India - Vote From Home – A Positive Move For Shareholder Meetings.

Legal News & Analysis - Asia Pacific - India - Regulatory & Compliance

29 April 2020
 

Introduction
 

The Companies Act, 2013 does not contemplate shareholder meetings being held electronically. However, as social distancing becomes de rigueur and the temporary lockdown has been extended to May 3, 2020, due to the COVID-19 pandemic, it has become difficult, impractical and illegal in many cases for companies to hold shareholder meetings physically. At the same time, companies need to plough through these difficult times, and crucial decisions on matters such as fund raising and restructuring, all of which require shareholders’ approval, cannot be suspended. Responding to this dilemma, the Ministry of Corporate Affairs (MCA) has issued circulars[1] relaxing the requirement to hold physical general meetings and permitting meetings to be held remotely through electronic means.

 

The MCA has requested companies to hold general meetings to take decisions of urgent nature (other than for items of ordinary business[2] and items where any person has a right to be heard) through electronic voting or postal ballot, according to the procedure under Section 110 of the Companies Act, 2013 (Companies Act) and Rule 20 of the Companies (Management and Administration) Rules, 2014, and the additional measures prescribed under the circulars.

 

However, it would be challenging for companies who have not previously adopted the electronic voting facility to now put in place the infrastructure to enable this, and a postal ballot may not be viable in all cases. Further, some issues may be of a nature which warrant the holding of a shareholders’ meeting from a governance perspective or otherwise. To address this gap, the MCA has permitted companies to hold an extra-ordinary general meeting (EGM) through video conferencing (VC) or other audio-visual means (OAVM), if a company believes that holding an EGM is unavoidable. This relaxation has been provided up to June 30, 2020. The circulars have set out requirements to be met by the company for such a meeting, and have provided separate procedures for companies which are mandated to provide electronic voting facility (or have opted for it) and those which are not mandated to provide electronic voting facility. The key considerations are set out below:

 

  • The recorded transcript of the meeting should be kept in safe custody and should be accessible on the company’s website (if any), in case of a public company.

 

  • Members’ attendance at the EGM through VC or OAVM will be counted for quorum requirements under the Companies Act.

 

  • The meeting should permit two-way participation by members and allow them to pose questions either at the time of the meeting or submit the questions in advance. At least 1,000 members should be able to attend the meeting on a first-come-first-served basis, barring shareholders holding more than 2% of the shareholding, promoters, institutional investors, directors, key managerial personnel, chairpersons of the committees and auditors, who may be allowed to attend the meeting without the first-come-first-served

 

  • Appointment of proxies is not permitted in such a meeting through VC or OAVM as physical attendance of members has been dispensed with under this framework. However, representatives may be appointed pursuant to Sections 112 and 113 of the Companies Act, such as representatives of members/creditors who are body corporates, for voting at the EGM through electronic voting.

 

  • The company should ensure that all members have access to electronic voting before the date of the meeting. If a company is not required to provide electronic voting facility by law[3] or has not opted for it, voting should be through email and the company is required to provide a secure email address to which members can send their votes through their registered email address when voting is done by poll. The company will be responsible for confidentiality of password and other privacy issues associated with the email address. Further, the company should also ensure that adequate safeguards have been undertaken to verify the authenticity of members’ email addresses and other details.

 

  • The notice for the meeting, which may be sent by email, should outline the procedure provided in the circular in detail and contain clear instructions on how to participate in the meeting. The company is required to provide a helpline number through a registrar & transfer agent or through a technology provider for members who need assistance with the VC or OAVM technology before or during the meeting. A copy of the notice should be prominently displayed on the company’s website and notified to the stock exchanges in case of a listed company.

 

  • Within sixty days of the meeting, the resolutions passed at the meeting should be filed with the Registrar of Companies, clearly indicating compliance with the mechanism under the circulars and the provisions of the Companies Act.

 

In addition to this relaxation, the MCA has also permitted companies whose financial year (other than the first financial year) ended on December 31, 2019, to hold their annual general meeting within nine months from December 31, 2019, instead of the six month requirement which is the norm.

 

While these measures by the MCA are a welcome gesture, the circulars permit companies to hold EGMs by VC or OAVM only if such a meeting is ‘unavoidable’. However, there is no clarity on what constitutes ‘unavoidable’. While an approval for fund raising may be unavoidable if a company is in need of finances, various shareholder approvals required in relation to a secondary transaction (such as appointment of a nominee director by the transferee) may not necessarily be unavoidable from the company’s perspective. Without clear guidelines and materiality thresholds to determine what is an ‘unavoidable’ circumstance, companies could face the risk of the MCA subsequently viewing the resolutions passed as not being unavoidableWhile it remains to be seen how the MCA will interpret the term, EGMs held by companies with reasonable justifications are likely to pass muster.

 

Permitting companies to hold virtual meetings is a significant and welcome deviation from the Companies Act, 2013. While the current circulars are merely a temporary measure in response to the COVID-19 outbreak, it bears merit to consider if these measures should become permanent. The concept of virtual general meetings is not new to Indian corporate law and was permitted under the erstwhile Companies Act, 1956, as a part of the MCA’s green initiative in corporate governance to permit paperless compliances.[5] If these measures are made permanent, apart from the obvious benefit of minimising the cost of organising and attending physical meetings, virtual meetings could promote increased participation by international shareholders through electronic means as we move towards a more globally connected market. With strict safety measures to protect the interest of shareholders and their participation in meetings, virtual meetings may well deserve a permanent place in Indian corporate law, rather than being a temporary stop-gap measure.
 

 

For further information, please contact:

 

Maheshwari Sundaresh, Partner, Cyril Amarchand Mangaldas

maheshwari.sundaresh@cyrilshroff.com

 


[1] MCA Circular on relaxation of compliance by companies for passing ordinary and special resolution on account of the threat posed by COVID-19, General Circular No. 14/2020 dated April 8, 2020 (http://www.mca.gov.in/Ministry/pdf/Circular14_08042020.pdf). MCA Circular clarification on the previous circular (General Circular No. 14/2020), General Circular No. 17/2020 dated April 14, 2020. (http://www.mca.gov.in/Ministry/pdf/Circular17_13042020.pdf).

[2] Section 102(2) of the Act provides that ordinary business means (i) consideration of financial statements, directors’ report and auditor’s report; (ii) declaration of dividend; (iii) appointment of directors in place of those retiring; and (iv) appointment and fixing the remuneration of auditors.

[3] As per Rule 20 of the Companies (Management and Administration Rules), 2014, unlisted companies and companies with less than 1000 members are not obligated to provide for electronic voting.

[4] MCA Circular on holding of AGMs by companies whose financial year ends on December 31st 2019, General Circular No. 18/2020, dated April 21, 2020 (http://www.mca.gov.in/Ministry/pdf/Circular17_13042020.pdf)

[5] MCA Circular on Green Initiatives in Corporate Governance, General Circular No. 27/2011, dated May 20, 2011 (http://mca.gov.in/Ministry/pdf/Circular_27-2011_20may2011.pdf)