Editor’s note: This guest column is written by Shantanu Surpure, partner at Economic Laws Practice, a Mumbai-based law firm specialised in venture capital, private equity and cross border transactions. Yashojit Mitra and Devyani Singh, associates at ELP, assisted in writing this article.)
As we continue our discussion of some comparative legal issues between the US and India, I thought it would be helpful to further analyse some of the minimum shareholding threshold amounts under Indian Law.
Foreign investment in India occurs through either the automatic route or approval route. The automatic route does not require further government approval. Investments in the approval route require further government approval such as from the Reserve Bank of India or the Foreign Investment Promotion Board.
Regardless of whether investment occurs through the automatic route or requires governmental approval, certain “sectoral caps” exist which serve to limit the amount of foreign investment in a company engaged in a particular section of the economy. Examples include: banking 10%, insurance 26%, telecommunications 49%, trading 51%, single brand retailing 51%. Why are these particular numbers important in Indian law? Is there a particular rationale?
The importance of shareholder thresholds
One of the key differences between Indian law and US law (i.e. Delaware) is that whereas pursuant to Delaware General Corporation Section 216, the Certificate of Incorporation or Bylaws of the company may specify the number of shareholder votes that may be necessary for the transaction of any particular item of business - under Article 189 of the Indian Companies Act, 1956 (the “Act”), certain actions require ordinary or special resolutions.
Therefore, there are certain shareholder percentage thresholds that one needs to consider in making investments in India because they result in certain rights or the ability to block certain actions. It is these specific shareholder thresholds that are critical in analyzing the sectoral caps.
The following are generally applicable to both public and private companies.
At 10% - the approval of at least 10% of the shareholders is required for the requisition of an Extraordinary General Meeting or for an application to the company Law Board for relief in the event of minority oppression or mismanagement of the company
At 26% - the approval of at least 75% of the shareholders (a special resolution) is required in order to inter alia:
- alter the Memorandum and Articles of the company
- change the name of the company
- repurchase the company’s shares
- change the registered office
- liquidate the company
At 51% - the approval of at least 50% of the shareholders (an ordinary resolution) is required in order to inter alia:
- alter/increase the share capital
- declaration of dividend
- to increase or reduce the number of directors
- to remove directors
- to appoint officers
Investors engaged in venture capital and private equity transactions in India generally insist on shareholders affirmative rights embodied in protective provisions in the definitive agreements and subsequent amendments of the Articles of Association of the investee company. This continues to remain a grey area in Indian law.
Pursuant to obiter dicta i.e. non binding language of the court in Re. Jindal Vijaynagar Steels Limited, if the shareholders in a company are permitted under law to transact any particular item pursuant to an ordinary or special resolution, the shareholders cannot restrict the ability of the company from so acting by placing such restrictions in its Articles of Association.
Therefore, it becomes critical when negotiating affirmative shareholders rights in an Indian transaction or in investing in sectors of the Indian economy in which there are sectoral caps, to consider the importance of certain shareholders threshold limits.
About the author
Shantanu Surpure is a partner at Economic Laws Practice (ELP) in Mumbai. He focuses on venture capital and private equity transactions. He has previously practiced law with a large US law firm in Silicon Valley. Shantanu holds a BA from Brown University/London School of Economics, an MA Juris from Oxford University and a Juris Doctor from Columbia Law School. Shantanu is admitted to practice law in India, California, New York and England and Wales. He can be reached at firstname.lastname@example.org.