Voting Through Postal Ballot – The new rules under the Companies Act, 2013

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Section 2(65) of the Companies Act, 2013 defines the term “Postal Ballot” as voting by post or through any electronic mode. This method of voting, used in respect of shareholders’ resolutions, gives an opportunity to the company’s members residing outside the local limits of its registered office, to exercise their voting rights, which would otherwise had not been possible in case of physical voting process.

Section 110 of Companies Act, 2013, which deals with voting by means of postal ballot, has brought about certain changes in the existing provisions relating to the passing of resolutions by postal ballot contained under Section 192A of the Companies Act, 1956 and the Companies (Passing of the resolution by postal ballot) Rules, 2011. It is pertinent to note here that Section 110 of the Companies Act, 201 has not yet come into effect.

Comparison of postal ballot provisions under the new and the old Companies Act

	Companies Act, 1956	Companies Act, 2013
Governing sections & Rules	Section 192A & Companies (Passing of the resolution by postal ballot) Rules, 2011	Section 110 & Chapter VII of the Draft Rules
Applicability	Listed public companies	All companies, whether public or private, having more than 50 members (One Person Company also exempted)
List of business notified by CG	9 items of business notified under the existing Rules.	Total 10 items of business notified under the draft rules. New item of business Change in objects for which a company has raised money from public through prospectus and still has any unutilized amount out of the money so raised under section 13(8) of Cos. Act, 2013.
Mode of posting notice	Registered Post Acknowledgement Due Other secured mode of posting provided by DOP  Electronic mail	Registered Post Acknowledgement Due Speed Post Electronic means
Newspaper advertisement	Certain matters specified.	Along with the matters already specified, contact details for redressal of grievances connected with postal ballot must also be included in the advertisement.
Scrutinizer’s Report	As soon as possible after the last date of receipt of the postal ballot.	As soon as possible but not later than 7 days from the last date of receipt of postal ballot.
Placing notice/ results of postal ballot on website	Not specifically mentioned	Required to be placed on the website

Lists of specified business to be transacted only through postal ballot process:-

1)  Alteration of the objects clause/ main objects (in the case of company in existence immediately before the commencement of new Act) of the memorandum;

2)   Alteration of articles of association in relation to insertion or removal of provisions which, under Section 2(68), are required to be included in the articles of a company in order to constitute it a private company;

3)   Change in place of registered office outside the local limits of any city, town or village as specified in Section 12(5);

4)     Change in objects for which a company has raised money from public through prospectus and still has any unutilized amount out of the money so raised under Section 13(8);

5)   Issue of shares with differential rights as to voting or dividend or otherwise under Section 43(a)(ii);

6)   Variation in the rights attached to a class of shares or debentures or other securities as specified under section 48;

7)     Buy-back of shares by a company under Section 68(1);

8)     Election of a director under section 151 of the Act;

9)   Sale of the whole or substantially the whole of an undertaking of a company as specified under Section 180(1)(a);

10) Giving loans or extending guarantee or providing security in excess of the limit prescribed under Section 186(3).

Items of business that cannot be transacted through postal ballot

Apart from the above, a company may, at its discretion, transact any other item of business also through voting by postal ballot instead of transacting it at a general meeting, except the following businesses:

(i) four ordinary items of business which could be transacted only at an Annual General meeting (Accounts approval, Dividend declaration, director appointment and auditor appointment); and

(ii) any business in respect of which directors or auditors have a right to be heard at any meeting.

Procedure for conducting voting through postal ballot in a nutshell

A. Steps to be taken by the Company Secretary in Employment

1. Prepare draft of Board resolution, postal ballot notice along with explanatory statement and postal ballot form. 
2. Obtain consent of the Scrutinizer to act as such. 
3. Convene Board meeting to approve the draft documents, appoint Scrutinizer, authorise WTD/ CS to oversee the entire postal ballot process, calendar of events.
4. Arrange for printing of address slips, notice, postal ballot forms and self-addressed postage pre-paid envelope (with Scrutinizer’s name and address).
5. File the board resolution along with the ’Calendar of events” with ROC within 7 days of passing Board resolution.
6. Despatch notices to shareholders whose names appear in the Register of members as on particular date as decided by the Board.
7. Place postal ballot notice on the company’s website. 
8. Immediately publish newspaper advertisement at least once in a vernacular newspaper in the principal vernacular language and at least once in English language in an English newspaper about the date of completion of dispatch of ballot papers and other specified matters.
9. Declaration of postal ballot results by the Chairman on receipt of the Scrutinizer’s Report. 
10. Place the results of the postal ballot on the company’s website along with the Scrutinizer’s Report and also display on the notice board.
11. File Form 23 with the Registrar of Companies in case of special resolution.
12. Prepare the minutes and obtain Chairman’s signature on it.
13. The company shall safely preserve the ballot papers and other related papers/register received from the Scrutinizer.

B. Steps to be taken by the Company Secretary in Practice (Acting as Scrutinizer)

1. Give his consent in writing, to the Board of Directors, to act as the Scrutinizer for conducting postal ballot.
2. After the dispatch of postal ballot notice is completed, receive the duly filled in and signed postal ballot forms sent by the shareholders and put receipt stamps on the envelopes as and when they are received.
3. To keep in safe custody all the postal ballot forms till the last date for receiving the postal ballot forms,
4. The scrutinizer shall maintain a register either manually or electronically and record daily assent or dissent received, mentioning the particulars of name, address, folio number or client ID of the shareholder, number of shares held by them, nominal value of such shares, whether the shares have differential voting rights, if any, details of postal ballots which are received in defaced or mutilated form and postal ballot forms which are invalid.
5. After the last date for receiving the postal ballot forms is over, prepare Scrutinizer’s report and submit the same to the Chairman of the company within 7 days of the last date of the receipt of postal ballot forms.
6. After the Chairman considers, approves and signs the minutes, the scrutinizer shall return the ballot papers and other related papers/register to the company.

The provisions relating to voting by means of postal ballot are not new to the Company Secretaries as it was already applicable to the listed companies. Now the recent Companies Act has also brought unlisted companies having more than 50 members under the purview of postal ballot provisions. Though on one hand, this change will bring about more responsibility on the Company Secretary professionals, on the other hand, it will also widen the scope for Company Secretaries in practice. 

 

P.S. The Draft Rules under Chapter VII of the Companies Act, 2013 (yet to be notified) have been referred to in writing the above article. In case, the Rules are subsequently modified on its notification, then the article must be read keeping in mind such modifications/ amendments.   

                                      

Review of guidelines governing stock related employee benefit schemes by SEBI

Last year, in case of listed entities, SEBI noticed that many companies were framing their own employees benefit schemes wherein Trusts were set up to deal in their own securities in the secondary market which was not envisaged within the purview of the ESOS Guidelines. Subsequently, in January 2013, SEBI restrained the listed companies from framing any employee benefit schemes involving acquisition of own securities from secondary market apprehending any manipulation in the company’s share prices by engaging in fraudulent and unfair trade practices. Giving effect to the above restraint, SEBI also amended the SEBI (ESOS & ESPS) Guidelines, 1999 and the Listing Agreement by way of inserting therein new clauses 22B and 35C respectively.

SEBI further directed the listed companies, which have already framed employee benefit schemes which are not in accordance with the amended SEBI (ESOS and ESPS) Guidelines, 1999, to inform the details of their scheme to stock exchanges and also to align such schemes with the amended SEBI (ESOS and ESPS) Guidelines by June 30, 2013 which was later extended to December 31, 2013.

Recently, vide its Circular No. CIR/CFD/POLICYCELL/14/2013, dated November 29, 2013 SEBI further extended the time line for said alignment of existing employee benefit schemes to June 30, 2014 in light of the ongoing review of guidelines governing stock related employee benefit schemes initiated by Discussion Paper issued by SEBI on November 20, 2013.

Secondary market Acquisitions by Employees Welfare Trusts – Underlying Issue

The Trusts set up for the benefit of the employees may hold shares of the company both under ESOP and Non-ESOP schemes. The objectives of the non-ESOP Trusts may be medical aid and educational help to employees or/and their family, help to purchase residential house, arranging Trips, Seminars or training for employees, etc.

Employee Welfare Trusts set up are usually financed by the Settlor Company itself by way of advancement of loan and managed/ controlled by the promoters of the Settlor Company appointed as the Trustees. Through advancement of loan, the listed company is funding the purchase of its own shares from the secondary market which is prohibited by virtue of provisions contained under Section 77 the Companies Act, 1956 (corresponding Section 67 of the Companies Act, 2013, yet to come into effect) which, inter alia, restrains a company from buying back its own shares or giving any loan, guarantee or providing security or any other financial assistance in connection with purchase of or subscription to any shares in the company or in its holding company. However, the restriction under Section 77 does not apply, if the company provides funds to a Employee Welfare Trust, pursuant to any such scheme for the time being in force for the purchase of or subscription of fully paid up shares in the company or its holding company.

Therefore, under the trust mechanism for administration of ESOS, companies can provide funds/ financial assistance to the Employee Welfare Trusts for acquisition of its own shares, either through subscription to fresh issue or purchase from the secondary market.

Now, one of the issue arises when the promoter(s)/ director(s)/ any other person(s) related to the Settlor Company are appointed as the trustees for the management and administration of the Employee welfare trusts including that of ESOS Trusts, which gives rise to a conflict of interest. Since the promoters have substantial financial interest in the company or the Directors may hold shares in the company or possess insider information, there may be a possibility, that in their capacity as trustees, they may deal in the company’s shares held by the Trust with the object of inflating, depressing, maintaining or causing fluctuation in the price of the securities by engaging in fraudulent and unfair trade practices. Such dealing in the company’s shares by the Trusts may also raise regulatory concerns regarding compliance with SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 and SEBI (Prohibition of Insider Trading) Regulations, 1992.

Apprehending the above possibility, SEBI prohibited the listed companies from framing any employee benefit scheme involving acquisition of own securities from the secondary market.

Prohibition from secondary market acquisitions - Why?

§    The Promoters of the Settlor Company appointed as Trustees exercise control over the securities held by the Trust and practically, these securities actually become a part of the promoters’ shareholding. The Promoters - Trustees can easily influence, in its favour, the voting rights exercisable by the Trust in respect of the securities held by it.

§  Further, secondary market acquisition of shares by the Employee Welfare Trust reduces the percentage of free float shares available to the general public in the open market and indirectly, facilitates the promoters to increase their control over the company.

§  Also in situations, where the Employee Welfare Trusts are managed by the persons having interest in the Company’s shares, there is the possibility of manipulation of share prices through purchase/ sale in the secondary market to make personal financial gains. These financial gains would be at the cost of the investments made by the genuine investors in the company’s shares.

§  Since the listed company is providing funds by way of loan to the Trusts, it’s management may try to exercise influence/control over the decisions taken by the Employee Welfare Trust till such time the loan is outstanding.

The prohibition issued by SEBI aims to curb these possible malpractices which will ensure better corporate governance and protection of shareholder’s wealth. However, not all the Employee welfare Trusts set up and financed by the company, directly or indirectly are engaged/ will engage in share price manipulation activities.

*   Employee Welfare Trusts set up and financed by various companies are managed by independent Trustees, who may be experienced professionals or reputed persons not related to the company or companies offering Trusteeship services. 

*      Acquisition of company’s shares from the secondary market by the Trusts is an internationally accepted practice.

*     Secondary market purchases avoid dilution of capital and do not impact the value of existing shares in the hands of shareholders like EPS, etc. This is very crucial and important in cases where option of expansion of capital base is not available to corporate or is not desirable from their perspective may be on account of undesirable increase in capital base by issue of fresh shares, servicing a bloated equity, etc.

Hence, keeping the above in mind, it has become necessary that the acquisition of shares from the secondary market by the Employee Welfare Trusts must be regulated by SEBI by prescribing conditions and imposing terms of reference. 

The way forward

In light of the representations received from various industry bodies and companies, SEBI decided to reconsider secondary market acquisitions by Employee welfare Trusts subject to necessary safeguards to prevent misuse instead of imposing outright ban. For this reason, SEBI has extended the time limit for the alignment of existing employee benefit schemes with the amended SEBI (ESOS & ESPS) Guidelines, 1999 to June 30, 2014 and also issued Discussion Paper on 'Review of guidelines governing stock related employee benefit schemes'.

Further, SEBI plans to convert the ESOS Guidelines into Regulations having the force of law and encompass all the employee benefit schemes like i) ESOP ii) ESPS iii) SARs and iv) Employee Welfare Schemes which deal in company’s securities under one regulation.

Highlight of the Recommendations in the Discussion paper

1) Proposed regulations shall cover all employee welfare Trusts, whether ESOP or non-ESOP, dealing in company’s securities and such Trusts must be set up, financed and managed by the Company, directly or indirectly.

2) Such Employee Welfare Trusts shall be permitted to make secondary market acquisition of shares subject to certain restrictions and conditions.

3) Acquisition of securities from secondary market would require shareholders’ approval which resolution shall clearly set out the maximum percentage of shares that can be acquired by the Trust from the secondary market. No approval of shareholders would be required if the purchases are made by the Trust out of its own funds / income and no loans are outstanding.

4) Recognition of Stock Appreciation Rights (SAR) Schemes under the proposed Regulations.

5) There should be limits on secondary market purchases for both ESOP and Non ESOP schemes:

Scheme Type	Yearly limit	Overall limit
ESOP Schemes	2% p.a. of the paid up capital at the end of financial year	5% of the paid-up share capital
Non-ESOP Schemes	-	2% of the paid-up share capital

The aforesaid ceilings shall be applicable for all the employee benefit trusts taken together at the company level and not at the level of individual trust, if a company has multiple trust and schemes.

6) Shares acquired by the Trusts should have a minimum holding period of 6 months otherwise than in case where the shares are transferred to employees pursuant to exercise of options.

7) Necessary disclosures should be made under the Insider Trading Regulations for purchase/ sale of shares. No purchase/ sale could be made during the Trading Window Closure Period.

8) Independent trustees must be compulsorily appointed at the discretion of the Remuneration Committee of the company.

9) The shares held by Trust should be disclosed along with promoter holding as these shares are not available to the public freely.

10) Any Trust/scheme which is funded/managed/controlled by the company shall not be eligible to exercise voting rights on the shares of the company held by them.

11) In the event promoter holding in the company is already 75%, then the Trust cannot acquire any shares from the secondary market to comply with the SEBI requirement of maintaining minimum public shareholding of 75% in all listed companies.

12) In case of Options granted to an employee who has been transferred or deputed to a fellow subsidiary / an Associate of the Company prior to vesting / exercise, the vesting / exercise shall continue as per the terms of the Grant.

13) Corporates will be given a 2 years transition period to migrate to the new Regulations.

For a detailed reading of the SEBI's Discussion Paper on "Review of Guidelines governing stock related employee benefit schemes", pls visit http://www.sebi.gov.in/sebiweb/home/list/4/23/0/0/Press-Releases