Institutional Investors Oppose Call for Differential Voting Rights; India Allows Differential Shares, For Now

The call of UK Finance Minister Paul Myners’ for differential voting rights for shareholders depending on the length of time they have held shares in the company has met with opposition from institutional investors. At the same time, India broadly permits differential voting rights under conditions set forth in the Companies Rules of 2001. The concept of differential voting rights envisions giving shareholders additional votes depending on their length of status as shareholders.

Reacting to the proposal of Lord Myners, the National Association of Pension Funds said that a two-tier shareholder system would not be able to take into account the need for pension funds to buy or sell shares based on external factors, in line with their need to look after their members’ interests. The association said that a more effective approach would be to improve dialogue between pension funds and their fund manager agents with the companies in which they invest. This would help to ensure there is a better alignment of interests between long-term investors, such as pension funds, and investee companies.

As the debate over the UK Minister’s proposal continues, India has shown the way to differential voting with the adoption of the Companies Rules of 2001 by the Ministry of Corporate Affairs. The rules allow all Indian public companies to issues shares with differential rights as to dividends and voting, contingent on shareholder approval at the general meeting. The issuance of shares is conditioned on a number of factors. For example, in order to issue differential voting shares, a company must pay a dividend and have made distributable profits for at least the preceding three years. Similarly, the company must have filed annual accounts and returns for the preceding three financial years before issuing the differential shares. Also, the company cannot have a conviction under the Securities Exchange Board of India Act.

However, interestingly, the Companies Act of 2009, introduced in the Lok Sabha (lower house of Parliament) last month, would eliminate shares with differential voting rights as part of a far-reaching reform of Indian corporate governance. The proposed Companies Act, which would replace the 1956 Companies Act, seeks to implement a vision of shareholder democracy, with protection of the rights of minority shareholders.

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