Section 152 of the Companies Act,2013 is applicable on only: –
- Public Company
- Private Limited Company which is a subsidiary of a public company (Deemed Public Company)
As stated in Section 152 (6) (a) of the Act, unless the articles provide for the retirement of all directors at every annual general meeting. At least 2/3rd (two-third) of the total number of directors of a public company shall be persons whose period of office is liable to determination by retirement of directors by rotation.
At every subsequent annual general meeting after first AGM, 1/3rd (one-third) of rotational directors for the time being as are liable to retire by rotation.
If their number is neither three nor a multiple of three, then the number nearest to one-third shall retire from office.
Need for Rotation of Directors: –
In Companies Act,2013 there are certain powers which are reserved strictly for the Board and some powers are reserved for the shareholders. Since, the shareholders are the owners of the Company they cannot interfere with the powers of the Board. Emphasizing this point, the Court in the judgement “John Shaw & Sons Ltd Vs Shaw” said that the only way in which the shareholders can exercise the powers of the Board are: –
- By altering the Articles of Association;
- By refusing to re-elect the directors whose action they disapprove;
Thus, Section-152 gives an opportunity to shareholders to remove the directors in general meeting whose actions they do not like. They get this chance every year.
Advantages of Rotation of Directors: –
- Limiting the corporate members service length and have them vacate;
- Reducing entrenchment, encouraging new leadership and develop strong corporate governance practice.