This article has been written by Mr. Aman Mishra, a 5th year student studying BALLB, from at IMS Unison University, Dehradun.

Title- 

Introduction: – 

An investor who invests in private shares of a company are called shareholder the ownership of shares of the company gives the shareholder to a bundle of rights namely, economic rights and control liabilities. The course and control of the organizations is in the joint hands of the management. In addition to appointing board members the shareholders also have the right to approve mergers and acquisitions, amendment of the company’s articles of association, is authorise new equity issues and other important corporate decisions. The power to control the major affairs of the company and that of appointing the directors it can be exercised by the shareholders through their right to vote. This makes the shareholders’ right to vote the crux of the system of corporate governance. The purpose of the current article is to give an overview of the laws relating to the voting rights of a shareholder of a company and shareholders’ activism. 

Voting rights attached to different types of shares. 

As per section 43 of The Companies Act, 2013, whenever a company limited by shares raises their funds into two kinds namely, its value equity shares capital and preference share capital. These two types of a share capital different from each other on one major aspect namely, the voting rights attached them.

1. i)     Preference share capital

According to Section 47 of the act it lays down the provision related to voting rights of shareholders in a company. According to sub-section 2 of this section a member of a company to holding preference share capital shall in respect of such capital have a right to vote in three circumstances namely, when resolutions are placed before the company, which directly affect the rights attached to his preference shares; when the resolve is for winding up the company; and when the resolution deals with the repayment or a reduction that the equity or preference share capital of  the company.

However, the provision under section 47(2) it mentions an exception to the above stated rule as it provides,

Thus, it can be said that only if they provide a company fails to distribute dividend in respect of a class of preference shares for a time of two years or more, the holder of these shares get a right to vote on all resolutions. It must be noted that under section 87 of The Companies Act, 1956 that compare to the current section provided for an explanation that the time of two years or there should be a consecutive period. The current section lacks clarity as to whether the period of two or more years must be consecutive or not. Further, it likewise misses the mark on clarification regarding whether in the event of combined inclination shares, the instalment of earlier years’ profit in the ensuing years will be considered as a medicinal measure in this manner stopping the democratic freedoms that the investors have gotten due to default in instalment of profit.

1. ii)    Equity share capital

According to Section 47(1) of the act to provides that every holder of equity shares it carrying voting rights shall have a right to vote on every resolution placed before the company. There is no requirement that the equity shareholder must hold the shares for a specific period for him to be entitled to vote. The voting rights of an equity shareholder are almost absolute except in three situations namely,

• non-payment of calls by the member of a company
• non-payment of other total due against a member of company 
• Where this company has been exercised the right of lien on his shares.

 Shares with differential voting rights.

According to Section 43 of the act to provides for the issue of equity shares with differential voting rights wherein the shares issued may not carry equal voting rights in consonance with the principle of ‘one share one vote’. These are contemplated as shares, which may have superior voting rights, or shares, which have inferior voting rights but offer higher dividends or are offered at a discount. The advantages of the issue of such shares to the companies are that it allows them to raise capital without changing its ownership structure and to avoid a hostile takeover. On the other hand, it proves to be beneficial to the passive investors who do not intend to participate in the management of the company but are looking for higher dividends and discounts. Under the act and the rules governing the issue of shares with differential voting rights, it is specified that shares with differential rights shall not exceed 26% of the total post issue paid up equity share capital. To regulate the issue of shares with differential voting rights, The Companies (share capital and debenture) rules, 2014 provides for certain prerequisites which must be fulfilled by the companies to be eligible for issuing shares with differential voting rights such as,

• The company should have had distributable profits for the three financial years preceding the year in which it decides to issue such shares.
• There should not have been any default on distribute any payment of dividend to preference shareholders or repayment of a term loan to a public financial institution among such others.
• The company should not have been punished by the court, tribunal, Reserve Bank of India or the Securities and Exchange Board of India during the three years immediately preceding the year in which it decides to choose to issue such shares.

The issue of shares with differential voting rights was permitted in India since 2000 and companies such as Tata Motors and Pantaloons Retail have issued shares with differential voting rights. In the year 2009, legitimacy of issue such shares had been challenged in Anand Pershad Jaiswal and Ors v. Jagatjit Industries Ltd and Ors, which resulted in a significant debate over the shares with differential voting rights. In this case the promoters of Jagatjit Industries Ltd had issued shares with 20 voting rights each per share. The principle behind the right to vote of a shareholder of a company is based on the consideration that, since the decisions taken by the company will affect the profits earned by it which in turn will directly affect the dividend received by the shareholder, the shareholder will ensure that the vote casted by him is one which is based on a sound reasoning. In case of shares with superior voting rights, the holder of such shares has a limited number of shares which guarantee him a limited dividend, but which are couple with a superior voting power. Under such conditions, the activity of the prevalent democratic power by the investors may be impeding to steady dynamic cycle, as it would prompt,

• The exercise of the voting power is not based on the sound reasoning as it will not have a direct and proportionate effect on the dividends earned by the shareholder.
• That is the Poor corporate governance as, the decision-making is in the hands of a few.

However, it can be observed from the current scenario that not many companies are interested in issuing shares with differential voting rights even though the company law allows them to do so. This could be because of lack of awareness about the advantages of issue of such shares as well as due to lack of participation by the general public, which is again as a result of being unaware. 

Shareholders’ activism considering their voting rights.

he idea of investors activism is something, which was non-existent in the Indian situation until a couple of years back. It is generally seen that in a large portion of the organizations albeit the investors should be the proprietors and partake in taking significant corporate choices, typically the administration controls the organization. Many of the investors are uninterested and detached towards the working of the organization wherein they own specific level of offers. This outcomes in these investors either not casting a ballot by any stretch of the imagination or essentially casting a ballot for the administration. Also, the institutional financial backers, for example, common subsidizes annuity reserves, insurance agency, and so on, who purchase extensive portions of the organization, don’t partake with regards to navigation and casting a ballot in the organization gatherings. Voting at a shareholders meeting is generally the only means outside of laws and regulations for the shareholders to protect their status as a residual owner of the company. It is extremely important that the shareholders exercise their right to vote to ensure that the management of the company is carried out in the best interest of the company and not for the benefit of a few men.

Conclusion:

As has been continuously harped upon in this article, the right of a shareholder to vote in the meetings of the company is of utmost importance not only for the benefit of the shareholder but also for the benefit of the company and the society. It can be observed that the Indian laws with respect to the voting rights of the citizens can be improved further and much more clarity can be brought about in its implementation. Awareness of these laws also has to be brought about, as it is a major obstacle, which prevents the shareholders from understanding the full impact of their right and take advantage of it accordingly. It is also the duty of the shareholders to take advantage of regulatory reforms introduced for their benefit and fulfil their fiduciary duties as owners of the companies.