India: Postal Ballots – An "Anathema" To Physical Meetings? – New Companies Act Perspective

Last Updated: 16 October 2015
Article by Rohini Das

In light of the vast array of amendments made to the Companies Act, 1956 (the "1956 Act") and the bringing into force of certain provisions of the Companies Act, 2013 (the "2013 Act"), an important question was raised by Godrej Industries Limited in Company Summons for Direction No. 256 of 2014 ("Judgment") before the Hon'ble Bombay High Court (the "Court"). The question being "whether a resolution for approval of a Scheme of Amalgamation can be passed by way of 'postal ballot' which includes electronic voting, in complete substitution of an actual physical meeting of equity shareholders". 

Before we delve into the discussion about the points made out by the Court in this judgment, it is crucial to state the pivotal provision of the 2013 Act that is the subject of the judgment – i. e. Section 110 of the 2013 Act which is said to be in substitution of Section 192(A) of the 1956 Act. Section 110 of the 2013 Act mandates that every company transact certain business items notified by the Central Government by way of 'postal ballot' only (whereas, Section 2(65) of the same statute defines 'postal ballot' as 'voting by post or through any electronic mode'); the Section also permits the use of 'postal ballot' in respect of transacting any other item excluding ordinary business and any business in respect of which directors or auditors have a right to be heard at any meeting in such manner as may be prescribed, instead of transacting such business at a general meeting; finally, the Section states that any resolution assented to by the requisite majority of shareholders by means of 'postal ballot' shall be deemed to have been duly passed at a general meeting convened in that behalf.

Certain important provisions of the 1956 Act, provisions of the 2013 Act, several circulars published by the Securities and Exchange Board of India ("SEBI") and various Rules such as the Companies (Passing of Resolution by Postal Ballot) Rules, 2001, Postal Ballot Rules, 2001 and the Companies (Management & Administration) Rules, 2014 were referred to in the judgment and thus, hold important places in the ensuing discussion.

The contention leveled by the applicant's counsel was that the 2013 Act clearly aims at doing away with the holding of physical meetings except in those limited circumstances required by the 2013 Act. It was further submitted that SEBI circular dated April 17, 2014 (CIR/CFD/POLICY CELL/2/2014) (the "Circular") more or less, made voting by 'postal ballot' mandatory with respect to listed companies. However, these submissions seemed to be extreme propositions to Patel J. in light of some of the below mentioned reasons:

  • The apparent legislative intent behind the provision of 'postal ballot' is more inclusiveness of shareholders in the voting process. The obvious drawbacks of a general meeting are the usual shortcomings related to physical presence of the individual such as travel time, opportunity cost and travel cost as well as availability of the person in question. However, one cannot easily overlook the overarching merits of a physical meeting of shareholders in corporate governance and decision making. Transparency and democracy are two extremely vital tenets of corporate governance which give shareholders the right to 'use the vote as an expression of an informed decision'. In a general meeting, it becomes possible for a shareholder to seek justifications, demand clarifications, voice his concern, declare his support, as well as persuade others to assent or dissent regarding a particular item that is subject to voting. These rights of a shareholder are invaluable, inalienable and absolutely necessary for the democratic governance of a business entity and thus, cannot be defenestrated. Using a system of 'postal ballot' in complete substitution of a general meeting results in forfeiture of all these rights and thus, takes away the element of democracy in the functioning of the business entity".
  • The Court in furtherance to rationalizing the foregoing view, also mentioned that Section 103 of the 2013 Act deals with quorum for meetings. While using 'postal ballot' as a total replacement of general meetings, it might be difficult to meet this statutory requirement. Although, the applicant's counsel contended that the words, 'Notwithstanding anything contained in this Act' in Section 110 of the 2013 Act stand as a non-obstante clause which eliminates the need for any such quorum, the Court in  non-concurrence to the said view and opines that Schemes of Arrangement including Schemes of Amalgamation are often amended at meetings. The relevant sections pertaining to the same are Sections 391 and 394 of the 1956 Act and the corresponding sections in the 2013 Act are Sections 230 and 232. If 'postal ballot' would be the only medium of voting, it would mean that all schemes put to vote would either receive the assent or fail to receive the assent of the requisite number of shareholders without ever being amended, altered or varied. Moreover, as of date, Sections 230 and 232 of the 2013 Act are not in force. Hence, Section 110 of 2013 Act needs to be read with Sections 391 and 394 of the 1956 Act, and as the non-obstante clause of Section 110 of the 2013 Act restricts its overriding effect to the provisions of the 2013 Act only, it would not extend to Section 391 and 394 of the 1956 Act.
  • The SEBI Circular referred to by the applicant's counsel itself upholds the rights of the shareholders to 'participate in and to be sufficiently informed on decisions concerning fundamental corporate changes, the opportunity to participate effectively and vote in general shareholder meetings, the opportunity to ask questions to the board, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limits'. In cases where 'postal ballot' is used as a complete substitution of a physical meeting, it is difficult to ascertain how the above mentioned rights can be given effect. Additionally, a clarification from the National Stock Exchange of India indicates that the said Circular is deferred till October 1, 2014. Hence, there is a dispute regarding whether the said Circular is in effect or not.
  • The Court in furtherance to the view and laying stress of the importance of debate and deliberation being too high in shareholders meetings, has also relied on the views taken by the relevant authorities in jurisdictions such as Australia, wherein, that even in a fully electronic meeting, the need for "reasonable opportunity to participate" in such meetings have been underscored.
  • The Court further pointed out that Section 110 of the 2013 Act pertains to meetings 'called by the company'; however, meetings with respect to Schemes of Arrangement including Schemes of Amalgamation under Sections 391 and 394 of the 1956 Act and Sections 230 and 232 of the 2013 Act are not subject to being 'called by the company', rather they are 'ordered by the court. Thus, prima facie, it appears that Section 110 of the 2013 Act would not apply to any Scheme matters including Schemes of Amalgamation. However, the court may in its direction permit or even require 'postal ballot' in addition to an actual physical meeting.

After hinting at the operation of all this uncertainty, the Court agreed with the recommendation of the amicus curie arguing against the applicantof considering a situation where the provision of 'postal ballot' could be in 'addition to' rather that in "replacement of' a general meeting. In such circumstances, shareholders would have the option to either vote by 'postal ballot' or 'electronically' or 'physically at a general meeting'. This would not only give the shareholders the option to attend a shareholders' meeting and clarify any doubts which they may have before they vote, but it would also allow those unavailable shareholders with strong opinions to skip these meetings and vote through 'postal ballot'. Thus, such a situation attains the goal of greater inclusiveness, meets the requirement of Section 103 of the 2013 Act pertaining to quorum at meetings, as well as preserves the irreplaceable rights of the shareholders to participation in an informed manner in the operation of the corporate entity.

The Court finally summed up by reiterating that provisions relating to mandatory voting by 'postal ballot' instead of physical meetings do not apply to court-convened meetings. The Court directed that at the latter meetings, provision must be made for 'postal ballot' and electronic voting in addition to an actual meeting. The Court also observed that on a prima-facie view that the elimination of all shareholder participation at an actual meeting is anathema to some of the most vital of shareholders' rights, it is strongly recommended that 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. The Central Government represented by the Additional Solicitor General and SEBI were requested to appear before the Court in order for the Court to fully consider the effect, interpretation and implication of the provisions of the 2013 Act and the relevant SEBI circulars and notifications pertaining to the above discussion. Although the application for dispensing with an actual meeting and having one only by 'postal ballot' and 'electronic voting' was permitted by the Court, the Court ordered this judgment to be shown as pending till a final determination on the above outlined issues.

While the Judgment is an important indication on the interpretation of a specific issue as deliberated above, however, the Court has sought the intervention of the stake holders such as the Central Government and the SEBI to consider and deliberate on the highlighted issue. Perhaps this is Judgment is one of  many guidance that may come up time and again before the courts in India, more importantly in light of the teething issues faced upon introduction of new legislation.

This article was first published on May 30th, 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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