RIGHTS OF SHAREHOLDERS UNDER THE COMPANIES ACT, 2013

Happy employees ensure happy customers. And happy customers ensure happy shareholders-in that order.

Simon Sinek

INTRODUCTION

Shareholder is a person who owns some shares in the company. By virtue of which, he becomes the owner of such company to that extent. And by virtue of which, he enjoys certain rights as a shareholder. The shareholders, subject to share capital, can be either equity shareholders or preference shareholders. The rights and duties of them vary accordingly. As per §47 of Companies Act, equity shareholders always have the right to vote in the appointment of directors and in passing of other company resolutions. While preference shareholders can vote only in certain situations. There are other rights which shareholders (equity ones mostly) enjoy. These rights include appointment of directors and auditors, right to receive dividend, right to transfer ownership by selling shares, make proposals, dissent and right to recall and attend general body meetings, right to information and inspect company registers, books and financial statements, right to sue directors for their wrongful activities etc. Being the owners of the company to the extent of their shares, the shareholders involve in fundamental activities and changes of the company. They indirectly govern the company and administer its business activities through Directors appointed by them.

SHAREHOLDERS IN INDIA

The Companies Act, 2013 doesn’t specifically define the ‘shareholders’ as such. However, as per Section 41 of the Act, the members can be categorized into three classes; members who subscribe to MOA of the company when it is formed, those who agree to company’s policy and whose name is registered by ROC, and those holding equity shares in the company and whose names are registered in the depository as a beneficial owner. As per the general view, a shareholder or stockholder is the person who subscribes or buys minimum of one share in the company. And he accordingly becomes the owner of the company to the extent of such purchase. More shares he purchases, the greater ownership he will possess.

Subject to the MOA and AOA of the company, any person can become a shareholder in a company by purchasing the shares and person includes both natural as well as artificial entities. It means that a company can also become a shareholder by purchasing the shares in a particular company. Subscribing to the shares of a company leads to a contractual relationship between company and the shareholder. Hence, any person competent to enter into contract under Indian Contract Act, 1872 can become a shareholder. It can be a company, an association, an institution or an individual.

Shareholders are of two types; equity or ordinary shareholders and preferential shareholders. Equity shareholders are the most prevalent type seen. As per §47 of Companies Act, equity shareholders always have the right to vote in the appointment of directors and in passing of other company resolutions. While preference shareholders can vote only in respect of the resolutions concerning them. Unlike equity shareholders, the dividend of preferential shareholders is fixed and is given to them even if company makes no profits. Equity shareholders are paid at last when dividend is divided or when company is wound up. While preferential shareholders are paid first. Apart from this, shareholders (equity ones mostly), by virtue of their position, enjoy various rights such as appointment of directors and auditors, right to receive dividend, right to transfer ownership by selling shares, make proposals, dissent and right to recall and attend general body meetings, right to information and inspect company registers, books and financial statements, right to sue directors for their wrongful activities etc. Shareholders and Board of Directors are the two important pillars of a company as far the company’s business is concerned. They fundamentally run the company. Being the owners of the company to the extent of their shares, the shareholders involve in fundamental activities and changes of the company. They indirectly govern the company and administer its business activities through Directors appointed by them

TYPES AND RIGHTS OF SHAREHOLDERS UNDER THE COMPANIES ACT, 2013

Shareholders are the owners of certain rights and interests in the company. These rights and interest are permanent and are measured in terms of money. It is a ‘chose in action’ type of interest or property which one is not having immediate possession of but has the right to it which can enforced by legal action.

Types of Shareholders

On the basis of types of shares bought or held, the shareholders are of two types; equity (common or ordinary) shareholders and preferential shareholders.

i: Equity Shareholders

They are also called as common or ordinary shareholders. They are most widely seen in corporate businesses. According to §43 of the Companies Act 2013, company’s share capital can be either equity share capital or preference share capital and the people subscribing to equity share capital are called as equity shareholders. They have voting rights and differential rights. The dividend is not fixed and depends upon the profits company makes. They are the last paid off at the time of dividend, or repayment of capital or at winding up. It is a risky but highly profitable source of investment. Through voting rights, the equity shareholders have a control over management of the company as they choose the Board of Directors through voting. Equity Shareholders can sell their shares to only to other buyers in the stock market but not to their own company. If their own company wants to buy them, they have to make a public offer to buy back such shares. E.g., Infosys

ii: Preferential Shareholders

The people subscribing to preference share capital are called as preferential shareholders. As per §43, they have to be given the preference at the time of distributing dividend and repayment (of capital or at the time of winding up). Preferential Shareholders have voting rights only with respect to the resolutions concerning them. The amount of dividend or profit is fixed and given to them even if company makes no profits. It is a profitable and safe source of investment. Section 47 says that if dividend fixed is not paid to them consecutively for two years, they acquire a position to vote in all resolutions. Preference shares are not traded in the stock market. Hence, their prices don’t vary usually. After certain time, preference shareholders can sell back their shares to the company.

Rights of Shareholders

By virtue of purchasing shares in the company and subsequent ownership to such ownership, the shareholders enjoy the following rights under The Companies Act, 2013. These rights were comprehensively discussed by Supreme Court in the case of Life Insurance Cooperation of India V. Escorts Ltd.

i: Right to Vote

Section 47 of the Act states that every equity shareholder has a right to vote in the resolutions passes by the company. It is also mentioned in the §43(a)(i) ad (ii) of the Act. however, the voting rights given to them are in proportion to the shares they have paid up for in the company. While as preference shareholders have the right to vote only in the resolutions concerning them. It also includes the resolutions for winding up or for repayment or reduction of equity or preference share capital of the company. They receive the fixed dividend which if not given to them consecutively for two years or more, they acquire a right to vote in all the resolutions of the company. Equity shareholders can appoint directors through voting and other institutions and individuals such as subsequent auditors in AGM. However, Section 106 of the Act says that company through its AOA can restrict voting rights of shareholders in certain cases such as unpaid shares and shares on which the company exercises right to lien. The section further states that voting rights can’t be restricted on any other ground. The vote can be made by showing hand, through proxy or through electronic means, by polling or through postal ballot.

ii: Right to Receive Dividends

Every shareholder whether equity or preferential, has a right to receive dividends at the end of the year according to the number of shares they hold in the particular company. Equity shareholders have also the right to receive interim dividend if declared by the Board of Directors. The dividends for equity shareholders are not fixed and depends upon the company’s business. While for preferential shareholders, the amount of dividend is fixed and given to them even if company makes no profits. The preference shareholders are preferred first over the equity ones, when the dividend is distributed or repayment during liquidation. A declaration for distribution of dividends is made by the Board with the authority of shareholders. Once such declaration is made, it creates a statutory debt against company in favour of shareholders. Shareholders’ right in the profits of the company exists irrespective of such declaration and they can claim such right by questioning Board in case no declaration is made despite company making profits.

iii: Right to Participate in General Meetings

According to Section 96 of the Companies Act 2013, the company is required to convene annual general meetings. The shareholders have the right to call for and attend general meetings of the company. They also have a right to approach Company Law Board as to how general body meetings will be conducted. The shareholders can also ask for extraordinary general meetings via board. It has to be convened by board within 21days and if it failed to do so after expiry of 45 days, the shareholders acquire right to convene it by themselves. All shareholders have the right to receive notice of annual general meetings, extraordinary general meetings, participate and vote in such meetings.

iv: Right to Transfer of Shares or Securities or other Interests

Section 44 of the Act states that the shares or debentures of a holder in the company are movable property and can be transferred through a process given by the AOA of the company. Sometimes, restrictions can be there upon such transfers and transmissions. Section 56 provides for such transfers and transmissions of shares and other interests between living shareholders and from deceased to successor/administrator respectively. While Section 58 provides for restriction upon such transfers which can be put by private company through its AOA or through pre-emptive clauses. There can also be private agreements between shareholders not there in AOA of the company. Such private agreements restricting transfers doesn’t bind the company though. However, such contracts or agreements are enforceable by members. Directors have the discretion to restrict the transfer of shares by shareholders. Such discretion is subjected to judicial and quasi-judicial interference in case it is mala fide or no adequate reasons are given or irrelevant considerations are provided.

v: Right to Initiate Legal Proceedings or Appeal to Tribunal

Although shareholders have to accept the decision made through majority voting. However, he has certain rights still with him. His right to receive dividend is an inherent right there irrespective of whether dividends are declared or not. If declaration is made but dividend is still not distributed. He has right to initiate legal suit. If the transfer or transmission is made by shareholders under §56 of the Act and it is not registered by the company, shareholders have the right to approach Tribunal with an appeal. Although an ordinary resolution is enough to appoint directors or remove them in certain situations. However, if it didn’t suffice, then the shareholders can commence legal actions under the Act. It includes fraud, mala fide acts, diversion of funds and assets of company; and other illegal and ultra vires acts which are prejudicial against the company affairs. They can also challenge resolutions before Tribunal on the grounds of mismanagement and oppression. A class action can also be filed by the concerned group of depositors or shareholders in situations mentioned under §245.

vi: Right to Information and Inspection.

Shareholders are the important structures of company. They have interests in the company in the form of their shares. Hence it is important to have all the financial and other fundamental information with respect to company’s business and management. They can ask questions to the Board where decisions are taken and inspect registers and account books of the company. Such as in the case of company making declaration of dividend with no subsequent distribution or no declaration at all. Section 129 provides that financial statements of the company has to be presented in AGM so that shareholders know the financial position of the company. The copies of financial statement and audited financial statement have to be given to them. have to be given to the shareholders. It is the duty of the company to send such statements to its shareholders. They have the right to know company general and monetary records and data, ask questions, require clarifications and can also challenge decisions. Section 119 provides right to the shareholders to inspect minutes of the meetings held which if refused, member can approach the Tribunal.

vii: Right to Proxy

Section 105 states that any person who is entitled to participate and vote in the meeting can also appoint a proxy who can do the same on his behalf in the meeting. However, there are certain restrictions. The proxy can only vote and speak in polling and he is not to be counted in quorum. Subject to the AOA of a company, proxies can not be appointed in companies without share capital. This right is important for the convenience of holders who due to absence or residing away from the company, can’t attend the meeting.

viii: Right to Alteration of MOA and AOA

Section 13 provides that MOA can be altered by passing a special resolution to that effect. The special resolution is passed where 75% of the shareholders who agree to such alteration. MOA is the fundamental and structural document of the company which defines the possible scope and management of the company and its operations. Similarly, Section 14 says that the AOA can only be altered by passing a special resolution signed by 75% of the shareholders. hence, shareholders play a significant role by possessing the right to amend memorandum and articles of the company.

ix: Right to Apply for Winding Up of Company

The shareholders have the right to apply for the winding up of company. Section 371 of the Act provides that a special resolution can be passed by the shareholders and apply to Tribunal to wind up the company. In the case of Chiranjit Lal Chowdhuri v Union of India, the Supreme Court held that shareholder has an interest in the company. It is a movable property which he can transfer, mortgage, pledge and sold. It gives him right to vote and hence involves indirectly in the company management. If these rights are refused to him, he can along with majority of shareholders institute action for winding up of company. Shareholders have to be informed of winding up.

x: Rights Issue

Under Section 62(1)(a) of the Act, the shareholders have the right to buy the shares when company decided to further issue or increase the subscribed share capital. They are to be issues to equity shareholders according to their held paid-up share capital. Hence, existing shareholders have a pre-emptive right when company further issues its shares.

xi: Right to Receive Share in Surplus Assets

When the company is wound up, shareholders have the right to get the shares in the surplus assets of the company at that time. The right is guaranteed by Section 297 of the Act and casts responsibility upon the Tribunal to distribute such surplus assets.

xii: Other Rights of Shareholders:

• Make written recommendations to improve corporate governance in their company.
• Make proposals to Board for improvements and other investment projects etc.
• Right to be employed by their company and can act in dual capacity.
• To ensure there is no competition from other shareholders against company.
• Right to be named in the register and tagged in sales etc.

SHAREHOLDERS’ RIGHTS IN INDIA AND UK: COMPARATIVE ANALYSIS

In India, the shareholders enjoy multiple rights both statutorily and otherwise. These rights are given by The Companies Act of 2013. They have been termed as fundamental rights of shareholders by the Supreme Court in multiple cases. In UK, the Companies Act of 2006 along with other secondary legislations govern the corporate businesses. It was the Company Act of 1866 which was enacted in British India. This led to India Company Act of 1956. Hence, there are various similarities between the Indian Companies Act (2013) and UK Companies Act (2006). However, there is no single statement when it comes shareholders’ rights. However, some general statutory rights are seen everywhere. The English Companies Act of 2006 subjected to the AOA, provides some additional rights when compared to the Indian Companies Act of 2013. Furthermore, the Draft Shareholder Rights Directive adopted by the UK government provides various other rights to the shareholders without affecting the existing ones in the Companies Act, 2006.

Rights of Shareholders in UK

The shareholders in UK also called as members, enjoy various rights. Such as right to dividend, right to information and inspection, voting rights and appointments rights in case of directors and auditors, right to appoint proxy, right to request Board to convene meetings, right to receive notice of general meetings, right to initiate proceedings, right to winding up of company etc. The abovementioned additional rights include:

• Right of the shareholders to be treated equally.
• Rights to get published the votes casted in resolutions, on company’s website.
• Right to block a special or an ordinary resolution.
• Right to approve long term service contracts of Directors, substantial property and credit transactions, loans and quasi-loans, etc.
• Right to receive a prior notice of 30 days for general meetings.
• Right of joint shareholders to appoint a proxy with voting rights.
• Right to derivative claims.
• Right of shareholders to raise audit concerns in the general meetings and get them published on the official website of the company.

Compared to Indian Companies Act, the UK Act is very comprehensive and exhaustive company law legislation. The shareholders rights given in Indian Companies Act (2013) are all there in the UK Companies Act, 2006. The later provides certain additional rights mentioned above such as right to equal treatment, right to block resolutions, right to get votes and audit concerns published on the company’s website etc.

Shareholders facing Unequal Treatment

Whether general shareholders or the minority ones, the Indian shareholders face unequal treatment when it comes to involvement and participation in the company business. The concern has also been raised by the World Bank itself in the report on Corporate Governance Assessment. It stated that it doesn’t provide adequate rights and protection to its minority shareholders which has impacted the Indian economy. The dominant and majority shareholders have much greater say in the appointment of directors. The independent directors which were supposed to bring that gap aren’t that neutral. The auditors need to be independent and the process of auditing must be qualitative and transparent in nature so protect the rights of shareholders. The provisions of transparency, accountability and stringent enforcement of existing provisions is the need of the hour. This would eventually protect rights of shareholders and improve corporate governance.

RECOMMENDATIONS

Shareholders are the members of the company who have certain transferable interest in the company. They buy the shares or stocks of the company and enjoy certain rights. Through these rights, they directly or indirectly get involved in the management of the company business. In India, these rights include right to vote and appoint, right to information and inspection, right to file legal action and apply for winding up of company, right to appoint proxy, right to receive dividends and assets etc. Also regarded as fundamental rights of shareholders, these rights are enshrined under the statute of Companies Act, 2013. The Act is not exhaustive when it comes to the rights of shareholders. Hence, some additional rights can be provided to the shareholders to increase their involvement in the company, improve corporate governance and bring about much more transparency in the corporate businesses.

The corporate business in UK is governed by the UK Companies Act, 2006. The Act is very comprehensive in nature and provides various rights and privileges to the shareholders in UK. They not only enjoy the rights given to shareholders in India, but various other additional rights and provisions are there. These rights include right of shareholders to be treated equally, right to publication of votes and audit concerns, right to block resolutions, right of joint shareholders to appoint proxy for them etc. The Act includes provisions of both incorporation and corporate governance. It also includes the provisions to bring about transparency and accountability in the corporate business. There is a uniformity in the company law in UK.

The need is to incorporate these provisions into the Indian Companies Act, 2013. The corporate laws in India are scattered. The need is to bring uniformity in the law by bringing a comprehensive company legislation into existence. The rights of shareholders in the Indian Companies Act, 2013 are not exclusive. Hence, new rights can be incorporate into the Act to bring equality among shareholders and transparency; and accountability among Directors. This will increase the investors and will lead to overall corporate development.

CONCLUSION

The shareholder or stockholder is the person who subscribes or buys minimum of one share in the company. And he accordingly becomes the owner of the company to the extent of such purchase. More shares he purchases, the greater ownership he will possess. By virtue of this position, the shareholders enjoy various statutory rights under the Indian Companies Act, 2013. These rights include the right to receive dividends, right to vote, right to appointment directors, subsequent auditors and other persons, right to appoint proxy, right to information and inspection of the important documents of the company such as financial statement, books of accounts etc., right to initiate proceedings against company, right to apply for winding up of the company, right to get share in the surplus assets of the company etc.

Based on the type of shares they are holding; the shareholders can be equity shareholders or preference shareholders. Equity shareholders enjoy voting rights and hence get indirectly involved in the management of the company. While preference shareholder, though preferred when dividends are distributed, enjoy voting rights only with respect to the resolutions concerning them. Although the rights are provided in the statute, but shareholders still don’t completely get the rights and safeguards Act provides. It has been seen from a very long time that minority shareholders face subjugation in the hands of majority shareholders. There are no express transparency and accountability provisions in the act itself. Apart from this, there are no provisions to promote equal treatment among shareholders. Compared with UK Companies Act of 2006, later has incorporated all these provisions. Hence, the need is two-fold. First to incorporate these provisions of equal treatment, transparency, accountability and more inclusion of shareholders in the company business. And the second need is to strictly implement the existing provisions of the Act which provides certain rights and safeguards to the shareholders in India. The corporate laws in India are scattered. The need is to bring uniformity in the law by bringing a comprehensive company legislation into existence

REFERRENCES

Cases

• Bennett Coleman & Co. & Ors vs Union of India & Ors, 1973 AIR 106.
• Chiranjit Lal Chowdhuri vs The Union of India And Others, 1951 AIR 41.
• Foss v. Harbottle, (1843)2 Hare. 461 (US).
• Life Insurance Cooperation of India V. Escorts Ltd, 1986 AIR 1370 (India).

Legislations

• Companies Act, 2013 (India).
• Companies Act, 2006 (UK).
• Shareholder Rights Directive, 2007 (UK).

Books

• Dr. G.K Kapoor, Company Law and Practice, Taxman Publishers 223 (24th Ed. 2019).

Reports

• World Bank Report on the Observance of Standards and Codes, (WB-IMF, 2004).

Web and Journal Articles

• Ben Madden, Shareholders Statutory Rights, Clarkson Wright & Jakes (11 July, 2019 12:26), https://www.cwj.co.uk/cms/document/shareholder_statutory_rights_for_emailing.pdf.
• B.S Kothari, Rights of Shareholders under The Companies Act, Indian Law Institute 211 (2015), http://14.139.60.114:8080/jspui/bitstream/123456789/693/28/Rights%20of%20Shareholders%20under%20the%20Companies%20Act.pdf.
• Chewtha & Arya R, The Importance of Shareholder and their Role in Corporate Governance in India, 120 International Journal of Pure and Applied Mathematics 76 (2018).
• Dr RK Agrawal, A Comparative Study of UK Companies Act,2006 & Indian Companies Act, 2013, 1 International Education and Research Journal 35 (2015).
• IF Desk, Shareholder Rights under Companies Act, 2013,  India Filings (22 May, 2018 14:40), https://www.indiafilings.com/learn/shareholder-rights-companies-act-2013/.
• Jyotsana Uplavdiya, Powers and Duties of Shareholders under Companies Act, Latest Laws, p. 4, https://www.latestlaws.com/wp-content/uploads/2018/09/All-About-Powers-and-Duties-of-shareholders-under-Companies-Act-By-Jyotsana-Uplavdiya.pdf.
• Kumar Gourav, Rights and Duties of Shareholders of a Company, Ipleaders (June 9, 2019), https://blog.ipleaders.in/shareholders-rights-duties/.
• Naveen Kumar, Corporate Governance in India: Case for Safeguarding Minority Shareholders’ Rights. 2 International Journal of Management and Business Studies 9 (2012). 
• Nayyar & Priya, Investor’s Protection, Acadmike (30 Apr., 2015 19:46), https://www.lawctopus.com/academike/investors-protection/#_edn12.
• Neal Watson, Shareholders Rights in UK (England and Wales), Thomson Reuters (01 Jan., 2019 22:04), https://uk.practicallaw.thomsonreuters.com/5-613-3685?transitionType=Default&contextData=(sc.Default)&firstPage=true.
• Richard C. Nolan, Shareholder Rights in Britain, 7 European Business Organization Law Review 566 (2006).
• Rudra Kumar & Vishal Nijhawan, Shareholders’ Rights and Powers in India, Lexology (10 July, 2018 12:02), https://www.lexology.com/library/detail.aspx?g=c644e5fb-de6e-461c-886e-56aba0902939
• Sakate Khaitan & Aditi, Shareholders’ Rights in Private and Public Companies in India: Overview, Thomson Reuters (01, Oct., 2020 20:49), https://ca.practicallaw.thomsonreuters.com/7-615-1126?transitionType=Default&contextData=(sc.Default)&firstPage=true.
• Sandeep & Arya, Study on Shareholder Rights in Management of the Company, 120 International Journal of Pure and Applied Mathematics 113 (2018).