Context

Shareholder meetings form the bedrock of shareholder democracy in a corporate institution. It provides shareholders with the opportunity to participate in the affairs of a company, allowing them to vote in favour or against resolutions, and empowers them to question the policies and working of the management of a company. Majority and minority shareholders have the right to attend meetings, and in case of any difficulty, even designate a proxy to attend meetings on their behalf. Primarily, there are two types of shareholder meetings in India:

1. Annual General Meeting (“AGM”) – As provided for 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.
2. Extraordinary General Meeting (“EGM”) – As provided for 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/ EGMs has picked up since the pandemic. In this blog, we assess the validity of MCA Circulars (as defined below), and if 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 and 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, transact urgent items of business like raising of capital, change of directors, etc. Hence, for the purposes of achieving compliance, representations were made to the Ministry of Corporate Affairs (“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 (“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, allowing AGMs to be conducted via VC or OAVM in 2024 or 2025.

Validity of MCA Circulars

The 2013 Act does not include any express provision which 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, inter alia, 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 enacted, which empower the MCA to issue circulars, and 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; and Section 100, which 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, it finds 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, passed 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 the case of Palaru Ramkrishnaiah v. Union of India[1], it was 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:

1. Amending the relevant provisions of CA 2013 to include virtual AGMs/ EGMs in its legislative scheme;
2. Amending the Companies (Management and Administration) Rules, 2014, by a notification under Section 469 of the 2013 Act; or
3. 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 correct 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 US, UK 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 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 was accorded for to conduct 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

1. 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/ investors to attend them at the click of a button, without the hassle of travel.
2. Companies can avoid incurring the cost of hosting such meetings, as companies with large public shareholding would attract large number of shareholders, making it unfeasible to host the meeting at the registered office, and would require booking an alternate venue.

Cons

1. 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 forcing the management to respond to queries, which is possible in physical AGMs.
2. 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 digitisation and easier and cheaper availability of internet across the country. It will certainly lead to wider shareholder participation, located across the country. However, certain safeguards need to be provided to ensure that the management of companies don’t 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.

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[1] AIR 1990 SC 166