India: Can Preference Shareholders Get Voting Rights?

Last Updated: 31 October 2019
Article by Nisha Punjabi

Voting rights:

Section 2(93) of the Companies Act, 2013 ("2013 Act"), provides the definition of 'voting right' which means 'the right of a member of a company to vote in any meeting of the company or by means of postal ballot'1. Principally, voting right is the decision making right vested with all the members of a company to approve or disapprove the resolutions placed before the company at the general meeting. In case of shareholders of the company, the right of shareholders to vote in a general meeting of the company is attached to the number of shares held by the shareholders of the company.

Voting rights of a member of a company:

Voting rights can vary depending on the nature and category of the shares issued by the company and subscribed by the shareholder. Section 47 (Voting rights)2 of the Act deals with voting rights vested with every equity shareholder and preference shareholder of a company. Voting rights may be on 'one person one vote' basis or on the basis of paid- up value of shares viz., on a show of hands, each member has only one vote, while on a poll, the voting rights of a member shall be in proportion to its shareholding in the paid up share capital of the company. It is pertinent to note that, the right to exercise such voting right by the shareholder is not automatic. A person holding shares with voting right will be entitled to exercise that voting right only if his name appear in the company's register of members. This was maintained by Securities Appellate Tribunal in Sharad Doshi v. Adjudicating Officer, (1998)3. Therefore, in order to be eligible to exercise the voting rights attached to a share, possession of share certificate alone is not enough, but it is necessary to have the name of the holder entered in the register of members of the company. Regardless of the size of the holding of the equity/preference shareholder, a company cannot by its articles of association or otherwise partially or completely deny the voting rights entitled to such shareholders. Also, a company cannot impose any threshold for exercising the voting rights by any shareholder at a general meeting such as allowing only such number of shareholders to vote or such shareholders holding more than a certain percentage of shares to vote and denying the rest who do not cross that prescribed limit. However, Section 106 of the Act provides for an exception, whereby, a company may include a restriction in its articles of association on exercising the voting right by a member in respect of any shares held by it on which any calls or other sums are presently payable by it and have not been paid, or in respect of which the company has a right of lien and has exercised that right.

Except as stated aforesaid, a company cannot restrict any member from exercising its voting rights, unless as prescribed by law, on any other ground as the voting right is an essential right of a member of the company and prohibiting such right is not legally valid.

Voting rights of a preference shareholder

While an equity shareholder has the right to vote on every resolution placed before the company, a preference shareholder has the right to vote only on those resolutions which directly affect the rights attached to its preference shares i.e. any resolution for winding up of the company or for the repayment or reduction of its equity or preference share capital. However, an exception under section 47 of the 2013 Act has been carved out for the preference shareholders, which is in the case where preference shareholders have not been paid any dividend by the company for a period of 2 years or more, such preference shareholders would acquire the right to vote on every resolution placed before the company just like equity shareholders (This is further explained under the next heading).

As per Section 47 of the 2013 Act, where the preference shareholders are entitled to vote, the proportion of voting rights of equity shareholders to the voting rights of the preference shareholders should be equal to ratio of the paid- up share capital of the equity shares and paid- up share capital of the preference shares.

Voting rights of preference shareholders on non payment of dividend:

Preference shareholders are restricted to vote only on those resolutions which directly affect their rights, however, Section 47(2) of the 2013 Act removes the limitation of exercising their voting rights and entitles the preference shareholder to vote on every resolution placed before the company in general meetings only if the dividend on such preference share is unpaid for a period of 2 years or more. Whereas, Section 87 (Voting rights) of the Companies Act, 1956 ("1956 Act") also entitled the preference shareholder to vote on all resolutions placed before the company if the dividend (i) was 'due'; and (ii) remained unpaid. There was an additional requirement in the 1956 Act for the dividend to be due other than being unpaid. This was further clarified in the Explanation of Section 87 (2) (b) of the 1956 Act which stated that dividend shall be deemed to be 'due' for any period irrespective of whether the dividend was declared on preference shares or not by the company. This was held in Surya Kant Gupta v. Rajaram Corn Product (Punjab) P. Ltd., (2008) where the preference shareholders were not paid dividend since the incorporation of the company, the preference shareholders became entitled under section 87 of the 1956 Act to exercise voting rights on every resolutions placed before the company at any general meeting.

A question arises whether a preference shareholder of a company still be entitled to acquire voting rights on all resolutions placed before the company which has incurred losses and unable to declare dividend,? Well, as per Section 123 (Declaration of dividend) of the 2013 Act (Section 205 of the 1956 Act), no company can declare or pay any dividend for any financial year to the shareholders except out of profits. Accordingly, in case the company has incurred losses for any financial year, it will be unable to declare or pay dividends to the preference shareholders for that financial year. However, this prohibition should not restrict the preference shareholder from exercising its voting rights on all resolutions placed before the company. This was settled by the Supreme Court of India in Ram Parshottam Mittal v. Hill Crest Realty SN BHD, (2009)4 wherein the Hon'ble Supreme Court of India held that notwithstanding the provisions of Section 205 of the 1956 Act which prohibited declaration of dividend out of profits to the shareholders, but in view of the Explanation provided in Section 87 of the 1956 Act, the dividend shall be deemed to be due even though not declared by the company for 2 years or more and thus the preference shareholders are entitled to vote on all resolutions placed before the company at any meeting.

Explanation of Section 87 is omitted in the 2013 Act and the conditions for the dividend to be 'due'. The position and outcome as provided in the provisions of 1956 Act remains the same under 2013 Act, that irrespective of dividend being declared or not on preference shares, the fact that preference shareholders have not been paid dividend for a period of 2 years or more would entitle them to exercise their voting rights on every resolutions placed before the company. Thus, a company's inability to make profits in a year should not deprive preference shareholders right to receive dividend and voting rights both at the same time.

Further, Section 47 is applicable to private companies where the memorandum of association or articles of association so provides, therefore private companies can specifically exclude the operation of Section 47 of the 2013 Act by providing the exclusion in its articles of association.

Footnotes

1 Postal ballot means voting by post or through any electronic means.

2 Not applicable to private company where memorandum and articles of association of private company so provides.

3 [1998] 16 SCL 269 (SAT – MUM.)

4 (2009) 4 Comp LJ 225 (SC)

Originally published October 18, 2019

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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