Business Today Net Special

Non-voting Shares

What was expected to be a major tool for financial restructuring for the corporate sector has turned out to be almost a non-starter. Under its guidelines, the Deaprtment of Company Affairs will allow differential voting rights only to profitable companies. Not surprisingly, the stragglers are cribbing.

By Dilip Maitra

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What was expected to be a major tool for financial restructuring for the corporate sector has turned out to be almost a non-starter. Last month the Department of Company Affairs (DCA) announced the detail guideline for issuing shares with differential voting rights---popularly known as non-voting or partial-voting shares----but the restrictive conditions will make sure that only healthy and profit making companies will qualify.

The DCA condition says that only those who have made profits and have paid dividends in the three preceding financial years will be allowed to issue shares with differential voting rights. It also insists that those who have failed to repay interest or redeem debentures will also be barred. This means that a financially weak company---badly in need of funds----will not qualify. Naturally, the corporate world is not happy. Says Jayant Thakur, Chartered Accountant and Corporate Consultant: "Companies without a strong balancesheet thought that by issuing non-voting shares they will be able to raise funds for financial restructuring without diluting promoters-holding. Now this seem to be a mirage." The profitability condition will also create problems for start-up companies because the techno-entrepreneurs, who planned to raise large funds without conceding much of control, will not be able to do so.

But even for profit-making companies there could be problems in issuing non-voting shares because of an absurd clause that a company has not defaulted in meeting investors' grievances. The condition is unrealistic because for any company it is virtually impossible to remain totally complain-free from investors. Small complains like non-receipt or delayed receipt of dividend and annual reports or delay in transfer of shares, is difficult to eradicate completely. The code must be modified to punish only those who are genuinely guilty of not attending to shareholders' grievances.

Another ambiguity that needs to be corrected is the stipulation that non-voting shares can be issued to the extent of 25 per cent of the issued share capital. Since share capital includes preference share capital, which is quasi debt in nature, the correct expression should be 25 per cent of equity share capital. Hopefully, the DCA will make note of these anomalies and will soon carry out changes to make issue of non-voting shares workable.

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