FIIs can't control firms via pref shares

NEW DELHI: The government is set to place restrictions on foreign investors seeking voting rights on preference share holdings in lieu of dividend in case of companies where sectoral caps for foreign equity participation apply.
A provision to this effect has been included in the Companies Amendment Bill, 2003 being introduced this week.
The provision has been introduced to ensure that the preference share route is not used by foreigners to gain control of a corporate entity.
The existing provisions of the Companies Act, 1956, allows holders of cumulative preference shares to seek voting rights on all resolutions placed before the board of a company if they have not been paid dividend for two years.
Similarly, the holders of non-cumulative preference shares are entitled to seek voting rights if the dividend remains unpaid for three years.
Once the new provisions come into force, foreign investors in preference shares of Indian companies would be entitled to voting rights on par with their holding only if the voting rights so acquired are within the sectoral cap level. In all other cases, the holders would be entitled to differential voting rights.
More importantly, if the foreign equity participation is at the maximum permissible level in a company, the preference shareholder may not be allowed any voting rights.
Sources said the amendment bill will have provisions enabling the government to place restrictions and make changes in accordance with changing FDI policies.
The issue of restricting voting rights on preference shares if it leads to breach of sectoral cap been under consideration for almost two years now, ever since foreign investors in BPL Telecom sought voting rights on their preference shares.