Why the Company Act, 1956 provides for the Proportional Representation System for Director's Appointment?
Why the Option is Available to Public Company Only?
Reason for Proportional System For Director
(Guest)
Why the Company Act, 1956 provides for the Proportional Representation System for Director's Appointment?
Why the Option is Available to Public Company Only?
The Logic behind that System is as follows:
From Centuries, People are doing business in the Partnership.
After the "Company" came into the existence. That Concept also embedded into the Company Act, 1956.
I am clarifying the whole situation as a example:
Mr. A from India and Mr. B from Japan entered into the Joint Venture and Incorporated the Company. Because of the Restriction of FEMA Mr. B holds the 24% Equity share capital of the company. Mr. A holds the 76% Equity share capital of the Company.
The Business runs well for 3 years, then after because of the Misunderstanding between Mr. A & Mr. B, the conflict arises. Both of them are not ready to sell the Shares at the Market Value/Net Assets Value. Both of the person wants very high amount to sell the shares.
As, the Mr. A has 76% shareholding, He can do anything in the Company. Because he can pass Special as well as Ordinary Resolution in the company.
Because of the Conflict Mr. B's director retires by rotation in the Annual General Meeting. Though Mr. B wants to continue the Directors. They can not do so, because they have only 24% Share holding, they can not go against the Mr. A.
Now, Mr. B can not go to CLB in order to appoint the Director for Small Shareholder, because he is not small shareholder.
Mr. B can not go to CLB under Oppression & Mismanagement.Mr. B can only do one thing that is sell the shares at the price offered by Mr. A.
Mr. B can do anything in that situation except selling the shares at very less value.
But the Situation will be inverse if there is Proportional Representation System in the Company.
Proportional System means the Appointment of Director as per shareholding.
So, If the Company has 4 Directors, then Mr. A can appoint only 3 directors and 1 director will be appointed by the Mr. B.
Cummulative Vote
e.g. Suppose the Company has the Cummulative voting system then, Mr. A can appoint 3 Directors as he has 76% Voting in the company and Mr. B can appoint 1 director as he has 24% Voting in the company.
Single Vote
e.g. In the Single Vote system Mr. A can appoint 2 Directors and Mr. B can appoint 2 Directors.
The Legislator has applied this provision for Public Companies only.
Because In 95% private Companies most of the Shareholding is divided between the Brothers/Family.
And It is general rule that Every family has certain dispute, And If the Legislator gave the power to the Private Company also, then they will use this section for their personal benefits.
And as the Company Act, 1956 is created for the purpose of Regulisation of the Companies and not as a medium for Family wars. The legislator has not given the power to Private Companies.
Imagine the Ambani Brothers Dispute with this section.
If you need further clarification, then Contact me.
Ankur Shah (Practicing Company Secretary)
"Guru Gautam" Bungalow, Inside Parshwa Tower,
Nr. Shyamal Cross Road, Satellite,
Ahmedabad - 15
Contact: +91-9427633901
Email: ankurjewel @ gmail.com
Blog: csankur.blogspot.com
The Harshit Aggarwal
(B.Com(H) ,CS Final)
(5278 Points)
Replied 22 September 2009
gud work sir.......
Ashish
(CS)
(32 Points)
Replied 03 October 2009
Mr. Ankur,
I doubt that the above system would be of any help as except few decisions which needs to be unanimously by all the directors, all the other decisiosn would be taken by directors of A Company by simple majority. The things which you are mentioning needs to be sorted out in Joint Venture Agreement itself i.e, if a conflict arises what would done to sort out the issues. What would be pricing of shares at that point of time or to be done by independent valuer whose decision would be binding.
Regds,
Ashish K Bhatt
The things which you are mentioning needs to be sorted out in Joint Venture Agreement itself i.e, if a conflict arises what would done to sort out the issues. What would be pricing of shares at that point of time or to be done by independent valuer whose decision would be binding.
The solution given by you is absolutely wrong. Any law of the world never allows such kind of provision, because voting power is decided on the base of shareholding & not on the basis of Any clause of agreement. Are you trying to say that JV Agreement shall have the overriding effect on the company Law?
Your concept of share valuation is totally wrong also.
Because any where in the world share valuation can not be done for the purpose of voting.
Moreover, If the share valuation will be done, than also the ratio of shareholding will remain the same.
Don't you know the simple mathematics?
First of all, understand what the other persons are trying to convey & then oppose him.
I feel pity on the Examiner who has checked your CS Exam papers.
You are not eligible for being CS.
Because of person like you, we CS are considered as Idiot.
Try to remain shut on the public forum, If you dont know anything.
I doubt that the above system would be of any help as except few decisions which needs to be unanimously by all the directors, all the other decisiosn would be taken by directors of A Company by simple majority.
People always go with the single vote, so, that other person can not get benefited.
In single vote system, Both Mr. A & Mr. B is provided with the single vote & their shareholding is not considered while voting.
Ashish
(CS)
(32 Points)
Replied 12 October 2009
The Business runs well for 3 years, then after because of the Misunderstanding between Mr. A & Mr. B, the conflict arises. Both of them are not ready to sell the Shares at the Market Value/Net Assets Value. Both of the person wants very high amount to sell the shares.
The things which you are mentioning needs to be sorted out in Joint Venture Agreement itself i.e, if a conflict arises what would done to sort out the issues. What would be pricing of shares at that point of time or to be done by independent valuer whose decision would be binding.
The reply was for this, when the dispute would arise and not for voting. If both the parties would have equal vote then there would be deadlock and if proportional system is adopted the B would always at loss. Thus, the one party always sells its share to other party, at the price decided in JV ageement. That's why I have said that these things are sorted out in JV Agreement.
But, It is a waste talking to fellas like you, who does not have manners to speak, who have done CS but behave worst then chaprasis.
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