CORPORATE LAW II RESEARCH PAPER

REFORM

OF

LAW GOVERNING GENERAL MEETINGS

Submitted By Govind Satish ID No. 1638 Trimester X IV Year, B.A., LL.B. (Hons.) Submitted on 3rd August 2011.

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TABLE OF CONTENTS
................................................................................................................................... 2 TABLE OF CONTENTS..................................................................................................3 Introduction................................................................................................................ 4 Background to Shareholder Passivity and Reforms....................................................6 Reform of Legislative Provisions ..............................................................................10 Linking Shareholding Pattern and Corporate Governance........................................19 Incentivising the Passive Shareholder......................................................................23 The Companies Act 2009 and Institutional Investors: A Circular Premise?...............26 Annexure-I................................................................................................................28 Summary of Articles and Reports.........................................................................28 Summary of Cases................................................................................................32 Bibliography..............................................................................................................36 Online resources:......................................................................................................39 Reports..................................................................................................................... 40 Annexure-II...............................................................................................................43 tabular data.......................................................................................................... 43

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INTRODUCTION
Presumptions have always been at the cornerstone of evolution, as it has driven us forward in the midst of adversity and ignorance. Indeed, company law and corporate governance seem to function on the presumption that both are fundamental to the promotion of good governance and that all shareholders of a company should be entitled to make informed judgments and enlightened critical comments about the companies in which they invest. 1 Corporate Governance2 has always been concerned with the area of increasing accountability mechanisms of the company and its functioning. The transparency and fairness of a corporations working has become all the more important in todays, globalized world where there is a need to attract the best human capital from all parts of the world. The theory of Constitutional Economics would suggest that the reason behind shareholders appointing directors to run the business on their behalf was because of the inconvenience caused to them when required to gather consensus of many for any action that is to be taken. Regardless, great importance is given to academic discussions on the role of the shareholder in the general meeting, since the accountability of the appointees of the shareholders are to be made accountable for their actions at some point.
1

Jennifer Payne, Giving Private Shareholders a Right to Participate, Comp. Law. 1997, 18(3), 90. 2 The principle of corporate governance, as understood widely takes the whole framework within which companies operate. It is defined as the system by which companies are directed and controlled. Directors are responsible for the governance of the company. The role of the shareholders is to elect the directors and appoint the auditors, who in turn are also expected to provide an external check on the directors. The problem is the gap between the theory and practice which leads to the lack of accountability to the shareholders, which gives rise to concern over the state of corporate governance. See: Adrian Cadbury, The Response to the Report of the Committee on the Financial Aspects of Corporate Governance, cf. Fiona Macmillan Patfield (Ed.), Perspectives on Company Law, Volume I, London, Kluwer Law International, 1995.

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In furtherance of this, the law has given certain powers to the members in general meeting, which they must exercise collectively.3 The chain of command would run in the manner that actions of directors may either be permitted or ratified through ordinary or special resolutions, and in case where there is any inadequacy of result or fraud on part of the management, the members are free to replace them with more competent persons.4 Another presumption made in this context is that the abovementioned system is implemented in conditions such that the shareholders take active interest in the company meetings and diligently discuss and vote for the resolutions that are beneficial to the company as a whole.5 Since current practice has shown that shareholder interest is far from being the actual scenario, discussions have been centered on the reforms of law relating to general meetings. It must however, be noted that little or no effort has been made to study the law relating to general meeting alone in India and this has come to cause us some discomfort. The discourse in this paper would model around the argument that there is an inevitable passivity of shareholders due to high costs with the addition of a premise that, that these costs are not to be done away through simple legislative amendments like in the past, but rather through incentivisation schemes, with due consideration given to the shareholding patterns of the same Corporates. The paper runs into four sections that have been divided with the aim of providing a comprehensive understanding of the situation of shareholder
3

Certain acts have to be ratified by the members, such as the further issue of capital: Section 81 of the Companies Act, 1956, which permits the company to issue further capital on a special resolution of its members at general meeting. Resolution to reduce capital: Section 100 permits the reduction of the capital of a company through a special resolution. 4 Section 284 permits members to remove a director prior to when he is supposed to retire by virtue of a special notice. 5 See Gower and Davies, Principles of Modern Company Law, London, Sweet and Maxwell, 2003, at p. 325-327.

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passivity and the rules or laws that have contributed to it. Having done so, the paper in an attempt at reaching its final premise delves into the shareholding pattern of Indian Corporates before making recommendations that would consider all the related aspects in full light.

BACKGROUND

TO

SHAREHOLDER PASSIVITY

AND

REFORMS

Professor Gower cites the report of the Committee on the Financial Aspects of Corporate Governance (1992) to illustrate a simple yet intricately thought over point- that the shareholders as owners of the company elect the directors to run the business on their behalf and hold them accountable for this running of the business.6 Therefore, apart from serving as a decision making body with respect to certain aspects of the corporate body, the general meeting also, and more importantly acts as a forum wherein questions can be asked and the work of the board of directors can be accounted for.7 A look into the legislative history would show that two concurrent themes would emerge from the three main committees that were appointed to identify the issues relating to the welfare of the shareholders; one follows the trail of thought that runs through Cohen and Cash, 8 the outstanding theme is
6

Report of the Committee on the Financial Aspects of Corporate Governance, 1992, Para. 6.1, Gower and Davies Principles of Modern Company Law (ed. Paul Davies, London: Sweet & Maxwell, 8th edition, 2008) at 556. HEREINAFTER GOWER. The Cadbury committee began its analysis of the accountability of the board of directors to its shareholders and recommended that both shareholders and board of directors should consider how the effectiveness of general meetings could be increased and as a result the accountability of all board members to be strengthened: Para. 6.8. Report of the Committee on the Financial Aspects of Corporate Governance: Cadbury, 1992. 7 Robert R Pennington, Penningtons Company Law (London: Butterworth, 8th edition, 2001) at 822. HEREINAFTER PENNINGTON. The General Meeting, in the modern day context acts with a twofold purpose: 1. Is to remain as an active check on the powers and exercise of the same by the board of directors and 2. As a means to allow the shareholder member to figure in the functioning of the company and the decisions that are to be undertaken with respect to the company and its growth. 8 Report of the Committee on Company Law Amendments: Cohen, 1945 and Protection of Shareholders Act: William Cash 1987. The objective of the Cohen Committee was to look into easier ways for shareholders to exercise more effective control. The committee concluded that the dispersion of capital had prevented permanently the ability of a shareholder to practice actual power. the Protection of Shareholders Act catered to the need of the

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that which maintains the dual identity of the company and any strong alliance between the two organs are vehemently opposed, but at the same time, wanting to improve shareholder control and protection. The second theme, which finds it origins in the Jenkins Committee,9 maintained that there needs to be no protection or increased controlling by the shareholders, and rather that the BOD, entrusted with the management of the company would pull through.10 Having said that, the legislature created a framework wherein there were four types of meetings of a company;11 four instances where the members could exercise their right to inspect the working of the board of directors, concretized to form a legislation with detailed provisions- sections 165-197 and the articles of association, Table A.12 However, the applicability of these sections and the rules vis--vis public and private companies (that are not
shareholders by demanding for the creation of shareholders committee in each committee which would effectively look into the problems of the members. However, there was no further action on the Bill. 9 Report of the Company Law Committee: Jenkins, 1962. The Jenkins Committee rejected suggestions that voting should take place via postal ballots and ultimately held that there is a meeting for purposes of discussion and therefore put the power right back in the hands of the Directors. 10 D. D. Butcher, Reform of General Meetings, C.f. Shakem Sheik and William Rees 224 (2000). 11 Palmers Company Law: Volume I (C. Schmitthoff et. al. Eds., London: Steven and Sons, 1987) at 555. Hereinafter cited as PALMER. There are four types of meetings of the members of a company: 1. The Statutory Meeting: to take place within a period of not more than six months from the date of commencement of the business. Applies to every public company limited by shares and limited by guarantee. Section 165, Companies Act 1956. Hereinafter referred to as CA 1956. 2. Annual General Meeting: Every company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting and a company may hold its first annual general meeting within a period of not more than eighteen months from the date of its incorporation. Ordinary business is supposed to be discussed at the AGM, however, this would depend largely on the Table A articles of the company. 3. Extraordinary General Meeting: General meetings other than annual general meetings and the statutory meetings, and the directors are free to call for an EGM whenever they think fit and further that they have to call one when the conditions under section 169 CA 1956. Meeting of Classes of Shareholders: when the shares of a company are divided into various classes, meetings for people owning the same class of shares maybe called, in the event that the rights of the shareholders are meant to be varied, section 106 CA, 1956. 12 General Meetings: Clause 47-48, Proceedings at General Meetings: 49-55, Votes of Members: 56-63.

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subsidiaries of public companies) is different as section 170 of the Companies Act, 1956 provides that certain sections (171-186) of the CA would apply to private companies only in the absence of rules formulated by the company and mentioned in the articles of association of the company. 13 As Gower rightly pointed out, the reason for the same can be traced back to the distinction made with regard to ownership and control. 14 As private companies are in the nature of entertaining only a small amount of members, the need for the distinction hardly becomes relevant since the managers and the members would be the same set of individuals in most cases.15 Even with the neatly provided sections and the thought over distinctions made by the legislators, it would soon emerge that large public companies did not effectively use the general meeting in securing the accountability of the management, and would provoke reformers to call into question the governing and construction of the rules itself. The CA 1956 and the Listing Agreement would begin to be criticized in so far as they did not effectively
13

Section 170 CA, 1956: Sections 171 to 186 to apply to meetings. (1) The provisions of sections 171 to 186 (i) shall, notwithstanding anything to the contrary in the articles of the company, apply with respect to general meetings of a public company, and of a private company which is a subsidiary of a public company; and (ii) shall, unless otherwise specified therein or unless the articles of the company otherwise provide, apply with respect to general meetings of a private company which is not a subsidiary of a public company. (2) (a) Section 176, with such adaptations and modifications, if any, as may be prescribed, shall apply with respect to meetings of any class of members or of debenture-holders or any class of debenture-holders of a company, in like manner as it applies with respect to general meetings of the company. (b) Unless the articles of the company or a contract binding on the persons concerned otherwise provide, sections 171 to 175 and sections 177 to 186 with such adaptations and modifications, if any, as may be prescribed, shall apply with respect to meetings of any class of members, or of debenture-holders or any class of debenture-holders, of a company, in like manner as they apply with respect to general meetings of the company. 14 GOWER, AT 566. 15 The shareholders are seen as a large group of people who have delegated the conduct of the companys affairs to smaller group of managers. If, as in a small company, the directors and the shareholders are the same people, it would not make sense to distinguish between the two. R. Smerdon, A Practical Guide to Corporate Governance, (London: Sweet and Maxwell Ltd., 2010) AT 234; HEREINAFTER SMERDON.

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promote shareholder action or control over the management.16 On a larger scale it would result in the systems of checks that were placed on the management by the ownership coming under severe scrutiny, and this would wipe out the presumption in favour of there being a two tier system governing the working of the company.17 The Cadbury Committee, 199518 was appointed to look into the matter regarding the public companies and the shareholders control over the Board and the auditors. In 1998 however, with the additional criticisms leveled against the public corporate machinery, The Hampel Committee Report was constituted to look into the case.19 The Committee, in an attempt to pacify proponents reasoned and recommended that the constructive use of the AGM would improve communications with the member shareholders, thus solving the problem.
16

20

In the Indian legislation however, there was no

The author, through the course of this paper, will try and look into reasons as to the degenerating nature of the AGM and attempts at reforming the same. In addition, the author will also look into the working of these reforms and try and work out reason for the so called passivity of the shareholders; this will also require the author to delve into the shareholding pattern of the various corporate offices and the trends of attending general meetings. 17 This relies on a basic assumption that the shareholders at the meeting will exercise some amount of control over the Board of Directors. There are various matters on which the Board statutorily requires the shareholders consent before such decisions can bind the company. Although the general meeting does not have to pass any resolutions relating to these, they are important because they give the members an opportunity to question the board on the manner in which the company has been managed and this might permit broader debates than a specific resolution would allow. Boyle and Birds Company Law (eds. John Bird et al, Delhi: Universal Publishing Company, 3rd edition, 1997) AT 325-327; HEREINAFTER BOYLE AND BIRD. 18 The objective of the Cadbury Committee was to investigate how large public companies should adopt corporate rules with a focus on the procedures of financial reporting production and the role of accounting. 19 Committee on Corporate Governance: Hampel, 1998. The Hampel Committee Report looked into four main issues: 1. Role of the director 2. Directors compensation 3. Role of the shareholder 4. Accountability and audit 20 Hampel Committee Report: Committee on Corporate Governance, 1998, available at http://www.ecgi.org/codes/documents/hampel.pdf, last visited, 14-7-2011. The committee, in summation, made the following recommendations with respect to the AGM: 1. Reasonable discussion time at the AGM and a written answer to any significant question 2. Prepare a resume of discussion at the AGM together with voting figures on any poll or proxy count 3. That there should full disclosure regarding the remuneration and interest of the directors of the company.

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evidence of there being provisions relating to AGM to suggest that the framers had paid heed to this suggestion.21 Without any delay, the Kumara Mangalam Birla Committee was set up in 1999 in order to ensure that the confusion in England would not find its way into India. The committee focused on measures that would strengthen the auditing of the company, the director disclosure standards and the role of the institutional investor.22 The Narayanan Murthy Committee also found that it would be most beneficial if the recommendations were focused more on the viva-voce; the auditing of the company and director disclosure measures finding most mention. However, the committee did realize the importance of Codes of Conduct amongst the directors as they sought to introduce responsibilities on the board of members to adopt them.23 The OECD Principles and the Listing Agreement (Clause 49) sought to address the problem with a different approach, as there was more focus on increased shareholder power, disclosure and transparency and responsibilities of the board; a step in a direction different to the previously auditing and independent director heavy reports.24

REFORM

OF

LEGISLATIVE PROVISIONS

Four separate corporate governance resolutions later,25 the Companies Act was still under heavy fire and scholars sought to label it as a growing impediment to the conduct of the General Meetings. Having attempted to garner
21
22

more

corporate

efficiency

by

means

of

external

regulatory

R. Balakrishnan, Constructive use of the AGM, 79 Company Law 182 (2007). Report of the Committee Appointed on Corporate Governance: Shri Kumar Mangalam Birla, Report of the Kumar Mangalam Birla Committee on Corporate Governance (1999) available at http://www.sebi.gov.in/commreport/corpgov.html 23 Report of the SEBI Committee on Corporate Governance: Narayanana Murthy, 2003 available at http://www.nfcgindia.org/library/narayanamurthy2003.pdf 24 S. K. Verma and S. Gupta, Corporate Governance and Corporate Law Reform in India, 25 Asian Law Series (2004). 25 Rahul Bajaj (1998), Birla (1999), Narayanana Murthy (2002) and Naresh Chandra (2003).

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mechanisms and the imposition of codes of conduct, the author suggests that the rules regarding the General Meeting should be analyzed instead. The applicable provisions relating to general meetings (166-197) flows in a constructive and chronological manner; starting with calling of the meetings (165-169), moving on to the more intricate details (170-174) such as the service of notice and its contents and quorum requirements, further ahead dealing with the provisions relating to the conduct of the meetings (175-185) i.e. rules relating to proxies and voting, and finally towards the rules providing for decision making at the meeting (188-192A) i.e. resolution requirements, types of resolutions and provisions dealing with the ways in which to pass a resolution. The bulwark of corporate efficiency, the AGM is protected under section 166 (2) of the CA 1956 which calls for an AGM to be conducted by every company during the working hours, on a day that is not a public holiday in order to discuss the various matters of management. 26 The section further states that an AGM can only be held in the city, town or village where the registered office of the company is situate and not elsewhere.27 It has to be noted that the increasing trends of dispersed shareholdings in public companies and the economic benefit weighing by minimum size share holders 28 would make it impractical to consider that members would spring into collective action for an AGM when the benefits of the same are not apparent.29
26

A Ramaiya, Guide to the Companies Act Part I (Nagpur: LexisNexis Butterworths, 17th Edition, 2010) AT 1543. HEREINAFTER RAMAIYA. 27 A clarification was sought for with reference to the boundaries within which an AGM could be held; whether they could be held only in the city, town or village where the registered officer of the company is situate and not elsewhere. Clarification: (Letter Number 1/1/83-CL - V & No. 6/159/PT/64 dated 16th Feb. 1981 Issued by the Department of Company Affairs) 28 A shareholder, whose holdings are not substantial, would not see the point in travelling to another city to participate in a general meeting, where, more often than not, his opinions etc will not have a material effect because of the high qualifications placed for the introduction of resolutions. Therefore, where a persons shareholding does not amount to enough so as to justify his intervention in company policy, he would rather remain a passive investor. Farrars Company Law (eds. John H Farrar et al, London: Butterworths, 4th edition, 1998) AT 318. HEREINAFTER FARRAR. 29 The first practical consideration that needs to be considered is with respect to the space required to hold an AGM. Most of the bigger Corporates in India have shareholders that run into the millions and accommodating them in one location does not seem feasible from the

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The rule governing meetings that are not in the nature of being an AGM or a Statutory Meeting is section 169, CA 1956 which empowers the directors of a company to call for an Extraordinary General Meeting on the requisition made by the members who; 1. In the case of a company having a share capital, hold not less than one-tenth of the paid-up capital of the company and, 2. In the case of company not having a share capital, exercise not less than one-tenth of the total voting power of all the members having the right to vote at that said date.30 Though this provision entitles the members to another effective control mechanism, to consider it effective all around would be gruesome, since in the case of large public companies with a dispersed membership, enlisting the support of other members required to make a valid requisition would be cumbersome, not to mention expensive.31 A notice with the matters that are to be discussed at the general meetings are drawn up and sent to all the members entitled to vote and this duty has been placed on the directors; however, the case may vary in instances of circulation of resolutions.32 Section 172 CA, 1956 mandates that a clear

companys perspective. Secondly, since AGMs cannot be held on a public holiday, it becomes highly inconvenient for a shareholder to compromise on his routine to attend one unless his shareholding in the company justifies the same. Lastly, since AGMs are held in the city of the registered office of the company only, the wide and varied shareholding patterns across the country would lead to shareholder disinterest. 30 Section 188, CA 1956; data collected in the year of 1996, showed that on an average, the largest institutional investor in a companys register held around 8% of the shares and the largest five held around 25%. This would indicate that in a typical case, a small group of investors would be in a position to activate the procedure under the Act. For private investors however the chances seem bleek, as per the data analysed, even persons acting in concert would bring about a total of only 2.4% of the shares. C.f. K. Parmjit and G. Suveera, Patterns of Corporate Ownership: Evidence from BSE-200 Index Companies, 13(2) Institute of Management Technology (2009). 31 In the case of small private companies, the provision would relatively well as the shareholding is more concentrated, in the hands of a fewer number of people. Eiles Ferran, Principles of Corporate Finance Law (Oxford: Oxford University Press, 2008) AT 569. HEREINAFTER FERRAN. 32 For resolutions, the company has the discretion to decide to send the notice along with the notice for the AGM, however, the circular accompanying the resolution is normally sent by the company, but the expenses are undertaken by the requisitionists and not the company. On the requisition made however, the notice must be sent out to other members and the cost of the same must be borne by the members and not the company. Section 188, CA 1956.

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notice33 of 21 days is required to be given to all shareholders and other parties.34 The notice usually contains information on the kind of matters that are to be discussed; a contentious problem however, is that explanatory notes are required only in the case of special business35 and this

33

There have arisen disputes as to the interpretation of the 21 day requirement under section 171. The following three interpretations have been put forth: 1. 21 days clear notice exclusive of the day of service and the day of meeting: RE. HECTOR WHALING LIMITED: (1936) 1 CH D. 208: In this present case, the issue was regarding a notice that was sent, convening an extraordinary general meeting of the Company on 30th May, 1935 dated and posted on 8th May, 1935. The articles of the company provided for the service of notice only on the 9th of May, 1935. The Court decided, relying on the ration in Rex v. Turner (1910) 1 K.B. 346 and Chambers v. Smith (1843) 12 M. & W. 2 : 152 E.R. 1085 that the expression "not less than twenty-one days ' notice " contained in Sub-section (2) of Section 117 of the Companies Act, meant 21 clear days exclusive of the day of service and exclusive also of the day on which the meeting was to be held. Thus, the court further held that it was not open by the Articles of Association to curtail the length of time which the statute had fixed. Therefore, in the present case, having excluded the date of the meeting, the total period of notice would only come to 20 days and this was considered to be void and illegal. 2. Interval of 21 days between the date of the meeting and the date of service of notice: NVR NAGAPPA CHETTIAR V. MADRAS RACE CLUB: (1949) 19 COMPCAS 175 (MAD): The Madras Race Club was a body corporate registered under the Indian Companies Act of 1913 with the object of carrying on the business of a race club. In April, 1947, 45 members of the Club sent a requisition to the Club for convening an extraordinary general meeting for the purpose of appoint a committee to consider the revision of the Articles of Association. On the 16th of October, notice was issued to the Club members of the extraordinary general meeting on the 7th of November, 1947. The plaintiffs contested that the meeting of the general body of the members of the Club held on the 7th November, 1947, was invalid and void and that all business transacted thereat was invalid null and void. The Court in this case held that the date of the meeting and the date of service of notice were to be excluded in counting the 21 clear days period. Thus, the meeting was held to be illegal and void. 3. Two days to be added to 21 days clear notice: BALWANT SINGH SETHI V. SARDAR Z.H. SINGH: (1988) 63 COMPCAS 310 (BOM): The respondent filed a case against the appellant for a declaration that the requisition contained in the letter dated September 21, 1987was not a valid and lawful requisition for calling an extraordinary general meeting. The notices for the meeting had been posted on August 31, 1987 and some of them on September 1, 1987, and, therefore, some of the members could not receive notice. The Court held that pursuant to section 53(2)(b)(i), the notices will have to be deemed to have been received after 48 hours from the day of posting, that is, on 2nd and 3rd. Therefore, since the meeting is to be held on September 21, 1987, the notices posted on August 31, 1987, and September 1, 1987, cannot be held to be 21 days' clear notice to the members. 34 Notice of every meeting of company must be sent to all members entitled to attend and vote at the meeting. Notice of the AGM must be given to the statutory auditor of the company. Table A also requires notice to be sent to all persons entitled to a share in

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differentiation may be utilized by the directors while undertaking to consider special business under the guise of an ordinary transaction.36 Looking into the provisions that deal with decision making, considered to be the most powerful tool in the hands of a shareholder, it is important to note that section 188 of the CA, 1956 allows for members to circulate their resolutions to the other members of the company.37 However, in practice, since the notice requirement period for moving such resolutions is 6 weeks, it becomes impossible for a member to circulate the said resolution along with the notice of the AGM circulated by the company.38 Thus, the timing required of such a resolution would make its utility hard-pressed as there are either significant costs or significant share holding power that is required before being able to move the same.39 Moreover, an additional disincentive is that the directors are free to use the machinery of the company in order to circulate their responses, and this would allow them to increase their
consequence of the death or bankruptcy of a member and to the directors. 35 Section 173, CA 1956 specifies the distinction between the two and requires explanatory notes only for the special business that is to be conducted. Further, as far as ordinary business is concerned, the notice does not require to be exact, however, in the case of a special business, the specifics of the meeting must be set out clearly. N. Sachdev, Significance of Annual General Meeting in Corporate Governance, 64 SEBI and Corporate Laws 28 (2005) at 31. 36 N. Sachdev, Significance of Annual General Meeting in Corporate Governance, 64 SEBI and Corporate Laws 28 (2005) at 34. 37 The resolutions are the instruments via which the general meeting passes on their decision and will over to the board of directors. All valid resolutions must be obeyed to by the BOD and the same is binding on them. Also, the power of removal of a director also comes in the form of moving a resolution. Thus, it can be stated that the General Meeting is the occasion and the resolution is the weapon for the members to exercise their control over the BOD. Fords Principles of Corporate Law (ed. I.A.Ramsay et.al, Australia: Butterworths, 10th edition, 2001) AT 124. HEREINAFTER FORD. 38 The moving of a resolution requires the member to give notice to the company of 6 weeks, and while the notice regarding the general meeting is only 21 clear days in advance, it now becomes virtually impossible for a member to figure out and strategize his plan in anticipation of the notice of the AGM, since all the documents and matters are released only then. K. Midgley, Companies and their Shareholders: the Uneasy Relationship, 24 Lloyds Bank Review (1975). 39 The other option available is section 188 (2) under which is required one-twentieth of the voting power, or, one hundred member who have the right to vote and who have an aggregate share capital of One Lakh Rupees. Since no record of beneficial owners is maintained, it will be difficult to obtain support and therefore, for individual shareholders who do not have the requisite amount, moving a resolution would seem quite daunting and impossible.

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advantage over the case of the dissenting members, if ever there was incrimination over how the company was managed.40 Another hurdle in the event of moving resolutions is the special notice requirement under section 190 CA, 1956.41 A special notice would mean that the person whos moving the said resolution is required to give the company notice of 14 days before the meeting at which the resolution is to be presented.42 In the case of removal of a director from the board, the 14 days, it is urged by Eilis Ferran, would give the director enough and more time to prepare his brief and circulate the same at the cost of the company, not to mention, the case is likely to be stronger as the 1000 word limit does not apply in presenting his case.43 Attached along with the resolutions, every member is entitled to circulate statements not exceeding 1000 words to the other members detailing and explaining the resolutions that they wish to place before the general meeting. However, the cost of circulation must be borne by the persons wanting to circulate the same, unless the company otherwise resolves a sum
40

PEEL V. LONDON: 1907 1 CH 5, CA: In the present case there was a controversy regarding to policy affecting the management of the company and in pursuance of this, the directors sent to each shareholder a circular setting out the facts and their views. The issue that arose was the expenses of printing, posting, and stamping these documents was paid for out of the funds of the company. Therefore the shareholders brought an action to restrain the company and the directors from using the funds of the company in paying expenses thus incurred. The court held the expenditure to be completely justified since it was a matter of policy. The circulars that are sought to be sent by the requisitionists cannot, in any event be of a length more than 1000 words. Furthermore, the cost of circulation is to be borne by the requisitionists. However, a company can respond to the resolution and the circular, by using the corporate machinery. 41 The following resolutions require a special notice to be sent: 1. To remove a director by an ordinary resolution 2. To appoint an auditor in certain circumstances or to remove an auditor from office 3. To allow director to serve beyond his retiring age FARRAR AT 321. 42 Section 190: In the span of 14 days, the directors of the company will be able to send out circulars that oppose the said resolution at the companys expense, whereas the member can only make his case at the General Meeting. If the member wanted to move circulars explaining his resolution, then the notice requirement changes and section 188, CA 1956 governs the proceedings. 43 FERRAN AT 224.

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payable by them that is reasonable.44 Termed as an unjustified luxury of the Board, a defense to the same luxuries would arise in cases where the dissenting member proposes to move a requisition because of a decision wherein the board had possibly sided with an opposing group of members; in such a case, it may be justified that the board uses the money of the company in explaining to them and other members the reason and logic for actions of the board.45 Despite the number of provisions relating to the calling of the general meeting, there exist circumstances where the calling of a general meeting might be beyond the control of the board of directors because of impracticability. Fortunately, the Court has been given the power to step in to remedy the situation and call a general meeting instead of the Board.46 One of the instances where the Court has deemed intervention to be necessary is when quorum could not be met- in cases where the minority shareholder holds out. The Courts have held, as previously suggested by the
44

Section 188 (1)(b) CA 1956. STEINBERG V. ADAMS: F SUPP 604 1950: The controversy in this case is the payments made by the corporation to defray the expenses incurred by two contesting parties in connection with an election of directors. The contest was conducted by printed appeals for proxies addressed to the stockholders, and employment of proxy solicitors and other devices and both parties had incurred expenses to the tune of $20,110.64 and $27,755.82 to win over the management and the insurgents. The court held that where the controversy is concerned with a question of policy as distinguished from personnel of management and the stockholders are called upon to decide it, it would be legal for directors to make such expenditures from the corporate treasury as are reasonably necessary to inform the stockholders of the considerations. The Court further held that a change in personnel would sometimes be indispensable to a change of policy and thus, it was not a contest. ROSENFIELD V. FAIRCHILD:309 NY 168 1955: In this case, there was a stockholder's derivative action brought by plaintiff as he seeks to compel the return of $261,522, paid out of the corporate treasury to reimburse both sides in a proxy contest for their expenses. The court held that if directors of a corporation may not in good faith incur reasonable and proper expenses in soliciting proxies in these days of giant corporations with vast numbers of stockholders, the corporate business might be seriously interfered with because of stockholder indifference and the difficulty of procuring a quorum, where there is no contest. The test laid down by the court was that when the directors act in good faith in a contest over policy, they have the right to incur reasonable and proper expenses for solicitation of proxies and in defense of their corporate policies, and are not obliged to sit idly by. 46 The Tribunal may exercise this power either of its own motion or on the application of any director of the company or of any member of the company who would be entitled to vote. Section 186 CA, 1956.
45

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Cohen Committee that one person present in person or by proxy shall constitute quorum for a meeting and this ruling has effectively found an effective solution to quorum tactics of the minority members.47 This rationale has now found place is sections 167 and 186 of CA, 1956. In the authors view, the most controversial aspect of the business of the company are the procedures relating to voting on resolutions- specific regard to the right of every member to appoint a proxy. Under section 176 CA, 1956 proxies have conventionally been called on for the purpose of facilitating shareholder democracy;48 however they also lead to the problem of solicitation of votes by the Board.49 In order to curb this practice, there are certain protections that have been advanced in the CA 1956 and the Listing Agreement.50 A tried and tested measure to curb the directors of the company from using the company machinery to issue proxies in their favour is to have the proxies sent at the instance at the board to be made available to all members and not merely select ones.51
47

Section 174 CA, 1956 provides for the quorum of a meeting and the same is set at 5 for a public company and 2 for a private company. Section 371 (2) of Companies Act 1985 of the United Kingdom is the equivalent provision. However, courts have in certain cases, held that one person can constitute quorum: IN RE: WHITCHURCH INSURANCE CONSTULTANTS: 1993 B.C.L.C. 1359: There was a motion made by the members of the company to have an extraordinary general meeting of the company to remove a minority shareholder from the position of director. The applicant held 666 of the 1,000 shares in the company and the respondent held the other 334. Though the petition gave no substantial grounds for alleging oppression or prejudice in respect of this company, on these facts, the court held that it was right to exercise the discretion under s. 371. The court further held that it was impracticable to hold a meeting and it was plainly right and desirable to get a proper board into the company by allowing the meeting to be held for the purpose of dealing with the present inqourate state.
48

In cases where the shareholder finds it inconvenient to attend a general meeting and there is a resolution in whose favour the member would like to cast his vote, he can, under the aegis of section 176 proceed to appoint a proxy who will, in his place attend the meeting and vote. However, there are certain restrictions placed on a proxy. Gore-Browne on Companies (ed. The Rt Hon the Lord Millet, Alistair Alcoch et al, Bristol: Jordans, 45 th edition, 2006) AT 1124. HEREINAFTER GORE-BROWN. 49 Since the directors are the first to send out their circulars with the explanations, it is only the most earnest of proxies that hear out both sides and then vote based on merit. PENNINGTON AT 268. 50 Section 176 (4) CA 1956 and Clause 34 (f) of the Listing Agreement. 51 It is the norm that a proxy may not speak at a meeting, unless the articles provide differently, and as regards voting, a proxy can only take part in a poll and not in a show of hands called by the chairman, and therefore the likelihood that the board can solicit the proxy to vote in a particular manner is high considering they act first and defiantly. Since the

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Moreover, it has been practice that the board, while sending out proxy forms, would issue forms in favour of their proposal along with detailed explanations, and this would likely result in the proxies being swung by these very elaborate explanation. In a bid to stop this disheveled practice, the Stock Exchange through the Listing Agreement requires that all companies will send out two-way proxy forms, i.e. forms which can either vote for or against a resolution.52 However, even with such measures to curb the heinous practice, the problem does not stand completely negated as the board still maintains the early movers advantage.53 To add to the worry, final decisions of the proxy, however, cannot be called into question in cases where the proxy has acted in a manner not consistent with the wishes of the member directing him, unless it arises in cases where fiduciary duties exist54 or in cases where there is a contract as per which the proxy is to remunerated.55 In a bid to better resuscitate the practice, the Kumara Mangalam Committee on corporate governance had noted the specific issues that arose with the advent of proxy voting, but had concluded that the system was both ineffective and misleading though essential, and therefore, voting by postal ballot and electronic means would be another option that is open to the members to consider exploring.56
advent of Proxy solicitation, the protection afforded under the regulations 176 (4) CA 1956 and clause 34 (f) of the listing agreement take particular significance. Ghosh and Chandratres Company Law (New Delhi: Bharat Publishing House, 13th edition, 2007) AT 312. HEREINAFTER GHOSH-CHANDRATRES. 52 The Jenkins committee had suggested that this be statutorily applicable to a public company in the UK and the same was not implemented. Although, in the UK, the same has found an appearance in the Listing Agreement, it provides a proxy with discretion apart from the two way proxy form. S. Sheikh and W. Rees, Corporate Governance and Corporate Control, (London: Cavendish Publishing Ltd., 2000) AT 229. 53 PEEL V. LONDON: 1907 1 CH 5, CA. 54 A Prime example is a case where the proxy is a professional advisor to the shareholder. GOWER at 581. 55 Unless there is a binding contract or any other equitable obligation, the answer lies in the negative. Normally, there is only a gratuitous authorization imposing no positive obligation on the agent, but merely a negative one not to vote contrary to the instructions of his principal if he votes at all. OLIVER V. DALGLEISH.:1963 1 WLR 1274. 56 S. Banerjee and S. Bose, Role of Proxy in General Meeting, 1 Company Law Journal 1 (2004). A proxy has the advantage of being able to use his discretion based on the proceedings of the meeting and can be a more real time authority check than an electronic voting medium.

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Having crossed the various hurdles with respect to the moving of resolutions and the voting mechanisms, the normal practice in meetings would require a vote to be counted first on a show of hands and then, if a valid demand is made, for a poll to be held. The difference is crucial because on a show of hands each member present will have one vote irrespective of the number of shares held, whereas on a poll members can cast votes attached to all of their shares.57 A proxy cannot vote on a show of hands, unless the articles specifically provide for the same and in the event that this is allowed by the articles, a proxy can record only one vote even if holding out for more than one.58 It is fortunate that the CA, 1956 under section 179 crystallizes and protects this distinction and the right of a member to demand for a poll.59 Having begun this section with the premise of exposing the impediments that lie within the Companies Act, to consider Professor Gowers conclusion, that the legislature is misguided in allocating more power to the AGM, is both self explanatory and crucial to note.60

LINKING SHAREHOLDING PATTERN

AND

CORPORATE GOVERNANCE

While concluding that the working of the Companies Act does not provide for an ideal support for the exercise of shareholder rights and protection, it is also important to note that the negative implications of the same would be twofold and further that they affect two separate but equally important functions of the General Meeting: firstly, as an instrument where a
57 58

Section 176 and 177, CA 1956. FARRAR AT 372. 59 Section 177, CA 1956. A show of hands, is required so as to show the mood of the members at the meeting and it is not an accurate judge of the will of the members considering that at a show of hands, a member is entitled to only one vote, irrespective of the number of shares held by him. PUNT V. SYMONS.1902 2 CH 506: In the current case, the question was with respect to one of the provisions in the companys articles of association. The provision had stated that a demand for poll could be made by the members only if there were at least five of them requisitioning. It was held by the court that a company could not contract itself out of statutory rules prescribed and concurrently that the right to demand of a poll by a member could not be subject to conditions as the company deemed fit. 60 D. D. Butcher, Reform of General Meetings, C.f. Shakem Sheik and William Rees 229 (2000).

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shareholder can properly exercise his rights relating to the working of the company, and secondly as an instrument by which to ensure that the proper control over the BOD is maintained. Professor Gower had noted that the BOD had become self perpetuating oligarchies that control the members rather than the members controlling the BOD.61 The previously mentioned committees appointed to find out the source of the problem (and Professor Gowers statement) had previously overlooked one key aspect- that the principles of ownership and control over property would not apply coextensively to shares in the midst of there being far too many shareholders; the explanation being that there would hardly be any incentive for them to act, given the unhelpful provisions. 62 Thus, it was concluded that shareholder action and participation was no longer economical for the average shareholder and therefore, the participation rates would obviously tend towards being very low.63 The Narayanan Murthy Committee realized this trend, as information relayed from the attendance of members at Annual General Meetings showed that the year 2001 witnessed only 35.7% of the AGMs conducted with a participation of more than 100 members. Considering this to be an abysmally low number, the ensuing disgruntle promoted researchers to look into reasons that can be attributable to the decline and it ultimately was agreed upon that the increased shareholder passivity comes from the increase in varied distribution of shares and shareholder dispersion; the growth rate of the companies being the major factor, as increase in the number of shares over the years meant that there were an exponentially increased number of

61 62

GOWER AT 512. D. D. Butcher, Reform of General Meetings, C.f. Shakem Sheik and William Rees 230 (2000). 63 From an economical point of view, the shareholder would not participate in the General Meeting unless the cost of intervention is lower than the benefits that he gains from the said intervention. This outcome, however, is rare in the case of small time shareholders. J. E. Parkinson, Corporate Power and Responsibility: Issues in theory of Corporate Law, (Oxford: Oxford University Press Inc., 2002) AT 154. HEREINAFTER PARKINSON.

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shareholders.64 The corporate governance regime came to the conclusion that diversified shareholding would imply that the action initiated by a single member working alone, would not yield the best of results as the incentive for intervention, let alone active participation would not outweigh the apparent economic costs involved. 65 A study of the shareholding pattern of the Indian corporate sector revealed that there was a marked level of shareholding in the hands of the Indian promoters; their average shareholding in the year 2002 was as much as 48% amongst a sample of over 2,500 companies.66 Another interesting and convoluting observation that was made was the increasing presence of institutional bodies in general and foreign institutional bodies specifically whose participation in the shareholding pattern increased from 3 % in 2001 to 20.4% in 2010.67
64

Shareholder Participation in the Modern Listed Company, Companies and Securities Advisory Committee (2000)available at http://www.camac.gov.au/camac/camac.nsf/byHeadline/PDFFinal+Reports+2000/$file/Share holder_final_reportJun00.pdf. From the year 1992 to 1999, there has been an increase in over 200% in companies with shareholders above 1,000,000 and about 200% in companies with shareholders ranging between 100,000 and 250,000. 65 Taking the case of removal of a director, section 284 CA 1956, states that a director maybe removed through an ordinary resolution at a general meeting, however the process is not that simple since the board has the entire companys resources at their disposal, the high costs and the elaborate public relations exercise they bombard the members with. Even in the case of members acting as a check and balance on the affairs of the BOD, there exists hurdles that hinder the surveillance process. Report of Committee appointed on Corporate Governance: Rahul Bajaj, CII Voluntary Code of Corporate Governance (1998), available at http://www.nfcgindia.org/library.htm and Report of the Committee Appointed on Corporate Governance: Shri Kumar Mangalam Birla, Report of the Kumar Mangalam Birla Committee on Corporate Governance (1999) available at http://www.sebi.gov.in/commreport/corpgov.html. The twenty one day limit, it has been noted by the two Indian Corporate Governance committees, is not enough in most cases to help the members understand the complex set of documents, let alone question the directors on it. 66 J. Sarkar and S. Sarkar, Multiple Board Appointments and Firm Performance in Emerging Economies: Evidence from India, Indira Gandhi Institute of Development Research (2005), Available at http://www.igidr.ac.in/ pdf/publication/WP-2005-001.pdf The figures were: 48% in manufacturing, 46% in standalone firms and 51% in group companies. In comparison, the Indian public's share amounted to 35 per cent, 28 per cent and 39 per cent, respectively. 67 Though this statistic would not be enough to consider a situational framework as in the case of the US where the institutional investors have a much larger share, the premise that the Indian market does not seem conducive enough to make affiliations with banks and institutions are not a pronounced feature of Indian Corporates as compared to other countries in Asia would be tested to its limits. B. S. Black and J. C. Coffee, Hail Britannia?:

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In quick succession, a relation between the effectiveness of a system of corporate governance and the shareholding pattern and ownership was projected, and it was suggested that the promoter as a significant shareholder would be interested in control benefits as well the as profits of the company, whereas an institutional investor would more likely be interested only in the profits that the company produced and neither control nor the goodwill would feature on its wish list.68 Thus, it became a moot point whether efforts at improving corporate governance would succeed in a promoter heavy setting. Since concentrated ownership placed a much smaller burden on the legal enforcement system, corporate governance reforms in India had mainly focused on internal governance mechanisms for systematic control and development.69 The situation however did not prosper as the attendance rate only proceeded to decrease in the coming years as AGM attendance in 2005 was recorded to be lower at 27.9%.70 Considering the new initiatives that were brought in to fix the problem had by then had enough time to make an impact, the Equity Participation Rate (EPR) and the Shareholder Participation Rate (SPR) for postal ballot resolutions,71 for the year 2005-2006 recorded at 58.74% and 5% was not comforting.72 To make matters worse, a study conducted on the
Institutional Investor behavior under Limited Regulation, 92(7) Michigan Law Review 1997 (1994). 68 E. F. Fama and M.C. Jensen, Separation of Ownership and Control, 26 Journal of Law and Economics 301 (1983). 69 Corporate Governance Review of Practice, A study of Corporate governance in leading Corporates in India, available at http://www.nfcgindia.org/pdf/asci250808.PDF. 70 K. Parmjit and G. Suveera, Patterns of Corporate Ownership: Evidence from BSE-200 Index Companies, 13(2) Institute of Management Technology (2009). 71 J. P. Sharma and P. Sethi, Impact of Postal Ballot System in Improving Shareholders Participation in Corporate Decision Making, 39 Chartered Secretary 159 (2009). Equity Participation Rate (or EPR) is defined as the percentage of equity capital of the company represented by the votes cast through the postal ballot, and Shareholder Participation Rate (or SPR), is defined as the percentage of Shareholders participating in the Postal Ballot exercise and measured as the number of postal ballot forms received back by the company as a percentage of total number of postal ballot forms sent out to the shareholders. 72 K. Parmjit and G. Suveera, Patterns of Corporate Ownership: Evidence from BSE-200 Index Companies, 13(2) Institute of Management Technology (2009). This indicates that even though less than 5% shareholders participated in the postal ballot process yet equity represented has been more than 58% which is on account of the typical shareholding pattern of Indian Corporates.

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SPR without a postal ballot system, was found to be lower, at around 3.3% only.73 It was then looked at that this steady and progressive decline in the participation of shareholders could not be attributed solely to the governing rules, as no amount of change and amendments had bettered the condition. Reformers felt the need of the hour was for the introduction a system that further incentivized the individual member shareholder to participate in effective corporate governance.

INCENTIVISING

THE

PASSIVE SHAREHOLDER

Attempts to rekindle constructive participation at General Meetings have always been an agenda for the drafting committee on the CA. The Companies Amendment Bill 2003, introduced in the Rajya Sabha, included a clause to enable holding of general meetings on Sunday and this would have been a salutary end for improving corporate democracy if it werent for the fact that the same has not been incorporated into the Companies Amendment Act 2009. 74 The last measure that dealt with the amending the procedures of the Act was the addition of section 192A to the CA, which allowed for the passing of resolution for a public listed company via postal ballot.75 From the perspective of a member, this would do away with the hurdles that both travel and the time taken in attending a general meeting. However, statistical data, as previously shown did not support this ideal and
73

S. Sinha, Equity Markets with Controlling Shareholders, Indian Institute of Management W.P. No. 2011-04-02, available at http://www.iimahd.ernet.in/assets/snippets/workingpaperpdf/8949079892011-04-02.pdf. The lower rate can be justified by the looking at the postal ballot system as an added convenience over the personal attendance mechanism which has accounted for this lower rate. The rate of other Countries, especially Australia stands high at just over 40%. 74 G. D. Agrawal, Corporate Democracy needs further improvement, 54 Company Law Perspective 30 (2003). 75 However, this is subject to the condition that the company is a. A listed public company b. To business that the government may, by notification allow Section 192A, CA 1956.

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there as the need for something more, and it came in the form of the introduction of voting through an electronic medium. It was envisaged that the use of integrated video conferencing and voting though the internet76 would substantially lower the costs of both conducting and attending a general meeting.77 However, it must be stated that there are those functions which a member cannot undertake through a postal ballot system or through the use of the internet,78 and basic means of communication- personal presence and active participation in the discussion before the vote cannot be substituted, and for the same reason the proxy system and the corporate representative ideal cannot be overlooked completely. Another direction towards increased participation was envisaged in section 187 CA, 1956 as per which a company may authorize such person as it thinks fit to act as its representatives at meetings and he may in addition exercise the same powers as the body corporate as if it were an individual. 79 It would prima facie be preferable for a company to appoint a representative over a proxy since he may speak and may also vote on a show of hands. However, the impact was merely makeshift as the inconvenience regarding the appointing of a representative is in the case of a nominee company holding shares on behalf of beneficial owners with a variety of views on the matter at issue persisted to be a problem.80
76

Voting through the corporate home page by the shareholder or the proxy, as the entry to the site would be available only to registered shareholders. Such an option would lead to equality between shareholders irrespective of the number of shares, as all would have access to similar information, since there can be the delivery of proxy material on the internet. R. Balakrishnan, Constructive use of the AGM, 79 Company Law 182 (2007). 77 G. P. Kobler, Shareholder Voting through the Internet: A Proposal for Increased Participation in Corporate Governance, 49 Alabama Law Review 673 (1998). 78 Only a proxy can ask for an adjournment of a meeting, furthermore, allowing the proxy to use his discretion through the course of the meeting is also preferred by a lot of shareholders to the electronic means because of the interaction that could determine decisions from the meeting itself. The same however is not possible in the case of electronic voting or voting through a postal ballot. 79 A Ramaiya, Guide to the Companies Act Part I (Nagpur: LexisNexis Butterworths, 17th Edition, 2010) at 1546. 80 GOWER AT 584.

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Moreover, unlike in the case of proxy appointment, where a company is entitled to appoint more than one proxy, a company can appoint only one representative. Adding to this infirmity, in practice, the relation between a nominee company and the beneficial owner isnt that smooth as there are logistical problems due to the onus of the nominee having to consult the beneficial owner to ask for his intention at a vote for every resolution. 81 This back and forth communication could lead to problems as there would not be enough time for the entire communication process; having kept this condition in mind, the National Association of Pension Funds {NAPF} suggested that companies should be given at least three months warning of contentious matters at forthcoming general meetings as it would give fund managers more time to consult.82 There is no present legal mechanism that covers the regulation of questions that can be asked by the members at a general meeting. Although companies do not generally disallow questions on a wide area of topics, the Department of Trade and Industry in the United Kingdom did consider the possibility of codification of practice with regard to the questions. 83 However, the proposal was not taken up any further as the DTI felt that this was something the companies should foster themselves as per the best practice rules under the Combined Code.84 A move in this direction, would, in the authors opinion only benefit and solidify the members right to ask questions and does not, in any way jeopardize the BOD of the company, if the questions are monitored by a third party moderator.85 Looking for ways to make the general meeting a worthwhile investment for a shareholder, there needs to be a greater role for the individual shareholder to play than the current passive existence, as pronounced in the work of S.
81 82

FERRAN AT 324. B. S. Black and J. C. Coffee, Hail Britannia?: Institutional Investor behavior under Limited Regulation, 92(7) Michigan Law Review 1997 (1994). 83 FERRAN AT 326. 84 Corporate Governance Review of Practice, A study of Corporate governance in leading Corporates in India, available at http://www.nfcgindia.org/pdf/asci250808.PDF. 85 Janet Dine, Company Law (London: Macmillan, 1998) AT 108. HEREINAFTER DINE.

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Black.86 It is suggested that the General Meetings, specifically the AGM should deliberate upon two resolutions that would help in better governance: the Governance resolution and the Remuneration resolution.87 In addition, the result of the resolution should be made public and making it an indicator of the management of the company.88 Further, the proxy system has been described by Gower to be deceptive and in reality, helps with the dictatorship of the Board; for this, an innovative and borrowed suggestion was made by D. D. Butcher. Citing the working of the election system in the parliament, the author suggested that proxy cards that are sent to the member shareholders must consist of three options: for, against and abstain and the same was to be sent to an independent body for counting and not to the BOD.89

THE COMPANIES ACT 2009 PREMISE?

AND

INSTITUTIONAL INVESTORS: A CIRCULAR

The resolutions stated above cater to increased and easy involvement of the member shareholder in the activities of the company. The Companies Amendment Act 2009 does propose for some promising result as some of the hindrances have been done away with. Clause 85, relating to the calling of an AGM has dispensed a One Person Company from calling an AGM. Clause
86

N. Sachdev, Significance of Annual General Meeting in Corporate Governance, 64 SEBI and Corporate Laws 28 (2005). 87 Remuneration Resolution: Information regarding the boards remuneration to be disclosed completely to all shareholders. A maximum limit of remuneration that is fixed by the members at the General Meeting to serve as a ceiling limit. Governance Resolution: the governance resolution consists of the agreement that the shareholders have the right to make public all the proceedings of the meeting which, in turn should incentives the directors to stick to corporate fairness. An example of a measure that is likely to be passed at a governance resolution it that where all votes cast at meetings are revealed to the shareholder; for, against and abstain. 88 When results are made public, potential shareholders and current shareholders will be likely to be effected by the grading that is given to the corporation and thereby insist on either leaving or making changes in the governing. This measure will incentivize the directors to act in accordance with the rules as their actions now directly lead to investor attraction/repulsion. 89 D. D. Butcher, Reform of General Meetings, C.f. Shakem Sheik and William Rees 226 (2000).

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85 also changes the time period in which to call the first AGM from 18 months after inception to 9 months from the date of closing of the first financial year of the company. Clause 85 (2) recognizes the problem of discounting public holidays as an occasion to hold an AGM and therefore has reduced the burden to excluding only National Holidays. Moreover, clause 86 gives power to the Tribunal to call the AGM of a company if there is any default; a power that previously rested only with the Central Government. The role that is to be played by the electronic media has been given formal recognition as it finds mention in clause 90 which states that notice of the general meeting may be given in writing or through an electronic medium. The same is with the case of appointing of proxies under clause 94 and in the case of procedure relating to voting via clause 97 wherein a member is given the freedom to exercise his right to vote through an electronic medium, in the manner provided. Clause 91: explanatory statement and its annexure make the disclosure duty on directors more stringent as the shareholding qualification has been reduced from 20% to 2% for an interested director. However, procedure regarding voting has seen a mixed outcome as the qualification amount of demanding a poll has been raised to five lakh rupees paid up capital (clause 98). Clause 99 and postal ballots sees the qualifications necessary for a company to transact through postal ballot reduced as the option is now open to all companies, the listed company requirement being done away with. There are two major highlights to the Amendment Act; the first being the provision on circulation of members resolution which does not have a qualification standard, and secondly, every listed public company is now required to prepare a report on each AGM and file the same with the Registrar: clause 109. With legislative enactments in the said areas, positive results with regard to nullifying shareholder passivity can be expected. However, the fact still
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remains that there are still certain factors over which there is no control and therefore have to be ceded to. One such factor is the growing investment made by institutional investors. Seen as powerful machinery, more than sufficiently equipped, the institutional investor has both the credibility and largesse required to poke its nose effectively into company affairs.90 Institutional investors do not change the position of the passive shareholder and therefore does not affect the general meeting in any lasting way. Considering the situation to be as thus, there arises a more pertinent question: has the concept and ideal of a shareholder evolved?

Annexure-I
SUMMARY OF ARTICLES AND REPORTS

1. D. D. BUTCHER, REFORM OF GENERAL MEETINGS, C.F. SHAKEM SHEIK AND WILLIAM REES 221

(2000). The article outlines the historical evolution of the various law reforms relating to general meetings and the contexts in which they arose. After having discussed the various reforms, the article begins to analyze as to why the general meeting has become a farce and the reasons for the same. In conclusion, the author proposes reform measures under four broad categories; auditing, shareholder director, voting and resolutions. The article has been used in order to fill in the various contexts behind the reform movements and further, reform measures that deal with the resolutions have also been incorporated in the paper.
2. G. D. AGRAWAL, CORPORATE DEMOCRACY NEEDS FURTHER IMPROVEMENT, 54 COMPANY LAW

PERSPECTIVE 30 (2003).
90

J. Coffee, Liquidity versus Control: The Institutional Investor as Corporate Monitor, 10(2) Bond L. Review 376 (1998): However, consideration ought to be given to the fact that they act outside the corporation and moreover, that their interest in the company would remain only as long as the company turns over the green. Adding further, there is also the problem of adding another level of bureaucracy between the shareholder and the company.

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The article calls for improved corporate responsibility from the shareholders and makes an account of the various provision in the Companies Act 1956 that allow them to do so. The author distinguishes between the roles of the Board of Directors and the members and recounts that the Board of Directors are always accountable to the members. The author lays emphasis on the power of the general meeting to remove a director, the quorum requirements and the proxy mechanisms involved. This article has been used in order to ascertain those areas of law that need reforming, when looking at the annual general meeting.
3. J. P. SHARMA AND P. SETHI, IMPACT OF POSTAL BALLOT SYSTEM IN IMPROVING SHAREHOLDERS

PARTICIPATION IN CORPORATE DECISION MAKING, 39 CHARTERED SECRETARY 159 (2009). In this article, the impact of the introduction of section 192A is being considered. The need for the amendment, as well as the background for the same was looked into by the authors. Most importantly, the authors collected data regarding the average attendance at AGMs without the use and with the use of the postal ballot system. Moreover, the authors also compared the participation rate amongst various countries to conclude that the 192A amendment has not brought about any significant change, though it was a novel idea. The author has used this premise and the data in the article to substantiate his point on the effect that statutory regulations would have.
4. K. PARMJIT AND G. SUVEERA, PATTERNS OF CORPORATE OWNERSHIP: EVIDENCE FROM BSE-200

INDEX COMPANIES, 13(2) INSTITUTE OF MANAGEMENT TECHNOLOGY (2009). In this article, the authors correlate the ownership pattern of the Indian corporations with the amount of corporate governance improvement in the corporation. The authors distinguish between family/promoter owned and institutional owned corporations and attempts to survey which amongst the two systems is better for effective corporate governance. The author has use the data dealing with the shareholding pattern in order to assess the reasons for shareholder passivity. Moreover, the article has been used in order to assess the role of institutional investors as a means to better corporate governance. L. C. BEBCHUCK, THE CASE FOR INCREASING SHAREHOLDER POWER, 118 HARVARD LAW REVIEW 96 (2011).
5.

Page | 29

The article works on the premise that shareholders in America did not possess the power to intervene in the management of the company and therefore, could not make corporate decisions. With the problem of dispersed ownership in the US, more so than in any other nation, the power of the management and the weakness of the ownership is not surprise. Shareholders are urged to intervene in three corporate decision making avenues; rules of the game- wherein the shareholder is entitled to improve the contractual and legal arrangements governing the corporation in order to avoid the inefficient tilt. Game ending decision ensures that the monopoly and perpetuation of the company does not continue beyond a certain point without the assent of the shareholders. Finally, scaling back regime would help more in empire building and the problem of free cash flow as there would be an increased monitoring of the activities of the Board. The article has been used to gain a background into the various avenues that are exploited by the Board, and which the members seek to actively participate in and curtail.
6. N. SACHDEV, SIGNIFICANCE OF ANNUAL GENERAL MEETING IN CORPORATE GOVERNANCE, 64

SEBI AND CORPORATE LAWS 28 (2005). The author highlights the need and rational for the separation of the two organs of the company in order to highlight the importance of the AGM. Having done that, the author proceeds towards the premise of the paper that the importance given to the AGM has come down in recent times. Highlighting the various drawbacks in the current legislative scheme, the author concludes that apart from statutory remedies, what are needed are incentivisation measures for the average shareholder. The article has been used to expound on the Director remuneration resolution and the governance resolution as measure to better incentives the members while maintaining a check on the BOD.
7. R. BALAKRISHNAN, CONSTRUCTIVE USE OF THE AGM, 79 COMPANY LAW 182 (2007)

The author emphasis on the need for constructive use of the annual general meeting. The author emphasis on the lack of the same in Indian, though the Hampel committee report had just listed out non-mandatory provisions that could be adopted. The author then moves onto discuss the various provisions relating to the functioning of the AGM and points out the difficulties with each. The article has been used to bring about deliberation on the topic of length of notice in an AGM.
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8. B. S. BLACK, SHAREHOLDER PASSIVITY EXAMINED, 89 MICHIGAN LAW REVIEW 520 (1990)

This article, considered to be the bible of activist shareholders lays out the various impediments to the active participation of the members in the affairs of the company and the AGM. Beginning with the proxy system, to the disclosure arrangement, to collective action problems, to management controlled agenda, the article highlight the main reasons for shareholder apathy and disgruntle with the general meetings of the company. The increasing impact that institutional investors have on the passivity and economic weighing of the average shareholder has also been discussed. The article has been used to obtain an understanding into the various problems that plague the current system. Furthermore, the article also proposes certain essentials that would help better the passive situation.

9. S. K. VERMA AND S. GUPTA, CORPORATE GOVERNANCE AND CORPORATE LAW REFORM IN INDIA,

25 ASIAN LAW SERIES (2004) The article traces the history of corporate governance in India, the various phases and the legal instruments used to enforce the principles under the system. The article connects the rights of the stakeholder as being the basis for corporate governance and draws a link between the economical and financial developments in India to the corporate governance regimes. The article has been used to highlight the nexus between the economic, financial and legal regime and their interrelations.
10. S. BANERJEE AND S. BOSE, ROLE OF PROXY IN GENERAL MEETING, 1 COMPANY LAW JOURNAL 1

(2004). The article delineates on the various aspects of the proxy mechanism provided for under the Companies Act 1956. Apart from discussing on the fundamental reasons for the existence of the system, the article also moves onto to provide for the implications and powers of a proxy. This article has been used to cite the various advantages and disadvantages of using the proxy system, when compared to e-voting and corporate representatives.

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SUMMARY OF CASES
1. RE. HECTOR WHALING LIMITED: (1936) 1 CH D. 208. In this present case, the issue was regarding a notice that was sent, convening an extraordinary general meeting of the Company on 30th May, 1935 dated and posted on 8th May, 1935. The articles of the company provided for the service of notice only on the 9th of May, 1935. The court further held that it was not open by the Articles of Association to curtail the length of time which the statute had fixed. Therefore, in the present case, having excluded the date of the meeting, the total period of notice would only come to 20 days and this was considered to be void and illegal. This case has been used by the researcher to illustrate that the 21 day clear notice period is mandatory under the Act. 2. NVR NAGAPPA CHETTIAR V. MADRAS RACE CLUB: (1949) 19 COMPCAS 175 (MAD) In April, 1947, 45 members of the Club sent a requisition to the Club for convening an extraordinary general meeting for the purpose of appoint a committee to consider the revision of the Articles of Association. On the 16th of October, notice was issued to the Club members of the extraordinary general meeting on the 7th of November, 1947. The Court in this case held that the date of the meeting and the date of service of notice were to be excluded in counting the 21 clear days period. Thus, the meeting was held to be illegal and void. The case has been used to cite an example regarding the calculation of the dates when looking into the notice period. The case used the interval of 21 days between the meeting and service date principle. 3. BALWANT SINGH SETHI V. SARDAR Z.H. SINGH: (1988) 63 COMPCAS 310 (BOM) The respondent filed a case against the appellant for a declaration that the requisition contained in the letter dated September 21, 1987was not a valid and lawful requisition for calling an extraordinary general meeting. The Court held that pursuant to section 53(2)(b)(i), the notices will have to be deemed to have been received after 48 hours from the day of posting, that is, on 2nd and 3rd. Therefore, since the meeting is to be held on September 21, 1987, the notices posted
Page | 32

on August 31, 1987, and September 1, 1987, cannot be held to be 21 days' clear notice to the members. This case has been in order to cite an example of a case wherein 21 clear days would constitute the non regarding of the day of service of notice and the day of meeting. 4. MAHARAJA EXPORTS V. APPAREL EXPORTS PROMOTION COUNCIL: 1986 60 COMPCAS 353 (DEL) In the present case, the plaintiff filed a case for declaring that the 4th Annual General Meeting purportedly held on 16-5-1984 was illegal and invalid. The notice was issued on 27-4-1984 and on 30-4-1984 the plaintiff received the notice for the General meeting of the defendant to be held on the l4th May 1984. In this case, the court held that 48 hours would have expired on 29-41984. Under these circumstances as already observed earlier the notice issued on 27-4-1984 will expire on 29-4-1984 which is well within the phrase '14 days clear notice'. 5. STEINBERG V. ADAMS: F SUPP 604 1950 The controversy in this case is the payments made by the corporation to defray the expenses incurred by two contesting parties in connection with an election of directors. The court held that where the controversy is concerned with a question of policy as distinguished from personnel of management and the stockholders are called upon to decide it, it would be legal for directors to make such expenditures from the corporate treasury as are reasonably necessary to inform the stockholders of the considerations. The case has been used to explain how directors of a company may be justified in passing circulars and resolutions at the expense of the company. 6. ROSENFIELD V. FAIRCHILD:309 NY 168 1955 In this case, there was a stockholder's derivative action brought by plaintiff as he seeks to compel the return of $261,522, paid out of the corporate treasury to reimburse both sides in a proxy contest for their expenses. The court held that if directors of a corporation may not in good faith incur reasonable and proper expenses in soliciting proxies in these days of giant corporations with vast numbers of stockholders, the corporate business might be seriously interfered with because of stockholder indifference and the difficulty of procuring a quorum, where there is no contest. The test laid down by the court was that when the directors act in good faith in a contest
Page | 33

over policy, they have the right to incur reasonable and proper expenses for solicitation of proxies and in defense of their corporate policies, and are not obliged to sit idly by. This case was used to illustrate the conditions necessary to be fulfilled by the director before he set out to utilize the proceeds of the company for policy purposes. 7. PEEL V. LONDON: 1907 1 CH 5, CA In the present case there was a controversy regarding to policy affecting the management of the company and in pursuance of this, the directors sent to each shareholder a circular setting out the facts and their views. The issue that arose was the expenses of printing, posting, and stamping these documents was paid for out of the funds of the company. Therefore the shareholders brought an action to restrain the company and the directors from using the funds of the company in paying expenses thus incurred. The court held the expenditure to be completely justified since it was a matter of policy. 8. PUNT V. SYMONS.1902 2 CH 506 In the current case, the question was with respect to one of the provisions in the companys articles of association. The provision had stated that a demand for poll could be made by the members only if there were at least five of them requisitioning. It was held by the court that a company could not contract itself out of statutory rules prescribed and concurrently that the right to demand of a poll by a member could not be subject to conditions as the company deemed fit. The case has been used to illustrate instances where the company had precluded the right of the member to demand a poll. 9. IN RE: WHITCHURCH INSURANCE CONSTULTANTS: 1993 B.C.L.C. 1359 There was a motion made by the members of the company to have an extraordinary general meeting of the company to remove a minority shareholder from the position of director. The applicant held 666 of the 1,000 shares in the company and the respondent held the other 334. Though the petition gave no substantial grounds for alleging oppression or prejudice in respect of this company, on these facts, the court held that it was right to exercise the discretion under s. 371 . the court further held that it was impracticable to hold a meeting and it was plainly right
Page | 34

and desirable to get a proper board into the company by allowing the meeting to be held for the purpose of dealing with the present inqourate state. The case illustrates how the Court may intervene in cases where necessary and convene a general meeting.

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Page | 37

BOOKS
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17th Edition, 2010).

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8. Palmers Company Law: Volume I (C. Schmitthoff et. al. Eds., London: Steven and Sons, 1987). 9. Paul Davies, Introduction to Company Law (Oxford: Oxford University Press, 2002). 10. Robert R Pennington, Penningtons Company Law (London: Butterworth, 8th edition, 2001).
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ONLINE RESOURCES: 1. Shareholder Participation in the Modern Listed Company, Companies and Securities Advisory Committee (2000) available at http://www.camac.gov.in/camac/camac.nsf/byHeadline/PDFFinal+Reports+2000/$file/S hareholder_final_reportJun00.pdf. 2. Combined Code on Corporate Governance (2003), available at http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf 3. Corporate Governance Review of Practice, A study of Corporate governance in leading Corporates in India, available at http://www.nfcgindia.org/pdf/asci250808.PDF 4. Corporate Governance: Recommendations for Voluntary Adoption, Report of the CII Taskforce on Corporate Governance Chaired by Naresh Chandra (2009), available at http://www.mca.gov.in/Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf 5. ICSA best practice guides, A Guide to Best Practice for Annual General Meetings, available at http://www.icsa.org.uk/policy-guidance/guidance-and-reports/best-practicePage | 39

guides 6. OECD Principles on Corporate Governance, available at http://www.oecd.org/dataoecd/32/18/31557724.pdf

7. S. K. Verma and S. Gupta, Corporate Governance and Corporate Law Reform in India,

25 Asian Law Series (2004).

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Management W.P. No. 2011-04-02, available at http://www.iimahd.ernet.in/assets/snippets/workingpaperpdf/8949079892011-04-02.pdf . REPORTS 1. A Report of the Committee on the Financial Aspects of Corporate Governance:

Cadbury, 1992 2. 3. Committee on Corporate Governance: Hampel, 1998. Corporate Governance: Recommendations for Voluntary Adoption, Report of

the CII Taskforce on Corporate Governance Chaired by Naresh Chandra (2009), available at http://www.mca.gov.in/Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf 4. 5. Protection of Shareholders Act: William Cash, 1987. Report of Committee appointed on Corporate Governance: Rahul Bajaj, CII

Voluntary Code of Corporate Governance (1998), available at http://www.nfcgindia.org/library.htm

6.

Report of the Committee Appointed on Corporate Governance: Shri Kumar

Mangalam Birla, Report of the Kumar Mangalam Birla Committee on Corporate Governance (1999) available at http://www.sebi.gov.in/commreport/corpgov.html 7. Report of the Committee on Company Law Amendments: Cohen, 1945.
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8.
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Report of the Company Law Committee: Jenkins, 1962. Report of the SEBI Committee on Corporate Governance: Narayanana Murthy,

2003 available at http://www.nfcgindia.org/library/narayanamurthy2003.pdf

Page | 41

TABLE OF CASES ENGLISH CASES 1. PEEL V. LONDON: 1907 1 CH 5, CA 2. PUNT V. SYMONS.1902 2 CH 506 3. IN RE: WHITCHURCH INSURANCE CONSTULTANTS: 1993 B.C.L.C. 1359 4. OLIVER V. DALGLEISH.:1963 1 WLR 1274 5. WILSON V. LONDON MIDLAND AND SCOTTISH RAILWAY COMPANY 1940 2 ALL ER 91 (CH) AMERICAN CASES: 1. STEINBERG V. ADAMS: F SUPP 604 1950 2. ROSENFIELD V. FAIRCHILD:309 NY 168 1955 INDIAN CASES 1. RE. HECTOR WHALING LIMITED: (1936) 1 CH D. 208. 2. NVR NAGAPPA CHETTIAR V. MADRAS RACE CLUB: (1949) 19 COMPCAS 175 (MAD) 3. BALWANT SINGH SETHI V. SARDAR Z.H. SINGH: (1988) 63 COMPCAS 310 (BOM) 4. MAHARAJA EXPORTS V. APPAREL EXPORTS PROMOTION COUNCIL: 1986 60 COMPCAS 353 (DEL) TABLE OF STATUTES ENGLISH STATUTES 1. Companies Act, 1985. 2. Companies Act, 2006. INDIAN STATUTES 1. Companies Act, 1956.

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Annexure-II
TABULAR DATA

TABLE 1: MEMBER PARTICIPATION IN AGM AGMs attracting 300 or more shareholders 20012005 2001 35.7% 2003 34.3% 2005 27.9 %

AGMs attracting fewer than 100 shareholders 20012005 2001 23.2% 2003 22.4% 2005 38.2%

TABLE 2: INVESTOR PARTICIPATION RATES IN ACTIVE GOVERNANCE Country Australi a UK Japan US Canada France German y Italy India Source: J. P. SHARMA Sri Lanka Participa tion Rate 40% 30% 30% 26% 25% 15% 9% 7% 3% 2%

AND

P. SETHI, IMPACT

OF

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POSTAL BALLOT SYSTEM IN IMPROVING SHAREHOLDERS PARTICIPATION IN CORPORATE DECISION MAKING, 39 CHARTERED SECRETARY 159 (2009)
TABLE 3: PROMOTER HOLDINGS Company TATA Tata Steel TCS Tata Power Tata Motors Tata Chemicals BIRLA Grasim Industries Aditya Birla Nuvo Hindalco Industries Ultra Tech Cement RELIANCE (MDA) Reliance Industries IPCL RELIANCE (ADA) Reliance Energy Reliance Comm. Reliance Capital Adlabs Promoter Holding 31% 82% 32% 33% 32% 25% 39% 27% 53% 51% 47% 34% 67% 52% 55%

SOURCE: S. SINHA, EQUITY MARKETS WITH CONTROLLING SHAREHOLDERS, INDIAN INSTITUTE OF MANAGEMENT W.P. NO. 2011-04-02
Page | 44

Page | 45

TABLE 4: SHAREHOLDER-WISE OWNERSHIP STRUCTURE

SR. NO. 1 1.1 1.2 1.3 2 2.1 2.1.1 2.1.2 2.1.3 2.2 2.2.1 2.2.2 2.2.3 SR. NO. CATEGORY OF SHAREHOLDER Promoters Holding Indian Promoters Foreign Promoters Persons Acting in Concert Non-Promoters Holding Institutions Mutual Funds/UTI Banks, FIs, Insurance Companies FIIs Non-Institutions Corporate Bodies Individuals (Indian public) Others (a) CATEGORY OF SHAREHOLDER 2001 45.08 30.27 11.76 3.05 54.92 21.10 6.42 9.11 5.57 33.82 8.48 22.35 2.99 2004 2002 46.24 31.43 11.73 3.08 53.76 20.21 5.48 9.42 5.31 33.55 8.28 22.30 2.97 2005 2003 48.61 33.24 12.13 3.24 51.39 19.43 4.76 9.75 4.92 31.96 6.86 21.80 3.30 2006

1 1.1 1.2 1.3 2 2.1 2.1.1 2.1.2

Promoters Holding Indian Promoters Foreign Promoters Persons Acting in Concert Non-Promoters Holding Institutions Mutual Funds/UTI Banks, FIs, Insurance Companies

46.66 31.20 12.15 3.31 53.34 23.51 5.10 8.64

46.22 30.71 12.45 3.06 53.78 24.99 5.05 7.95

45.60 30.69 12.86 2.05 54.40 27.78 5.62 7.46

2.1.3 2.2 2.2.1 2.2.2 2.2.3

FIIs Non-Institutions Corporate Bodies Individuals (Indian public) Others (a)

9.77 29.83 7.08 18.96 3.79

11.99 28.79 7.01 17.24 4.54

14.70 26.62 6.40 15.11 5.11

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TABLE 4: SHAREHOLDING PATTERN SHARES HELD BY VARIOUS CATEGORIES OF SHAREHOLDERS (NO. OF COMPANIES)
PROMOTERS HOLDINGS Range of shareholding (%) 2001 Less than 5 5-20 20-35 35-50 50 and above 34 13 33 23 31 2006 32 14 32 25 31 2001 97 5 5 6 21 2006 96 6 4 5 23 2001 117 8 5 3 1 2006 121 7 4 2 0 Indian Promoters Foreign Promoters Persons Acting in concert

NON-PROMOTERS HOLDINGS Range of shareholding (%) Institutions (a) 2001 Less than 5 5-20 20-35 35-50 50 and above 18 46 54 13 3 2006 7 33 58 27 9 2001 0 18 60 37 19 Non- Institution (b) 2006 0 41 66 20 7

Source: K. PARMJIT
FROM

AND

BSE-200 INDEX

G. SUVEERA, PATTERNS OF CORPORATE OWNERSHIP: EVIDENCE COMPANIES, 13(2) INSTITUTE OF MANAGEMENT TECHNOLOGY (2009).

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TABLE 5: COMPANY GROWTH RATE (NUMBER OF SHAREHOLDERS) More than 1,000,000 500,00 0 to 1,000,0 00 250,00 0 to 500,00 0 100,00 0 to 250,00 0 50,000 to 100,00 0 25,000 to 50,000

19 92 19 99

SOURCE: SHAREHOLDER PARTICIPATION IN THE MODERN LISTED COMPANY, COMPANIES AND SECURITIES ADVISORY COMMITTEE (2000)

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