Director Retirement by Rotation Under Section 152(6): A Detailed Overview

Summary: Section 152(6) of the Companies Act governs the retirement of directors by rotation in public companies, with private companies excluded from this provision. According to the section, unless otherwise specified in the Articles of Association, two-thirds of the total number of directors (excluding independent and nominee directors) must be those liable to retire by rotation. From this group, one-third must retire at every Annual General Meeting (AGM). In rounding calculations, two-thirds are rounded up to the next whole number, while one-third retiring directors are rounded to the nearest whole number. Directors who retire are eligible for reappointment through a majority vote. Independent and nominee directors are excluded from the rotation count, while small shareholder directors, although included in the two-thirds, are non-rotational and not subject to retirement by rotation. The order of retirement follows the First-In-First-Out (FIFO) method, meaning those who have served the longest retire first. If multiple directors were appointed on the same date, retirement is decided by a draw of lots. For instance, in a public company with 12 directors, including 6 independent directors, only the remaining 6 are considered for rotation. Two-thirds of these (i.e., 4 directors) are liable to retire by rotation. At each AGM, one-third of these four—rounded to 2—must retire. After reappointment or retirement, the cycle continues based on tenure, maintaining an orderly rotation.

Understanding Section 152(6) of the Companies Act

• Section 152(6) specifically applies to public companies, thereby excluding private companies from the provision related to retirement of directors by rotation.
• The section provides that, Unless Articles provide for the retirement of all Directors at every annual general meeting, two-thirds of the total number of directors should be those liable to retire by rotation, and out of them, one-third must retire at every Annual General Meeting (AGM) following the meeting in which the first directors are appointed.
• Any fractional value arising in the calculation of two-thirds is to be rounded up to the next whole number, as rounding to the nearest number might result in non-compliance with the prescribed proportion.
• In contrast, fractions in the one-third retiring directors are to be rounded off to the nearest whole number, in accordance with the method specified under the Act.
• Retiring directors are eligible for re-appointment, provided that the votes cast in favor of their reappointment exceed the votes cast against the resolution.
• Additionally, Independent Directors and Nominee Directors are excluded from the two-thirds calculation. A Small Shareholder Director, although included in the two-thirds count, shall always be treated as a non-rotational director and hence cannot be retired by rotation.
• The one-third of directors retiring at the AGM are determined using the First-In-First-Out (FIFO) method. Directors who have served the longest tenure will retire first. In cases where two or more directors were appointed on the same day, their retirement is decided through a draw of lots.

Let us understand it better with a situation:

Suppose there are total 12 directors in a public (listed company), 6 of which are independent, 2 of them are executive and 4 are non executive and non independent.

For calculating 2/3rd independent directors are not included in the calculation. So 6*2/3 will be 4. 4 directors are retiring by rotation.

Out of these 4 directors 1/3rd are liable to retire in every AGM. 1/3rd of 4 is 1.3333. So 2 directors shall retire at every AGM. Directors can be appointed by shareholders by majority.

Now which 2 directors are liable to retire at the AGM firstly? The directors which are holding office longest will go for retiring firstly. After their re-appointment or retirement, at next AGM, the next 2 directors who are holding office for longest will be liable for retirement.

Assume that these directors are standing in a line in such an order that the person who is holding office for longer when compared to other directors will stand first and the director who is holding office for minimum period of time will be standing at last.

Now the one who is re-appointed will go at last behind the person who has held office for the shortest duration and the one is retired will leave the line. And subsequently this cycle will continue.