Proviso to Sec 196 puts unnecessary fetters, needs reconsideration

Section 196 of Companies Act 2013 for Appointment of Managing director, Whole-time Director or Manager applies to all companies including Private Ltd companies. It has a proviso that says that “no re-appointment shall be made earlier than one year before the expiry of his term”. Didn’t get the rationale for the same, what does this achieve? Unnecessarily complicates matters for Pvt Ltd closely held companies which want to reappoint a person mid-term – just happened in one of our cases where a new investor came in, the terms of the Founder MD were renegotiated, and as per the terms of the SHA the MD was to be appointed for another 5 years at a particular remuneration but couldn’t as he was already the MD of the company and more than one year was pending in the existing term. The terms of the SHA which were in violation of Section 196 also couldn’t be incorporated in the Articles (as required by the SHA) as that would amount to the Articles too not being in sync with the Act.

This needs serious reconsideration as India seems to be on the move with huge interest and investment activity in Start-ups and the rights of the Founders and the Investors unnecessarily get muddled through such fetters.

In the earlier 1956 Act Section 317 had a period of 2 years within which the reappointment could be made, the same is now reduced to 1 yr. In any case the said section did not apply to Pvt Ltd companies but Section 196 does.