Freeze on voting rights casts cloud on AGM season

Most cos will be unable to pass resolutions

The freeze on promoter voting rights by the Securities and Exchange Board of India (Sebi) at the beginning of the season for annual general meetings (AGM) has cast doubts on whether companies would be able to pass resolutions.

Earlier this week, Sebi had passed an order against promoter individuals and entities of 105 companies for failing to reduce their shareholding to at least 75 per cent. Besides prohibiting these companies from accessing the market, Sebi also imposed a freeze on voting rights and benefits, such as dividends and bonuses, on the promoters of non-complaint companies.

The deadline for meeting the minimum public shareholding norm for private companies expired on June 3.

The regulator has said the freeze on voting rights would be to the extent of excess promoter or promoter group shareholding. For instance, if the public shareholding in a company is just 12.5 per cent, which means the company has only achieved 50 per cent public holding (half of 25 per cent), half the promoter holding would be frozen.

Securities law experts believe as more than 50 per cent votes are needed to pass an ordinary resolution (special ones need more), more clarity is needed on how non-compliant companies would be able to pass resolutions. Shriram Subramanian, founder and managing director, InGovern Research, said, "There is no clarity on whether such companies would be able to pass any resolutions in the coming proxy season. Most of the companies have their annual general meetings scheduled for August-September."

S N Ananthasubrama-nian, president of the Institute of Company Secretaries of India, agreed the issue required interpretation of rules.

“The passing of an ordinary resolution will require more than 50 per cent votes. If half the voting rights are frozen, the companies may find it difficult to pass a resolution,” he said.

According to an analysis by Business Standard, of the 70-odd companies (excluding those in the suspended category), promoters in at least 26 companies face a voting rights freeze of more than 50 per cent.

Experts said Sebi should provide clarity on how the issue could be resolved. Some experts say Sebi is likely to consider the unfrozen part of voting rights for passing resolutions.

M S Sahoo, lawyer and former whole-time member of Sebi, says, “The interpretation is likely to be (that) available votes would be counted when deciding on a resolution.”

J N Gupta, founder and managing director, Stakeholders Empowerment Services, and former executive director of Sebi, agreed. “They have frozen shareholding in a proportionate manner, which means ordinary resolutions could still go through if the votes are considered as a total of the unfrozen. In rare cases, it could create a situation where special resolutions, which require a larger number of votes, might be blocked,” he said.