company to adopt proportional representation for the appointment of directors. Earlier, the provisions related to the appointment of directors by way of proportional representation were applicable for only a public company or a private company which is a subsidiary of a public company. But, now under section 163 of CA 2013, even the articles of the private companies may provide for the appointment of directors by way of proportional representation.

Name of ActThe Companies Act 2013
Enacted byParliament of India
Administered byMinistry of Corporate Affairs (MCA)
Number of Chapters29
Number of Sections484 (470-43+57)
Number of Schedules7
You are reading:
Chapter No.XI
Chapter NameAppointment and Qualifications of Directors
Section No.163
Section NameOption to adopt principle of proportional representation for appointment of directors
Monthly Updated EditionCompany Law PDF

Appointment of Directors by way of Principle of Proportional Representation

Applicability:

In accordance with the provisions of section 163 of the Companies Act, 2013, any Private Company or Public Company may adopt principle of proportional representation for appointment of directors.

Principle of Proportional Representation:

Notwithstanding anything contained in the Companies Act, 2013, 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.

Principle of Proportional Representation is a system of election wherein parties standing for a Post, gets voted in proportion to the number of votes cast for them. In other words, the shareholders of the company get chance to vote for their choice of director in proportion to his holdings for election of directors.

Section 163 prevail other Sections:

We have already discussed the provisions of section 162 of the CA 2013 which provides for appointment of directors to be voted individually. And therefore section 162 is contrary to section 163. But as the wording of “Notwithstanding anything contained in this Act…” is used under section 163, the provision of section 162 shall be excluded.

Optional for Adoption:

The articles of association of a company may provide for the appointment of directors of a company on proportional representation. That means the requirement of provisions in the articles is authoritative for invoking section 163. Hence, there is no compulsion on companies to have such provisions in their articles.

Appointment Once in Every 3 Years:

The appointment of directors by way of proportional representation shall be made once in every three years. Note that such appointment shall be made whether by the Single Transferable Vote or by a system of cumulative voting or otherwise.

Did you know? Single Transferable Vote means if a candidate gets the required number of votes fixed as quota then only he shall be elected for the appointment as a director in a company. These systems of voting ensure that the Board of Directors (BOD) of the company will have fair representation of the minority interest.

Whereas Cumulative Voting is a type of voting system allows shareholders of the company to cast all of their votes for a single nominee for the BOD when the company has multiple openings on its board.

In other words, the shareholders of company are allowed to accumulate votes for their preferred candidate on the nomination list. Accordingly, the cumulative voting system helps strengthen the ability of minority shareholders to elect a director in a company.

For example:
You are holding 1000 shares with one voting power per share of a company. The election is for 5 directors of the company. Thus, you have total 5000 voting powers – 1000 votes for each of 5 directors.

Now, under the cumulative voting system, you can choose to vote all 5000 votes for one candidate or 2500 votes to each of two candidates, or 1000 votes to each of all 5 elected directors or otherwise divide your votes as you want for your choice of directors. However, under the regular voting system, you could only vote for one candidate with a maximum of 1000 shares.

Casual Vacancy:

If any casual vacancy arises in the office of directors appointed by way of proportional representation under section 163 of the CA 2013, such casual vacancy shall be filled as provided in sub-section (4) of section 161 of CA 2013.

As per section 161 (4), in the case of a public company, if the office of any director appointed by the company in general meeting is vacated before his term of office expires 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 a meeting of the Board.

Provided that 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.

Removal of Directors:

As per the proviso of section 169(1) of the CA 2013, nothing contained in sub-section (1) of section 169 shall apply where the company has availed itself of the option to appoint directors according to the principle of proportional representation.

Therefore, if any director appointed in compliance with section 163 then, he cannot be removed in terms of section 169 regarding removal of directors.

Exemption to Govt. Companies:

According to section 462 of CA 2013, the provisions of section 163 of the Companies Act, 2013 shall not apply to some specified Government Companies. In other words, a Govt. Company in which the entire paid up share capital is held by the by the Central Government or/and one or more State Governments shall not be required to comply with the provisions of section 163.

Section 163 of Companies Act 2013: Option to adopt principle of proportional representation for appointment of directors

Section 163 shall come into force on 12th September, 2013 vide Notification No. S.O. 2754(E) dated 12.09.2013.

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.

Exception/ Modification/ Adaptation:

1) Section 163 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. –Notification No. G.S.R. 463(E) dated 5th June, 2015


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