Wednesday, November 4, 2009

E-Voting in Indian Companies

Public (or retail) shareholders in a company usually exhibit traits that result in “collective action problems”. This refers to the difficulties that arise in achieving consensus among a diffused set of shareholders who do not play an active role in the company. These problems are exacerbated by the heterogeneity of interests and differing levels of information available with these shareholders. For these reasons, public shareholders seldom participate actively in general meetings of the company. In most cases, decisions of general meetings are a foregone conclusion as resolutions proposed by the board and management (with the tacit approval of the majority shareholders) are only put through the formal motion at the meetings. Public or minority shareholders make their appearance in small numbers, and their votes cast are not sufficient to cause any dent to the majority decision. Such problems are compounded because general meetings (which are often held in locations that are not prominent or easily accessible) require shareholders to be present in person or by proxy.

A solution to this problem was devised about a decade ago, which was voting through postal ballot. Section 192A of the Companies Act, 1956 provides that listed companies are required mandatorily to obtain resolution of shareholders through postal ballots on certain matters, and optionally on other matters. However, this has failed to achieve the intended result.

It has now been proposed, as reports (here and here) suggest, that online voting be introduced. There would be no legal or regulatory hurdle to begin with as the explanation to Section 192A states: “For the purposes of this section, "postal ballot" includes voting by electronic mode.” Hence, it is a question of prescribing the appropriate mechanism for electronic voting, which is an exercise reportedly being undertaken by the depositories.

Although it would be difficult to estimate the true extent of change that this proposal would usher in, it is certainly a move in the right direction. Electronic voting may motivate more shareholders (including individuals) to exercise their corporate democratic right with greater convenience, and this may signal greater acceptance of shareholder activism in the Indian context by addressing the collective action problems (at least partially).

1 comment:

G said...

In a Section 25 Company such as Clubs which are limited companies, 1. is there a need to obtain prior company law or any other approval before electronic voting is introduced?
2. if electronic voting is introduced, does it mean that postal ballot is also automatically in?
3. If so, is postal ballot mandatory for changes in Articles?
G. Jacob,