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CAN A TECHNOCRAT CONTROL A COMPANY WITH LITTLE CAPITAL

CS Ramanuj Asawa 
on 02 February 2009

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CAN A TECHNOCRAT CONTROL A COMPANY WITH LITTLE CAPITAL

In today's tech and knowledge era there is no dearth of capital, ideas and all. The real difficulty a tech guy faces is if he starts a company would he be able to control the company. Most of the time people with finance control the companies. To enable a technocrat start a business and control the affairs of a company the law allows certain unusual things. A summary is presented here:

Under The Companies Act, 1956 a company can have two types of share capita:

1. Equity share capital; and

2. Preference share capital.

Further the equity shares can:

1. equity shares with voting rights; or

2. with differential rights as to dividend voting or otherwise in accordance with such rules and subject to such conditions.

Exercising the power conferred under section 86(a)(ii) of the companies Act, 1956 The Ministry of Company Affairs has promulgated the COMPANIES (ISSUE OF SHARE CAPITAL WITH DEFERENTIAL VOTING RIGHTS) RULES, 2001 which govern the issue of equity shares with differential rights as to dividend, voting or otherwise.

These rules are applicable to all companies other than private limited companies. The rules contains certain conditions. A company which fulfills the conditions can issue equity shares with differential rights as to dividend voting or otherwise. These conditions safeguard the interest of the existing shareholders and other stakeholders. The conditions are given in appendix I to the said rules.

The existing companies other than private limited companies can take advantage of these rules if they fulfill the conditions laid down in the said rules.

By operation of sub-section (2) of section 90 of the Companies Act, 1956, the provisions of sections 85 to 89 are not applicable to a private company, unless it is a subsidiary of a public company (private company simliciter).

Therefore, even a brand new private limited company can have equity shares with differential voting and or/ dividend rights. There is no limit laid down under the law as to the scale of voting or dividend. One type of equity shares say class 'A' equity shares can have 1 vote for each share while class 'B' equity shares can have 10/100/1000 votes for each share. Likewise dividend can be paid in multiple times on class 'A' equity shares than what is paid to class 'B' equity shares.

This way a person investing lesser amount in equity can control the company and get more dividend.

In practical life you would ask why the others would allow one to have equity shares with differential voting and dividend rights. Truly speaking this mechanism is used where a technocrat and a financer forms an alliance. In the today's knowledge economy you cannot put a specific value to the knowledge and experience of the technocrat. As soon as he reveals his plan and concept he becomes valueless. To keep his value and let him have his share in the fortune this provision greatly helps the technocrat. After getting controlling power he can use his knowledge and experience and can safeguard his interest

This is not the only route to have control of the company. A provision can be made in the articles that Mr. x will be the MD of the company for say ten years or for life or till he voluntarily resigns from office. The law allows this in private limited company. Even in public companies 1/3 of the total directors can be non-retiring (permanent) directors. However, a public company can appoint a Managing Director only for five years at a time. He can be re-appointed for any number of times.

A provision in the articles can be amended by passing of a special resolution. So if technocrat holds or controls less than 26% equity shares he would not be able to block such special resolution.

I can show you a situation where one person holding as little equity as 1 share can act in a decisive way. Suppose there are two groups each holding say 49.99% each and are not getting together well. If you hold the balance .01% then you can strategically rule the company. The party with whom you sit can rule the company and you can mediate and bring peace to them. This is the game-plan of the politics we see as horse-trading.

Disclaimer: This article is for general understanding purpose only. Please take action only after knowing the law of the land and under proper legal guidance.




Category Corporate Law
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CS Ramanuj Asawa 

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