Mumbai: The Bombay high court has raised concerns about the e-voting provisions of the new Companies Act 2013 in a significant ruling that could force the government and the capital market regulator to rethink the provision.
According to the Act, it is mandatory for a listed firm or a firm having more than 1,000 shareholders to provide investors the facility to exercise their right to vote by electronic means.
Some companies are interpreting the provision for e-voting as a way to do away with shareholder meetings, including annual general meetings (AGMs), except those explicitly required by law.
On 8 May 2014, a single-judge bench of the high court ruled that if companies don’t hold shareholder meetings and rely only on votes by postal ballot, which includes voting electronically, it will “erode” the shareholders’ right to take an informed decision.
“We strive today to greater transparency; that means that more should be given the opportunity to speak and to exercise their rights as shareholders. But that cannot come at the price of their right to speak, to be heard, to persuade, even to cajole. What corporate governance demands is the government of the tongue, not the tyranny of a finger pressing a button,” justice G.S. Patel ruled.
The court was hearing an application filed by Godrej Industries Ltd asking for permission to hold only a postal ballot and electronic voting instead of a shareholder meeting to approve the merger of Wadala Commodities Ltdwith the company.
A Securities and Exchange Board of India ( Sebi) circular of 21 May 2013, which the court referred to in its order, says listed companies need to ensure that a merger scheme submitted to the high court for approval provides for voting by public shareholders through postal ballot and e-voting, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such a resolution.
In response, the court order said, “It may often happen that a shareholder is undecided on any particular item of business. At a meeting of shareholders, he may, on hearing a fellow shareholder who raises a question, or on hearing an explanation from a director, finally make up his mind...”
The court went on to observe that using the e-voting provision given under the Companies Act to avoid shareholder meetings may be “completely contrary to the legislative intent”. The court order also raised concerns about the process of determination of electronic votes cast according to the new norms.
Lawyers specializing in securities market transactions say that many listed companies have raised questions over the need for shareholder meetings such as AGMs, especially since the AGM season has just begun.
A rule that the postal ballot and e-voting process has to be completed three days before shareholder meetings defeats the purpose of having an AGM or an extraordinary general meeting, said Sandeep Parekh, founder of Finsec Law Advisors.
“The new law seems to be saying that meetings are not necessary. The basic principles of corporate democracy mean that there has to be a discussion and the way it is framed in the new Companies Act seems to suggest that discussion is pointless and you have to vote before a discussion. You cannot discuss, argue or convince. It is a very regressive step,” said Parekh, a former Sebi executive director.
The high court has now referred the case to a larger bench for detailed examination because it thinks this issue is likely to come up in “several matters”. The court has also made the central government and capital markets regulator a party to the case and directed them to appear before a larger bench of the court.
An email sent to Sebi did not elicit a response.
The court order said, “…till this issue is fully heard and decided, no authority or any company should insist upon such a postal-ballot-only meeting to the exclusion of an actual meeting.”
Following the court order, Godrej Industries withdrew its application from the high court. In an email response to a Mint query, a Godrej Industries spokesperson declined to comment on the issue.
J.N. Gupta, founder of SES Governance, a corporate governance advisory, does agree with the interpretation of the court and says that neither the government, nor the capital market watchdog, said general meetings need not be held and that all matters need to be decided by a postal ballot.“Sebi’s new corporate governance code has made e-voting facility compulsory for the top 500 companies. This does not mean that AGMs are not to be held. My interpretation is that e-voting is an addition and not a substitution for existing procedure,” he says.
Gupta, who has earlier worked with Sebi as an executive director, adds that the intent of Sebi circular is not to substitute physical meetings, which are required by statute, but to supplement the provisions related to participation; e-voting enables shareholders to exercise their rights even without participating in a meeting physically.
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