Proposal To Block Conversion Of Preference Shares May Get Delayed

The pressure from the domestic telecom lobby notwithstanding, the proposal to block conversion of preference shares into ordinary shares with voting rights in companies with sectoral caps is likely to get delayed. The government, at present, is considering the unfavourable consequences that the proposed amendment might lead to.

A Cabinet note on the proposal has already been prepared and circulated in the concerned ministries for their comments by the department of company affairs (DCA). However, the final clearance from the law, justice and company affairs minister, Arun Jaitley, is pending. The committee of secretaries (CoS) headed by the Cabinet Secretary had asked DCA to prepare the note.

Senior government officials, however, told Business Standard that the government feared such a proposal might scare away foreign direct investors in the country since it appeared to introduce an element of uncertainty about government decisions. They said the proposal would now be taken to the Cabinet only after weighing the pros and cons.

The government is under pressure from the domestic lobby which is pushing for the amendment, the officials said. "We are still considering if a government policy (relating to sectoral caps) should be allowed to overrule an Act of Parliament," they added. Allowing conversion of preference shares into ordinary shares as per the Companies Act could in some cases lead to a breach in the sectoral caps.

The proposal appears to be unfair to foreign investors in companies where the rule is applicable, a senior official said. Foreign investors who have not received any dividends on their preference shares might end up with no voting rights also.

The initial calculations, based on which they would have taken a decision to invest in these companies would go haywire now. The valuation of the investments would have depended to an extent on the provision of the Companies Act, he added.

At present, Section 87 of the Companies Act, 1956 grants voting rights to preference shareholders if the company does not pay dividends on cumulative preference shares for two years and on non-cumulative preference shares for three years.

The amendment, if carried through, would put to rest CDC Financial Services' claim for voting rights in BPL Cellular. The Mumbai High Court has, by way of an interim order, ruled in favour of BPL cellular.

In 1998, BPL Cellular had issued non cumulative non convertible redeemable preference shares of face value $41.3 million to CDC subject to the 49 per cent FDI cap in the telecom sector. BPL could, however, not pay any dividend due to recurring losses. CDC subsequently sought to invoke its voting right on all resolutions of the company. BPL argued that allowing CDC voting rights would tantamount to increasing the FDI limit beyond 49 per cent and go against the policy.