The Game of passing resolutions with the help of Voting through Proxies
The basic purpose of this article is to provide members with food for thought and look at the concept of Voting through Proxy in a different light.
It has been observed that Proxy is used as a tool to get major resolutions approved at the AGM/EGM or at other members’ meetings which are convened as per the Order of the High Court.
Statutory Provision concerning Proxies:
The Companies Act, 1956 contains provisions for Proxies under Section 176.
Section 176(1) states that any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote instead of himself. The sub-section further goes to state that a proxy shall not have any right to speak at the meeting.
There are three proviso to sub-section(1) of Section 176 that states that unless the articles provide otherwise,
(a) this sub- section shall not apply in the case of a company not having a share capital;
(b) a member of a private company shall not be entitled to appoint more than one proxy to attend on the same occasion; and
(c) a proxy shall not be entitled to vote except on a poll.
Proviso (a) to sub-section(1) is very clear and does not any further explanation.
Proviso (b) to sub-section(1): A Private Limited Company can by its articles allow a member to appoint more than one proxy to attend on the same occasion. Whereas, in the case of a Public Limited Company, the Act itself allows a person to appoint more than one proxy to attend on the same occasion. Hence, if a member has 15 shares with each share carrying one voting right, he has the right to appoint 15 Proxies with 1 voting right each.
Proviso (c) to sub-section(1): A Proxy shall not be entitled to vote except on a poll. I have not come across Articles of Association of any Company which allows a Proxy to vote by show of hands.
A Combined reading of the above given basic provisions tell that:
1) An Individual can become a Proxy Holder for an unlimited number of members. Hence, a person can be present individually and can hold proxies for hundreds of shareholders and thereby vote as ten individuals.
2) In case of a Public Limited Company, a member can appoint as Proxy as many persons as his voting rights and increase the head count.
3) A Proxy does not have any right to speak at the meeting.
4) A Proxy has the right to only vote at the meeting and that too only when the resolution is put to poll.
5) If the resolution is not put to poll, then the Proxy cannot vote for that resolution.
Considering the above, why would any member like to appoint any person as his Proxy or why would any person like to become any member’s Proxy.
Member’s resolutions are of three types:
1) Ordinary Resolutions: In simple words, these are those kinds of resolutions which have to be approved by simple majority i.e., more than 50% of the voting should be in favour of the resolution.
2) Special Resolutions: In simple words, these are those kinds of resolutions which have to be approved by special majority i.e., more than two – third of the voting should be in favour of the resolution or say members in favour of the resolution should be twice as compared to the members against the resolution.
In both these cases, it is the voting right (Value of Shares) that is reckoned and not the number of members in favour or against.
a. If the resolution is put to vote by Show of Hands: Proxy is not allowed to vote on resolutions by show of hands and hence giving a proxy or becoming a proxy would not be worthwhile.
b. If the resolution is put to vote by Poll: Proxy is allowed to vote on resolutions by Poll and hence each and every vote in favour of the Company through Proxy would be helpful.
3) Resolutions to be passed by Special Majority: In case of meetings which are convened at the instructions of the High court i.e., for matters under Section 391 to Section 394 or Section 100, the Company Court Rules are applicable. The resolution has to be put compulsorily through poll.
Such meetings are held to consider a Scheme of Arrangement with the members and generally include matters like:
a) Amalgamations / Mergers
c) Reduction of Capital
d) Re-organisation of Capital
e) Any other sort of arrangement with the members or creditors
As per the Company Court Rules, the resolution has to be passed with the following type of special majority:
1) more than 50% in number of the members present should vote in favour; and
2) out of the total present, more than three-forth of the voting rights in value terms should be in favour.
In most cases, the second condition is easy to fulfill as a large percentage of the voting rights are held by the Promoter Group which is constituted by a small number of persons and investment companies.
The Public shareholding is scattered across a very wide base of shareholders. Out of this wide base of shareholders, a very small percentage is active enough to understand their rights and attend such meetings.
Hypothetical Example: Company ABC Limited is a listed Company. The Promoter group consists of the Chairman, family members, close relatives and some investment companies, in all 40 members or folios which hold 50% of the voting rights in the Company. The balance 50% is held by Public Shareholders and there are 50,000 folios. This is the typical case of most listed companies, where the average holding of each public shareholder is negligible and a very small set of shareholders actively participates in the meetings.
In such a scenario, if out of these 50,000 public shareholders, even 100 shareholders holding in all just 0.01% voting rights attend the meeting and vote against the resolution then the resolution would not be approved as the first condition (50% in number) would not be met.
Hence, companies resort to arranging proxies to get their resolutions passed comfortably. A Person is appointed as Proxy for 100 members (example) each holding just one share. When such person votes in favor of the company, it would be counted as 100 members individually voting in favour of the Company.
A Recent Practical Example:
ICICI Bank announced the Merger of Bank of Rajasthan with itself. In accordance with the Banking Regulations, members’ EGM has to be conducted wherein the proposal has to be approved by the members. After such approval only, the Bank can apply to RBI for its approval. In case of merger of two banks, approval of the High Court is not required but the resolution has to be approved by Special Majority as stated above.
The EGM for both the Banks were held on 21st June, 2010. I was a small shareholder of ICICI Bank and had attended the EGM held at Vadodara. The venue where the EGM was held has a seating capacity of around 500 persons.
After conclusion of the meeting, Managing Director of ICICI Bank, Ms. Chanda Kochhar informed the media: “Our EGM to consider the merger concluded peacefully. Over 500 people attended the EGM and according to regulations, a poll has been conducted successfully.”
The above quote can be found freely on the internet and various newspapers. From the above, it is clear that the Managing Director states that 500 persons attended the EGM.
Now, let’s look at the abstracts of the results posted on the website of the Bombay Stock Exchange Limited (BSE) and the National Stock Exchange Limited (NSE) as reported by the Company.
No. of Shareholders
Shareholders present in person
Shareholders present through Proxies / Authorized Representatives
Now, when the MD states that 500 persons attended the meeting, how is it possible that the poll results show that 7,562 shareholders have attended the meeting. Statistically, every person who was a proxy would be representative of 16-17 shareholders. This cannot be a co-incidence. It has to be a planned strategy. This is the magic of Proxies.
Everything that has been done is legally correct. The intention of this article is also not to doubt the act of the Bank or its shareholders who have given out proxies. The intention of this article is to provide readers with an insight of what can be done with the help of proxy shareholders.