Affirmative Rights

A minority investor normally has little say. If a matter needs only an ordinary resolution and the promoter holds the majority, the promoter decides. An AIF putting tens of crores into a company it does not control will not accept that for the decisions that could destroy its investment.

Affirmative rights are its answer. The workbook defines them as "those corporate actions that require the approval of the investors irrespective of the extent of their shareholding in the company". Even if an action could be passed by an ordinary resolution — the workbook's shorthand is a simple majority of 51% — it "cannot be carried through without such shareholder's express consent".

The workbook calls these positive control: the power to influence corporate actions. Their mirror image is the veto right — negative control, the right to oppose an action even when it has the requisite majority.

The standard list. The workbook sets out fifteen matters on which investors commonly insist on affirmative rights:

1. Changes in capital structure through new issues (preferential or otherwise) or a buyback — the restriction on new issues is also known as a pre-emption right on future capital issuances.
2. Alteration of the memorandum and articles of association.
3. Raising secured debt or issuing debt securities beyond agreed limits.
4. Any new fund raising, except renewal or enhancement of normal working capital limits.
5. A proposal for an IPO, indirect listing or listing of debt instruments.
6. Investments outside the ordinary course of business.
7. Any change in the business plan or activities.
8. Spinning off, starting or divesting subsidiaries.
9. Any rearrangement, reconstitution, merger or amalgamation.
10. Disposal of assets above an agreed value outside the ordinary course of business.
11. Suspension or discontinuance of business activities.
12. Any action to initiate winding up.
13. Changes in board constitution by appointing new directors.
14. Appointment or removal of auditors.
15. Appointments, terminations and changes in service conditions of key managerial personnel.

Affirmative versus veto. Veto powers are insisted upon for some of the same actions as an alternative to affirmative rights. The workbook's example: the ratchet protection against a down round can be achieved "even through a veto power on further issuances of shares", preventing dilution of the investor's equity.

Where they sit. Affirmative and veto rights are negotiated in the term sheet and written into the definitive agreements, with the articles amended so they are enforceable.

Illustrative figures. Vindhya Capital Fund holds 16% of Pench Agritech Pvt Ltd after investing Rs 32 crore. The founders hold 70%. The SHA gives the fund affirmative rights on the standard list.

On the rights issue, the promoters' 70% would comfortably pass an ordinary resolution. It still cannot proceed without the fund's express consent. That is the difference between voting power and an affirmative right.

Had the fund negotiated only a veto on new share issues rather than an affirmative right, the practical result on that item would be similar — but the right would be framed as a power to block, not to approve.

Chapter 7 (Investment Process and Governance of Funds) lists "affirmative and veto rights" among its learning objectives and sets out the rights and their standard list at 7.4.4, within the overview of investor protection rights. A sample question at the end of Chapter 7 states "'Affirmative right' means the right to exit the company" (false). Expect definition questions (irrespective of shareholding; positive control versus negative control) and "which of the following is a typical affirmative right matter" questions.

• Affirmative rights are not exit rights. Exit rights are ROFR, ROFO, tag along and drag along; the chapter's sample question tests exactly this confusion.
• They apply irrespective of shareholding. A small minority holder can have them.
• Affirmative = positive control; veto = negative control. Do not swap the labels.
• Renewal or enhancement of normal working capital limits is the standard carve-out from the new fund-raising restriction.
• The restriction on new issues is also called a pre-emption right on future capital issuances in this list — distinct from the pre-emptive right under section 62 of the Companies Act, which is a right to participate pro rata in future issues.
• A veto can achieve anti-dilution protection too — the workbook gives the ratchet example through a veto on further issuances.