Proposal for “Golden Share”

Business Standard reports that the Government is considering investing in the “golden share” in infrastructure projects. The report states:

“The “golden share”, which will be owned by the government, will ensure that it has a say in all major decisions taken by the private concessionaire. It will also obviate the need for the government to invest in the equity of the company.

The proposal has been mooted by the Planning Commission in the new model concession agreement (MCA) that it has developed for the infrastructure sector. The agreement has been circulated among various stakeholders for consultation.

The MCA says the private infrastructure developer, or the concessionaire, will sign an agreement with the government for issue of one non-transferable equity share of the company (“golden share”) in favour of the government. The share shall entitle the government to nominate a non-retiring director on the board of the concessionaire.

According to the Planning Commission, the golden share-holder will have the right to veto any board resolution aimed at following: altering the memorandum and articles of association; changing the name of the company; issuing sweat equity shares; purchasing the company’s own shares or specified securities; reducing the share capital; entering any new business; applying for winding up the company, among others.”

This is certainly attractive from the Government’s perspective as it can exercise significant control rights over the infrastructure company without investing moneys and taking economic risk on the project. But, this also gives rise to the important questions of whether this can be achieved contractually or if this requires legislative changes to corporate law. Different situations may attract varied solutions.

First, if the Government is exercising voting rights as a shareholder, there seems to be no problem with such a share being issued so long as the infrastructure company is a private limited company. Private limited companies are not bound by the provisions of the Companies Act pertaining to the types of shares they can issue, and hence possess the freedom to issue shares with weighted voting rights in favour of the Government.

Second, if the Government is exercising voting rights as a shareholder and the infrastructure company happens to be a public limited company, such a golden share may not be feasible. Public companies can issue only two types of shares, viz. preference shares and equity shares. Furthermore, all equity shares are pari passu, and the only exception is the possibility of issuing shares with differential voting rights. Under the current rules pertaining to shares with differential voting rights, they can be issued only by companies with a 3-year track record of profitability, which infrastructure development projects would perhaps not enjoy to begin with. Hence, that would be a non-starter. In any event, the fate of shares with differential voting rights themselves hangs in doubt as the Companies Bill, 2008 proposes to do away with that instrument altogether.

Finally, the veto right to the Government at the board level as the proposal suggests is somewhat astonishing. The law is quite clear that directors owe fiduciary duties to the company (represented by the shareholder body as a whole). In case directors are nominated by any particular shareholder (here the Government), they cannot put the interest of their nominator before the interest of the company of which they are directors. Hence, where there are conflicts of interest involved, such a veto right at the board level cannot be sustained. This issue has also been extensively (and fairly convincingly) dealt with by the Bombay High Court in Rolta India Ltd. v. Venire Industries Ltd.

While the “golden share” concept is certainly attractive, there is a need to structure the instrument so as to fall within the confines of existing corporate law. This has always been a contentious issue and several “golden shares” that were issued during the privatizations in Britain and other parts of Europe have often been challenged, sometimes successfully too.