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Company Audit

T Venkataramanujam (student) (41 Points)

08 August 2009

Can an auditor hold preference shares in a company in which he is appointed as auditor?

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Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 08 August 2009

No.

He can not be appointed in such company in which he holds preference shares. Reason being under Section 226(3)(e) Preference shares is a security which carries voting rights. Hence auditor is disqualified under the above mentioned section.

Regards

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shivanand s.k. (3rd sem) (30 Points)
Replied 08 August 2009

please send information about company audit

Ravi Jagetiya(CA Final) (Articled assistant) (191 Points)
Replied 03 September 2009

Originally posted by :Ankur Garg
"	No. He can not be appointed in such company in which he holds preference shares. Reason being under Section 226(3)(e) Preference shares is a security which carries voting rights. Hence auditor is disqualified under the above mentioned section. Regards	"

Hi sir please tell me where it is written that preference share is security and carries voting right

Madhusudan Kabra (knowledge seeker) (1779 Points)
Replied 08 September 2009

(3) None of the following persons shall be qualified for appointment as auditor of a company-

(a) a body corporate;

(b) an officer or employee of the company;

(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;

(d) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees;

⁵[(e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000.

Explanation.-For the purpose of this section, "security" means an instrument which carries voting rights.]

Explanation.-References in this sub-section to an officer or employee shall be construed as not including references to an auditor.

for further reffrence visit :- :- https://www.vakilno1.com/bareacts/companiesact/s226.htm

Regarding voting rites of p.s. holder

Voting rights on preference shares are creating serious complications under the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (takeover regulations).

The takeover regulations are primarily concerned with acquisition of equity shares since they carry voting rights. In 2002, the “Reconvened Bhagwati Committee” wanted to expressly exclude preference shares from the definition of the term “shares” for purposes of the takeover regulations, explaining that “preference shares normally do not carry voting rights.”

The Companies Act, 1956, which provides for two broad types of share capital–equity and preference–sets out circumstances in which preference shares too carry voting rights. Under the Act, preference shares are shares that entitle the holder to a “preference right” to dividend and to liquidation proceeds. All other shares are equity shares.

In other words, when the company makes profits, it is the preference shareholder who first gets paid the contracted rate of dividend. The equity shareholder is paid later. Similarly, when a company is wound up, the preference shareholder has a preference over the equity shareholder in the queue for distribution of residual assets after the discharge of all liabilities.

However, normally, only equity shares have voting power. Yet, should the dividend due on preference shares remain unpaid for the time periods specified in Section 87(2)(b) of the Act, preference shareholders too get a right to vote on every resolution of the company.

Such voting power on preference shares would be proportionate to the paid-up face value of the preference share capital as compared with the paid-up face value of the equity share capital. In other words, the voting power of the equity shareholders would automatically erode to make room for the preference shareholders.

Despite the Bhagwati Committee recommendation to expressly exclude preference shares from the definition of “shares” having been accepted, (the committee report even notes that in special circumstances, voting rights do arise), acquirers are now being forced to include voting power on preference shares within the scope of equity shares for purposes of takeover regulations.

To begin with, the voting power on preference shares springs up involuntarily, once the arrears on dividend payment cross the stipulated timelines. Of course, a secondary purchase of preference shares on which voting power has already accrued would be a positive voluntary act, but the takeover regulations are not structured to dealing with even that situation.

If the regulator were to force preference shareholders who involuntarily get voting rights to make an open offer, it would be unfair – the imposition of a pecuniary obligation on a person whose dividend is not paid, to fork out even more funds to buy additional shares in that very defaulter company.

Moreover, it ought to be remembered that no sooner than the company pays dividend, the voting power would automatically vanish. This is no parallel with forcing an open offer on purchase of equity shares, since there is no scope for voting power on equity shares to vanish involuntarily.

The takeover regulations mandate the open offer to be for “twenty per cent of the voting capital of the company”. However, even if one were to make an open offer upon accrual of voting rights on preference shares, there is no clarity on what the offer should be for –proportionate number of voting preference shares, or even more equity shares.

Worse, when the voting power on preference shares gets extinguished upon payment of dividend, the voting power of the equity shareholders would involuntarily increase again. If an involuntary accrual of voting power on preference shares were to trigger an open offer, so would an involuntary increase in the equity shareholders’ voting power. All of this would lead to an unhealthy disorder with frequent open offers being announced for shares of the company.

The conspiracy theorists would of course argue that companies could deliberately default on dividend to confer voting power on preference shareholders.

That would amount to cutting the nose to spite the face. Companies would have to consistently post losses to ensure that there is no dividend, or default on dividend despite profits, leaving even the equity shareholders high and dry. In either case, no one would touch such companies. Besides, the takeover regulations adequately empower Sebi to act against any such contrivance.

The Act now provides for differential voting rights even on equity shares. However, the rules for such issuance are quite unworkable. But if cleaned up, a further range of issues would arise.

The Indian market has indeed moved away from an era of cynicism to an era of compliance. The consequences of a default under securities laws are getting increasingly dreadful. There is an urgent need for clarity.

(business standered ;New Delhi December 04, 2006)

Madhusudan Kabra