Rights and Privileges of Shareholders

8/9/2019 Rights and Privileges of Shareholders

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Rights and Privileges ofRights and Privileges of

ShareholdersShareholders


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Theoretical BasisTheoretical Basis --

Agency CostsAgency Costs

Fundamental theoretical basis ofFundamental theoretical basis ofcorporate governance is agency costscorporate governance is agency costs

Shareholders are the owners of the jointShareholders are the owners of the joint--stock, limitedstock, limitedliability company and are the principalsliability company and are the principals The management directly or indirectly selected by theThe management directly or indirectly selected by the

shareholders pursue the objectives of the companyshareholders pursue the objectives of the companydefined by the principalsdefined by the principals

T

hough it is presumed that the management may carryT

hough it is presumed that the management may carryout this responsibility, it often may not be the case asout this responsibility, it often may not be the case asthe objectives of the management in real practice couldthe objectives of the management in real practice coulddiffer from those of the shareholders which may lead todiffer from those of the shareholders which may lead toagency costsagency costs


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Instruments that may reduce the agencyInstruments that may reduce the agency

costscosts

Financial and nonFinancial and non--financial disclosuresfinancial disclosures

Independent oversight of managementIndependent oversight of management

consisting of two aspects:consisting of two aspects:1.1. The role of the independent statutoryThe role of the independent statutory

auditorsauditors

2.2. Independent oversight by the board ofIndependent oversight by the board ofdirectors of a companydirectors of a company


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LongLong--term Shareholder Valueterm Shareholder Value

Universally, it is accepted that the objective of goodUniversally, it is accepted that the objective of goodcorporate governance is to maximize the longcorporate governance is to maximize the long--termtermshareholder value. There have been variousshareholder value. There have been variouscommittees and boardscommittees and boards

that have been set upthat have been set upboth internationally andboth internationally andin India to improve thein India to improve thequality of corporatequality of corporategovernance.governance.

We need to at this stageWe need to at this stageunderstand the rights of theunderstand the rights of theshareholders laid down byshareholders laid down bythe Indian Companies Act of 1956.the Indian Companies Act of 1956.


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Rights of ShareholdersRights of Shareholders

These rights are conferred on the shareholders either byThese rights are conferred on the shareholders either bythe Indian Companies Act of 1956 or by thethe Indian Companies Act of 1956 or by theMemorandum of Articles of Association of the companyMemorandum of Articles of Association of the companyor by the general law, especially those relating toor by the general law, especially those relating tocontracts under the Indian Contract Act of 1872.contracts under the Indian Contract Act of 1872.Following are some of the rights of the shareholdersFollowing are some of the rights of the shareholders

based on the above acts of the country:based on the above acts of the country:


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1.1. To obtain copies of the memorandum of association ,To obtain copies of the memorandum of association ,

Articles of Association, and copies of certainArticles of Association, and copies of certainresolutions and agreements on request, on payment ofresolutions and agreements on request, on payment ofprescribed feesprescribed fees

2.2. To get the share certificates within 3 months of theTo get the share certificates within 3 months of theallotmentallotment

3.3. The right to transfer the shares or other interests inThe right to transfer the shares or other interests inthe company subject to the provisions in the articles ofthe company subject to the provisions in the articles ofthe companythe company

4.4. The right to appeal to the Company Law Board if theThe right to appeal to the Company Law Board if thecompany refuses/fails to register the transfer of sharescompany refuses/fails to register the transfer of shares

5.5. Has the preferential right to purchase the share on aHas the preferential right to purchase the share on a

propro--rata basis in case of further issue of shares andrata basis in case of further issue of shares andholds the right to renounce all or a part of the sharesholds the right to renounce all or a part of the sharesin favor of any other personin favor of any other person

6.6. Holds the right to apply to the Company Law Board forHolds the right to apply to the Company Law Board forthe rectification of the register of membersthe rectification of the register of members


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7. Is entitled to receive notices of general meetings and to attend7. Is entitled to receive notices of general meetings and to attendsuch meetings and vote either in person or by proxysuch meetings and vote either in person or by proxy

8. Is entitled to receive a copy of the statutory report8. Is entitled to receive a copy of the statutory report9. Entitled to receive copies of the annual report of directors, annual9. Entitled to receive copies of the annual report of directors, annual

accounts, and auditors reportaccounts, and auditors report

10. Has the right to participate in the appointment of auditors and the10. Has the right to participate in the appointment of auditors and theelection of directors at the AGMs of the companyelection of directors at the AGMs of the company

11.11. Has the right to request the Company law board for calling AGMHas the right to request the Company law board for calling AGMin case the company does not convene the meetingin case the company does not convene the meeting

12.12. Can request the directors to convene extraCan request the directors to convene extra--ordinary AGMsordinary AGMs13.13. Is entitled to inspect and obtain copies of the minutes of theIs entitled to inspect and obtain copies of the minutes of the

AGMsAGMs14.14. Has the right to participate in declaration of dividends and receiveHas the right to participate in declaration of dividends and receive

dividends dulydividends duly15.15. And many moreAnd many more


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Investor ProtectionInvestor Protection

Strong investor protection is associatedStrong investor protection is associatedwith effective corporate governance.with effective corporate governance.I

nvestors typically entertain highI

nvestors typically entertain highexpectations of the companysexpectations of the companysperformance; steady income and capitalperformance; steady income and capitalgrowth from the securities are expectedgrowth from the securities are expected

results. A mismatch of the final outcomeresults. A mismatch of the final outcomeand the expectations of the investorsand the expectations of the investorscould increase the risks taken by them.could increase the risks taken by them.


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Investors finance companies by taking certainInvestors finance companies by taking certainrisks. Investors may get denied of income andrisks. Investors may get denied of income andcapital growth by the managers or board ofcapital growth by the managers or board of

directorsdirectors known as insiders. This may be dueknown as insiders. This may be dueto the misappropriation of the income orto the misappropriation of the income orwealth by the insiders either covertly orwealth by the insiders either covertly orovertly. This will shake up the confidence of theovertly. This will shake up the confidence of theinvestors in the company and its management.investors in the company and its management.This could adversely impact the overallThis could adversely impact the overallinvestment climate in the country and slowinvestment climate in the country and slowdown economic growth of the country.down economic growth of the country.


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How Do Insiders Steal InvestorsHow Do Insiders Steal Investors

Funds?Funds? The insiders, both managers and controlling shareholders canThe insiders, both managers and controlling shareholders canexpropriate investors in a variety of ways:expropriate investors in a variety of ways:

1.1. In some countries they simply steal the earnings and in othersIn some countries they simply steal the earnings and in othersthey make elaborate arrangements to divert profits.they make elaborate arrangements to divert profits.

2.2. Insiders may sell the output or assets of the firm to another entityInsiders may sell the output or assets of the firm to another entity

they own at below market prices. Such transfer pricing and assetthey own at below market prices. Such transfer pricing and assetstripping are largely of the nature of pure and simple thefts bystripping are largely of the nature of pure and simple thefts byinsiders.insiders.

3.3. Expropriation also takes the form of appointing underExpropriation also takes the form of appointing under--qualifiedqualifiedfamily members as managers or at excessive executive pay.family members as managers or at excessive executive pay.

4.4. Expropriation through insiders selling additional securities in theExpropriation through insiders selling additional securities in the

firm they control to another firm they own at lower market pricesfirm they control to another firm they own at lower market prices

The minority shareholders and creditors thus become far moreThe minority shareholders and creditors thus become far morevulnerablevulnerable


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Rights to Information and OtherRights to Information and Other

RightsRights Investor protection is not attainableInvestor protection is not attainable

without adequate and reliable corporatewithout adequate and reliable corporateinformation. All Investors whether theyinformation. All Investors whether they

are shareholders or investors have anare shareholders or investors have aninalienable right to have certain corporateinalienable right to have certain corporateinformation. All rights provided to theinformation. All rights provided to theinvestors by the law cannot be exercisedinvestors by the law cannot be exercisedby the shareholders unless the companiesby the shareholders unless the companiesin which they hold securities, share within which they hold securities, share withthem such information.them such information.


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Creditors too have certain rights and theseCreditors too have certain rights and theseare to be protected. Minority shareholdersare to be protected. Minority shareholdershave same rights as majority shareholdershave same rights as majority shareholders

in dividend policies and in accessing newin dividend policies and in accessing newsecurity issues. Nonsecurity issues. Non--controllingcontrollingshareholders need the right to have theirshareholders need the right to have theirvotes counted and respected. Forvotes counted and respected. Forexample, the Birla committee hadexample, the Birla committee hadrecommended postal ballot forrecommended postal ballot forshareholders in certain situations.shareholders in certain situations.


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Corporate Governance throughCorporate Governance throughL

egal ProtectionL

egal ProtectionCorporate Governance reforms in mostCorporate Governance reforms in mostcountries are meant to protect the rights of thecountries are meant to protect the rights of theoutside investors including the shareholdersoutside investors including the shareholdersand creditors. These reforms focus onand creditors. These reforms focus on

expanding financial markets:expanding financial markets: To facilitate external financing of new firmsTo facilitate external financing of new firms To infuse large foreign investments in existing firmsTo infuse large foreign investments in existing firms To promote external commercial borrowings to helpTo promote external commercial borrowings to help

local firms access foreign capital by listing the firms inlocal firms access foreign capital by listing the firms inthe overseas stock marketsthe overseas stock markets

To move away from concentrated ownershipsTo move away from concentrated ownerships To expose native firms to foreign competitionTo expose native firms to foreign competition


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Impact ofInvestor Protection onImpact ofInvestor Protection on

Ownership and Control of FirmsOwnership and Control of Firms In many countries, firms are owned andIn many countries, firms are owned andcontrolled by promoter families and in suchcontrolled by promoter families and in suchclosely held firms, insiders may use everyclosely held firms, insiders may use everyopportunity to abuse rights of otheropportunity to abuse rights of other

shareholders and steal their profits throughshareholders and steal their profits throughdevious means.devious means.

Investor protection also provides an impetus forInvestor protection also provides an impetus forthe growth of capital markets. When investorsthe growth of capital markets. When investors

are protected from the insider expropriation,are protected from the insider expropriation,they tend to pay more for securities whichthey tend to pay more for securities whichmakes it attractive for the entrepreneurs to issuemakes it attractive for the entrepreneurs to issuesecurities.securities.


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Through investor protection, financial marketsThrough investor protection, financial marketscan develop with ease and perfection. Thiscan develop with ease and perfection. Thispromotes economic growth through:promotes economic growth through:

1.1. Enhancing savings and capital formationEnhancing savings and capital formation2.2. Channelising these into real investmentsChannelising these into real investments

3.3. Improving the efficiency of capital allocation sinceImproving the efficiency of capital allocation sincecapital flows into more productive usescapital flows into more productive uses

Research studies point out that countries withResearch studies point out that countries withwellwell--developed financial markets regulated bydeveloped financial markets regulated bylaws, allocate investment across industrieslaws, allocate investment across industriesmore in line with growth opportunitiesmore in line with growth opportunities

Rights and Privileges of Shareholders

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