[Bharat Vasani is Senior Advisor – Corporate Laws and Ayush Lahoti an Associate in the General Corporate Practice, both at the Mumbai office of Cyril Amarchand Mangaldas. An earlier version of this post was published on the Cyril Amarchand Mangaldas Blog]
Shareholder meetings form the bedrock of shareholder democracy in a corporate institution. They provide shareholders with the opportunity to participate in the affairs of a company, allowing them to vote in favour of or against resolutions, and empower them to question the policies and functioning of the management of a company. Majority and minority shareholders have the right to attend meetings and, in case of any difficulty in participating in person, even designate a proxy to attend meetings on their behalf. Primarily, there are two types of shareholder meetings in India:
- Annual General Meeting (“AGM”): As provided under section 96 of the Companies Act, 2013 (“CA 2013”), every company is mandated to hold one AGM every year, within six months from the close of the financial year. The AGM is a platform for a company to present information to shareholders and acts as a forum for discussion between the management and shareholders. Typically, a shareholder meeting is required to be held at either the registered office of the company, or at any other place where the registered office of the company is situated.
- Extraordinary General Meeting (“EGM”): As provided under section 100 of CA 2013, an EGM is typically held for passing resolutions in the course of the year that require shareholders’ approval and are not addressed at the AGM. An EGM may also be called by shareholders, at the cost of the company.
The trend of virtual AGMs and EGMs has picked up since the pandemic. In this post, we assess the validity of circulars issued by the Ministry of Corporate Affairs (“MCA”), and consider whether an amendment to sections 96 and 100 of the CA 2013 would be a better way of permitting virtual AGMs or EGMs. Further, we assess the pros and cons of virtual AGMs or EGMs and whether they must be made the norm.
Virtual AGMs/ EGMs: The Need for MCA Circulars
Companies were unable to hold physical meetings during the COVID-19 pandemic induced lockdowns and social distancing norms in force under the Disaster Management Act, 2005, and the Epidemic Diseases Act, 1897. This made it difficult to comply with the mandate of holding an AGM for transacting urgent items of business like raising of capital and change of directors. Hence, for the purposes of achieving compliance, representations were made to the MCA seeking relaxations and permission to conduct both AGMs and EGMs by audio-visual means such as videoconferencing (“VC”).
Under the circumstances, the MCA therefore issued General Circular No. 14/2020 dated April 8, 2020, General Circular No. 17/2020 dated April 13, 2020, General Circular No. 20/2020 dated May 5, 2020, and General Circular No. 22/2020 dated June 15, 2020 (“collectively, MCA Circulars”), which allowed companies to hold EGMs and AGMs until September 30, 2020 through VC or other audio visual means (“OAVM”). While the issuance of the MCA Circulars was the need of the hour, it is pertinent to note that the MCA even till date is issuing General Circulars, extending the validity of the MCA Circulars, the latest one being General Circular No. 9/2024 dated September 19, 2024, allowing AGMs to be conducted via VC or OAVM in 2024 or 2025.
Validity of MCA Circulars
The CA 2013 does not include any express provision that empowers the MCA to issue clarificatory circulars. Likewise, there is no mention of any provision of the CA 2013 in the circulars issued by MCA, which establishes its statutory power. The question therefore is: where do these circulars find legislative backing?
Article 77 of the Constitution of India empowers the President of India to make rules for “convenient transaction of the business of the Government of India and for the allocation among Ministers of the said business.” Pursuant to this power, the Government of India (Allocation of Business) Rules, 1961, were promulgated, which empower the MCA to issue circulars; in fact, the MCA Circulars have been issued by the MCA in exercise of such powers. Therefore, while the legal authority of the MCA to issue circulars is well established, the validity of the extension of MCA Circulars is still in jeopardy.
The MCA Circulars are clearly contradictory to the legislative mandate of section 96, which requires an AGM to be held physically at either the registered office of the company, or at any other place where the registered office of the company is situated. Moreover, section 100 requires an EGM to be held physically at any place in India. However, since they were issued under extraordinary circumstances (during the lockdown) to allow compliance with government directives, the circulars find backing under section 72 of the Disaster Management Act, 2005, which states that its provisions shall have an overriding effect over other laws, including CA 2013.
However, it is pertinent to note that the said lockdown notifications are no longer in force. While we have returned to normalcy, the MCA continues to exercise its powers under Article 77 of the Constitution and continues to extend the validity of the MCA Circulars annually. This, in our opinion, will fail the test of constitutionality. It is settled law and several Supreme Court and various High Court judicial pronouncements state that the MCA, or any other government department, cannot issue any circulars against the provisions of law enacted by Parliament. A circular inconsistent with, or running counter to, or abridging statutory provisions, is invalid. Therefore, circulars issued by the MCA can “fill in the gaps” in the law passed by Parliament – but cannot be repugnant to CA 2013. In Palaru Ramkrishnaiah v. Union of India, the Supreme Court held that such circulars and clarifications cannot be contradictory to the principal legislation. If a circular issued by the MCA is repugnant to any provision of the 2013 Act or the rules framed thereunder, such a circular shall be unenforceable, to the extent of such repugnancy. A series of judicial decisions have also held that clarificatory circulars cannot amend or substitute statutory rules; but in case an Act or Rules made thereunder are silent, the Government can issue clarifications to supplement them.
It is pertinent to note that instead of merely issuing circulars, the MCA had the following three options to legitimize virtual AGMs/ EGMs:
- Amending the relevant provisions of CA 2013 to include virtual AGMs/ EGMs in its legislative scheme;
- Amending the Companies (Management and Administration) Rules, 2014, by a notification under section 469 of the CA 2013; or
- Issuing an exemption notification under section 462 of CA 2013.
However, by choosing to issue circulars, the MCA has taken the easy way out, despite the same being legally impermissible under the present scheme of CA 2013. In any case, since virtual AGMs/ EGMs have become a reality, it is imperative to assess the pros and cons, and determine whether an amendment to CA 2013 is the appropriate way forward.
Pros and Cons
Virtual general meetings are not a new concept and existed even pre-pandemic. A few jurisdictions that permitted purely virtual meetings were the United States, the United Kingdom and Hong Kong, albeit with sparse adoption.
In India as well, the first mention of virtual general meetings dates back to 2011, in General Circular No. 27/2011 dated May 20, 2011, wherein the MCA undertook its green initiative in corporate governance and permitted holding of general meetings through the electronic mode. However, as discussed above, the trend picked up during the pandemic, when the relaxation accorded from conducting physical AGMs and EGMs was brought about for a specific purpose, viz. ease the hardship faced by companies to conduct them during lockdown, and of shareholders to attend them during the lockdown.
Pros
- Physical AGMs had become inefficient and cumbersome, with attendance rates declining steadily and changing participation preferences. By hosting such meetings via VC or through OAVM, it has become easier for shareholders to attend them at the click of a button.
- Companies can avoid incurring the cost of hosting such meetings, as companies with large public shareholding would attract a significant number of shareholders, making it unfeasible to host the meeting at the registered office, and would require booking an alternate venue.
Cons
- A physical AGM allows shareholders to collaborate with one another on an issue, to ensure the management listens to their concerns. Further, shareholders can judge the body language of the management in response to sensitive queries. There is no way of compelling the management to respond to queries, which is possible in physical AGMs.
- Companies have more control of the engagement in a virtual AGM, as they can muzzle dissent by muting or not responding to more vocal shareholders, and also have an opportunity to screen difficult questions.
Concluding Thoughts/ The Way Forward
The MCA needs to strike a harmonious balance between the rights of minority shareholders on one hand, and the desirability of permitting virtual AGMs/ EGMs, due to large scale digitization and easier and cheaper availability of internet across the country. It will certainly lead to wider shareholder participation across the country. However, certain safeguards need to be provided to ensure that the management of companies do not abuse the facility to muzzle the voice of minority shareholders.
Also, it is inappropriate to issue General Circulars that are directly repugnant to the provisions of CA 2013. It is, therefore, advisable to amend the relevant provisions in the next round of amendments to CA 2013.
– Bharat Vasani & Ayush Lahoti