Law Firm in India

Can Preference Shareholders Get Voting Rights?

As per the Companies Act 2013, the preference shareholders do not get voting rights, except in some situations as mentioned in Section 47 of the Act. In this article, we will discuss these exceptions.

Voting rights in a company are one of the basic differences between equity shareholders and preference shareholders. In normal parlance, only equity shareholders get a right to vote while preference shareholders have no right to cast a vote in the matters of the company. 
The reason behind this is that equity shareholders are owners of the company, in a sense, thus, their opinion is important in the company’s decision making. Preference shareholders have no rights over the assets of the company, thus they are more outsiders to the company than the preference shareholders, which is why they haven’t been granted voting rights. Their position is also secure as compared to equity shareholders, who also have to bear the brunt of liabilities in event of liquidation. This difference makes equity shareholders vulnerable to poor decision-making of the management. Thus, they’ve been given voting rights as against preference shareholders. 
To understand the concept of voting rights in the Companies Act, 2013, one must read Section 2(93) along with Section 47. 
Section 2(93) of the Companies Act defined voting rights to mean ‘the right of a member of a company to vote in any meeting of the company or by means of postal ballot'.
Voting right is decision-making rights vested in members of a company that is exercised by them to approve or disapprove any resolution placed before them in the general meeting of the company. 
Voting rights under the Act extend the right to involve in decision-making beyond the top management of the company to the shareholders, principally equity shareholders so that they can contribute their poll to the final decision. 
However, just by buying the share, the right to exercise the right to vote isn’t extended automatically. As given by the Securities Appellate Tribunal in the case of Sharad Doshi v. Adjudicating Officer, the right to vote given to any shareholder can be exercised by him only when his name is visible in the company’s register of members. 
Under Section 47 of the Act, the right to vote of equity shareholders and preference shareholders has been dealt with. Section 47(2) throws light on the right of preference shareholders to vote and states that “every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares and, any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital and his voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company:

Provided that the proportion of the voting rights of equity shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares:

Provided further that where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.”
The right to vote of preference shareholders arises only in events when their interest is involved, that is to say, their right to vote is limited to resolutions where that affect their shares directly. It also arises in events when the company attempts to pass a resolution for winding up of the company, or where a resolution regarding the reduction of equity or preference share capital is involved. 
Section 47(2) also prescribes the extent of the right to vote granted to preference shareholders and states that the right to vote is proportionate to the share of such shareholders in the paid-up preference share capital of the company. 
However, the statute has attached two provisos to the section. The first proviso states that the voting right of the preference shareholders together, as against the equity shareholders together should be proportionate to the paid-up capital in respect to preference shares as against the paid-up capital in respect to equity shares.
Also, the second proviso mentions that in case the dividend hasn’t been paid to the preference shareholders for a consecutive period of two years or more, then such preference shareholders get an automatic right to vote in all the resolutions placed before the company, similar to the status of equity shareholders in terms of voting rights. 
Furthermore, the demarcation of voting rights of different classes of preference shareholders had been done in Section 87 of the former legislation, Companies Act 1956. The voting rights of cumulative and non-cumulative preference shareholders had been defined in Section 87, but the explanation limited itself to the event when a dividend hasn’t been paid by the company to the preference shareholders for two consecutive years or more. 
Section 87(2)(b) stated that “Subject as aforesaid, every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, be entitled to vote on every resolution placed before the company at any meeting if the dividend due on such capital or any part of such dividend has remained unpaid. In the case of cumulative preference shares, in respect of aggregate period of not less than two years preceding the date of commencement of meeting; and ii. in the case of non-cumulative preference shares, either in respect of a period not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of an aggregate period of not less than three years comprised in the six years ending with the expiry of the financial year aforesaid ”
Section 87 has been replaced in the new act, however, the position and status as regards the voting rights of the preference shareholders remain the same even in the new Companies Act 2013, by virtue of Section 47. 
The legal position mentioned in Section 47 of the current act, which is the successor of Section 87 of the previous act, has been reiterated in the landmark judgment of Surya Kant Gupta v. Rajaram Corn Product (Punjab) P. Ltd. In this case, the court upheld the right to vote of the preference shareholders of the company who hadn’t received any dividend since the incorporation of the company. 
The question which is posed before us now is whether the voting rights for preference shareholders exist even when the company is running in losses and is unable to declare a dividend owing to such losses. This question arises because of Section 123 of the Act, which has taken place in Section 205 of the 1956 Act. 
As per Section 123, no company can declare dividends except out of the profits earned by it during the financial year for which the dividend is due. This makes the company crippled in terms of declaring dividends for years in which it incurs losses, which can very well be two consecutive years. 
The answer to this proposition can be found in the Supreme Court’s judgment in the case of Ram Parshottam Mittal v. Hill Crest Realty SN BHDIn this case, the court had put the argument to rest by pronouncing that notwithstanding anything mentioned under Section 205 of the then operative Companies Act 1956, the company is required to give voting rights to preference shareholders in terms of all resolutions if they don’t declare dividend for such shareholders. This judgment was given on the basis of the explanation attached to Section 87 of the Companies Act 1956, which stated that due would mean to include the dividend which is either not paid or not declared by the company in the two years.
Though the explanation to Section 87 has been omitted by the new Companies Act 2013, the legal situation, as mentioned already, remains unfazed by the changes. Thus the judgment that was given by the court in the Ram Parshottam Mittal case still holds, despite the numerous changes brought to the legislation.
There is one catch in this entire process. A company can exclude the application of Section 47 if the company is private in nature and the articles of association of the company provide so. This is so because as per the legislation, Section 47 of the Act is applicable on private companies where a memorandum of association or articles of association provides for the same.
In conclusion, it can be deduced that the right to vote of preference shareholders is an exception to the general rule and shall only arise in some limited situations. In most cases, the right to vote of preference shareholders is limited to certain resolutions, while the right to vote in all resolutions shall be extended to the preference shareholders only if their dividend hasn’t been declared or paid by the company for two consecutive years.

The right to vote is a privilege availed by the equity shareholders, however, the uncertainty attached with these shares makes the right a valid consolation. On the other hand, preference shareholders enjoy a greater degree of certainty, thus they haven’t been granted to right to vote, except in some circumstances those are mentioned in the act.


Copyright 2022 – India Law Offices –

We would be happy to assist you!

By submitting this Helpdesk form that India Law Offices LLP has not solicited any Legal work.