Regulatory Framework Governing Gifts to Shareholders: In corporate practice, companies have historically expressed appreciation towards their shareholders through souvenirs, coupons or other forms of small tokens. This was particularly common when physical shareholder meetings were regularly conducted prior to the COVID period in certain Indian promoter operated companies.
A frequently asked question is whether companies are permitted to distribute gifts to shareholders? The position under law is fact sensitive and not absolute. However, the regulatory framework places certain restrictions, particularly where gifts are distributed at or in connection with a general meeting, as such practices may raise concerns regarding influence on shareholder voting.
Accordingly, it becomes important to understand the regulatory position under the Companies Act, 2013 read with Secretarial Standard-2 on General Meetings.
Section 118(10) of the Companies Act, 2013 requires companies to comply with the Secretarial Standards issued by the Institute of Company Secretaries of India and Clause 14 of Secretarial Standard-2 provides that:
“No gifts, gift coupons, or cash in lieu of gifts shall be distributed to members at or in connection with the meeting.”
The intent behind this provision is rooted in corporate governance considerations. Distribution of gifts at the time of a general meeting may give rise to a perception that shareholders are being influenced while exercising their voting rights.
At the same time, the Guidance Note -2 on General Meetings issued by The Institute of Company Secretaries of India, [1]to the aforementioned clarifies that certain practical aspects which are to be considered for companies are: [2]
- The restriction primarily applies to gifts distributed at the meeting or in connection with the meeting.
- One of the key concerns is that such distribution may benefit only those shareholders who physically attend the meeting.
- Any benefit provided with the intention of influencing the decision of members may also fall within the scope of a prohibited gift.
Regulatory Interpretation in Practice: A relevant regulatory example can be seen in the order passed by the Regional Director (Southern Region) in the matter of Madras Fertilizers Limited AGM Gift Card Case. In this matter, the company had issued SBI gift cards to minority shareholders during an AGM conducted through video conferencing. The company’s explanation was that the gift cards were provided in lieu of refreshments that would ordinarily have been served during a physical AGM.
Since the meeting was conducted during the COVID period, the company extended the gesture as a substitute for the refreshments that could not be provided in a virtual meeting. However, the authorities held that the company had violated Clause 14 of Secretarial Standard-2 on the basis that the gift cards were distributed in connection with the AGM.
Concerns Raised from a Governance Perspective: . It was observed in certain [3]
The Ministry emphasised that companies should refrain from distributing gifts or inducements during AGMs and that only light refreshments as a matter of courtesy may be provided. The underlying objective of this position is to ensure that the integrity of shareholder participation and voting is preserved[4].
Reading the Position: From the above, it can be understood that the restriction is not on gifting per se, but on gifting which is linked to the conduct of a general meeting.
The concern primarily appears to be on timing of the benefit; linkage with the meeting; and possibility of influence on shareholder decision making.
At the same time, it is also relevant to note that benefits which are extended uniformly and not linked to the meeting may not attract the same level of regulatory concern.
What is Allowed: While Secretarial Standard-2 restricts distribution of gifts in connection with meetings, it does not mean that companies are completely prohibited from extending benefits to shareholders.
Key compliance considerations from a practical standpoint, companies should keep the following aspects in mind:
- Gifts should not be distributed at or in connection with an AGM;
- Any benefit should not be linked to attendance, participation, or voting at a meeting;
- Promotional offers or coupons should be uniformly available to all shareholders;
- The purpose of any benefit should remain corporate goodwill rather than influencing shareholder decisions.
Intent Behind Allowing and Restricting Certain Practices: The distinction appears to be based on preserving the integrity of shareholder meetings. While companies are allowed to engage with shareholders and extend goodwill gestures, the law seeks to ensure that such gestures do not have any bearing, direct or indirect, on shareholder participation or voting at a general meeting.
Accordingly, what is restricted is not the act of gifting itself, but the possibility of such gifting being perceived as an inducement.
Conclusion: While the position appears clear in principle, certain practical questions continue to arise:
At what point does a courtesy become a benefit?
Whether a benefit provided before or after an AGM can still be regarded as being “in connection with” the meeting?
How should companies approach such practices in a virtual meeting environment?
Whether uniform distribution alone is sufficient to remove governance concerns?
The regulatory framework does not prohibit companies from expressing appreciation to their shareholders. However, it is important that such gestures remain clearly separated from the conduct of shareholder meetings and the exercise of voting rights.
Notes:
[1] https://www.icsi.edu/media/webmodules/GN2_Guidance_Note_on_General_Meetings.pdf
[2] Please refer to page 98 of 188 of the GN-2
[3] https://taxguru.in/company-law/draft-circular-providing-gifts-shareholders-annual-general-meeting-agm-company-comments-invited.html MCA July 29, 2011 circular.
[4] ibid
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Author: Jasmeet Singh Joshi, Manager , SEBI Team
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