RIGHTS OF SHAREHOLDER & STAKEHOLDER: HOW TO PROTECT

THE RIGHTS OF STAKEHOLDER

Project report on Corporate Governance

Submitted To:

Assistant Prof. Kamaljeet Singh

Submitted By:

Shivani Jaiswal

B.B.A.LL.B (Hons.) – VIII Semester

MATS University

MATS Law School, Raipur

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ACKNOWLEDGEMENT

I express my sincere gratitude to Asst. Prof. Kamaljeet Singh , MATS Law School, Raipur,

and owe my foremost regards to him for giving me an opportunity to carry out this project work

under his guidance. This work would not have been possible without his invaluable support and

thought provoking comments. I would also like to thank my batch mates who directly or

indirectly helped me in making this project.

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DISCLAIMER

This project report is authored by student of 4th year under the five year BBA.LL.B (H) Program

in MATS Law School, Raipur. The report is purely academic in nature and shall not be treated as

a legal or business advice. The views expressed in this report are personal to the student and do

not reflect the view of law school or any of its staff or personnel. All the copyrights relating to

this work are vested in the author; the same shall not be exploited without their express

permission.

Shivani Jaiswal

4th Year, MATS Law school, Raipur

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TABLE OF CONTENT

INTRODUCTION.....................................................................................................................................5

RIGHTS OF SHARHOLDER..................................................................................................................6

Shareholders' rights against directors...............................................................................................7

Shareholders' rights against the company's auditors........................................................................7

Share transfers and exit....................................................................................................................8

RIGHTS OF MINORITY SHAREHOLDERS AS PER COMPANIES ACT 2013.............................8

STAKEHOLDERS: RIGHTS AND RESPONSIBILITIES.................................................................10

THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE.........................................10

HOW TO PROTECT THE RIGHTS OF SHAREHOLDER..............................................................13

CONCLUSION........................................................................................................................................15

BIBLIOGRAPHY...................................................................................................................................16

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INTRODUCTION

Some say “Don’t talk about rights of shareholders; the investors are eager for profits only. Few

investors attend shareholder meetings. So, time and expenses spent for shareholder meetings

should be used for other benefits.”

If you have the same feeling, don’t worry, you aren’t alone! When a company operates smoothly

and the board of directors supervises and oversees matters efficiently, most shareholders will

have trust and confidence, and will not be eager to vote. However, a proper shareholders

protection mechanism is essential to ensure the accountability of directors to shareholders, and

the effectiveness of measures for shareholders to monitor whether the board of directors and

management do their best in performing their duties. If they have poor results, leading to a share

value drop, some shareholders might, of course, step in to protect their investments, instead of

selling their shares with a loss. Respect for shareholders’ rights is, therefore, crucial for corporate

governance. Indeed, it is a must. But whether shareholders will exercise their rights is not an

issue that you as a Director have to be responsible for.

SHAREHOLDERS' GENERAL RIGHTS

1. To receive not less than 21 clear days’ notice of general meetings.

2. To receive notice and forms for Postal Ballots in terms of the provisions of the

Companies Act, 2013 and the relevant Rules issued there under

3. To receive copies of Balance Sheet and Statement of Profit and Loss along with all

annexures / attachments (Generally known as Annual Report) not less than 21 days

before the date of the Annual General Meeting.

4. To participate and vote at general meetings either personally or through proxy (proxy can

vote only in case of a poll).

5. To receive dividends and other corporate benefits like bonus, rights, etc. once approved.

6. To demand poll on any resolution at a general meeting in accordance with the provisions

of the Companies Act, 2013.

7. To inspect statutory registers and documents as permitted under law.

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RIGHTS OF SHARHOLDER

To require the Board of Directors to call an extraordinary general meeting in accordance with the

provisions of the Companies Act, 2013. The formal role and rights of stakeholders arise from

various sources: company law, labour law, contract law, insolvency law, etc.  These rights

creates an obligation on the part of the company and the management to ensure the company’s

proper compliances.

The Supreme Court of India observed “By a share in a company is meant not any sum of money

but an interest measured by a sum of money and made up of diverse rights conferred on its

holders by the article of company which constitutes a contract between him and company.” Thus,

it represents a “Bundle of rights and obligations.”1

 

Regarding rights of shareholders the Supreme Court in a very important case LIC of India vs.

Escorts Ltd.2at 1412 held that “a shareholder has an undoubted interest in a company, an

interest which is represented by his shareholding. Share is a movable property within the

attributes of such property. The rights of shareholders are:- 

1. To elect director and thus to participate in the management through them,

2. To vote on the resolutions at meeting of the company. To enjoy the benefits of the

company in the shape of dividends.

3. To apply to the court in the case of oppression

4. To apply to court for winding up of the company

5. To share in surplus on winding up.

6. To apply to the court for relief in case of mismanagement.

1 CIT v. Standard Vacuum Oil, (1966) comp LJ 187 SC2 AIR 1986 SC 1370

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Further There Are Various Rights of Shareholder

Shareholders' rights against directors3

Generally, a shareholders' ordinary resolution is required for the appointment and removal of

directors under the Companies Act 2013. The following directors can also be appointed in a

board meeting of the company: Additional director, to hold office till the date of the company's next annual general

meeting. Alternate director, to act as an alternate for a director during his absence from India

for a period of three months or more. Nominee director nominated by any institution under any law in force at the time or

any agreement. Director appointed in the case of a casual vacancy in the office of any director

appointed in a general meeting in a public company.

Shareholders' rights against the company's auditors4

Appointment of auditor

Under the Companies Act 2013 (CA 2013), the first auditor of a company must be

appointed by its board of directors in the first board meeting of the company. Then

the auditor is appointed by the shareholders in an annual general meeting (AGM), at

the recommendation of the board of directors or audit committee. Such appointment

is made for a period of five years at a time, and is subject to ratification by way of an

ordinary resolution in every AGM.

A casual vacancy in the auditor's office can be filled by the board of directors within

30 days of that vacancy. In case of the existing auditor's resignation, appointment of a

new auditor must be approved by the company at the general meeting within three

months of such resignation.

Removal of auditor3 http://www.icsi.edu/portals/0/APPOINTMENT%20AND%20QUALIFICATIONS.pdf4 http://taxguru.in/company-law/appointment-auditor-companies-act-2013.html

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Under the CA 2013, a company can remove its auditor from office before the expiry

of its term by passing a special resolution, after obtaining the requisite approval from

the central government.

Share transfers and exit5

Private companies can place restrictions on the free transferability of shares. However, shares of a public

company must be freely transferrable. The shareholders of all companies, including public companies, are

permitted under the Companies Act 2013 to enter into contracts to restrict the rights of their shareholders

with respect to such transfers. However, such agreements will only be enforceable against the company if

it is a party to it. In practice, such restrictions are also recorded in the investee company's articles of

association. Typical clauses that restrict transfer of shares are:

The call option.

Right of first offer.

Right of first refusal.

Right of last offer.

Drag-along right.

RIGHTS OF MINORITY SHAREHOLDERS AS PER COMPANIES ACT 2013

Definitions:

Small Shareholder: a shareholder who is holding shares of nominal value of INR 20,000 or such

other sum as may be prescribed. Minority Shareholder: Equity holder of a firm who does not

have the voting control of the firm, by virtue of his or her below fifty percent ownership of the

firm's equity capital

Objectives:

1. The objective of the policy is to protect the rights of the minority shareholders and keep them

updated about their rights from time to time.

2. To check that the Shareholder Relationship Committee is redressing the grievance of the

minority shareholders. 5 India: Restrictions on Transferability of Shares, Subashini R

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Rights of Minority Shareholders:

1. Right to appoint a director- Small shareholders, upon notice of not less than 1/10th of the total

number of such shareholders or 1000 shareholders, have a small shareholder director elected.

2. Right in decision making and such director appointed shall be considered as independent

director.

3. Oppression and mismanagement- Right to apply to tribunal by the minority shareholders,

when management or control of the company is being conducted in a manner prejudicial to the

interests of the class or company.

4. Rights with respect to reconstruction and amalgamation-

Purchase of shares of dissenting shareholders at a determined value by the registered

valuer.

The minority have been given a right to make an offer to the majority shareholders to buy

the shares of minority shareholders.

The transferor company shall be the agent for making payments to minority shareholders.

Class action suit: Class action suit may be filed by the minority shareholders as per the

provisions of Companies Act, 2013

Steps taken by company to protect the rights of minority shareholders:

1. Provision of PIGGY BACKING- When a majority shareholder sells their shares, a minority

shareholder has the right to be included in the deal. This is called "piggybacking." It protects

your investment should the company be sold. Piggybacking requires that any party considering

the purchase of the business be able to buy 100 percent of the outstanding shares.

2. Provision of compulsory dividends to the minority shareholders.

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STAKEHOLDERS: RIGHTS AND RESPONSIBILITIES

The role of stakeholder is a concept in law. A stakeholder was originally a person who

temporarily holds money or other property while its owner is being determined. This is, for

example, the situation when two persons bet on the outcome of a future event and ask a third,

disinterested, neutral person to hold the money (or "stake[s]") that they have wagered (or

"staked")). After the event occurs, the stakeholder distributes the stakes to one or both of the

original (or other) parties according to the outcome of the event and according to the previously

decided conditions. Courts sometimes act as stakeholders, holding property while litigation

between the possible owners resolves the issue in which one is entitled to the property. Trustees

also often act as stakeholders, holding property until beneficiaries come of age, for example. An

"escrow agent" is one kind of trustee who is a stakeholder, usually in a situation where part of

the purchase price of property is being held until some condition is satisfied. In legal documents,

the escrow agent is often referred to as a "mere stakeholder."

THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE

The corporate governance framework should recognize the rights of stakeholders as

established by law or through mutual agreements, and encourage active cooperation

between corporations and stakeholders in creating wealth, jobs, and the sustainability of

financially sound enterprises.6

A. The rights of stakeholders that are established by law or through mutual agreements

are respected. 7

THE RIGHTS OF CREDITORS

i. Secured creditors such as banks, development financial institutions (DFIs) and insurance

companies offering long term debt, have the right to be represented on the board through

their representatives who, in India, are called ‘nominee directors’. This right arises from

the contract executed between the company and the creditor organisation, and is enforced

through the covenants of such a contract. Almost all major listed companies belonging to

6 http://www.eccb-centralbank.org/PDF/corp_gov08.pdf7 www.fwd.com.ph/wp-content/uploads/2015/06/Corporate-Governance(C).pdf

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Group A and B1 of the BSE which have sizeable debt from banks, DFIs and insurance

companies have nominee directors.

ii. Creditors also have the right to block dividend payments if their dues have not been paid.

This involves all debt dues, including payment towards debentures or bonds; this right is

enforced by petitioning the civil courts, the Company Law Board or High Courts.

iii. Creditors’ rights are supreme in bankruptcy restructuring or liquidation. Under the

Companies Act, 1956, the Sick Industrial Companies Act, 1985, (SICA), and the Debt

Recovery Act, 1992, creditors have the right to take a company to bankruptcy court, civil

courts, High Courts or Debt Recovery Tribunals for securing their dues either through

receivers, or via bankruptcy restructuring or winding up procedures. Under section 19 of

22 SICA, secured creditors have the right to veto any bankruptcy restructuring plan

proposed by the debtor company, and this veto right is binding. In winding up under the

Companies Act, creditors and workmen (as defined by the Industrial Disputes Act, 1947)

have pari passu rights over all other claimants to recover through asset sale their unpaid

debt and wages / salaries, respectively.

iv. Recently, the Government of India enacted the Securitzation Act where creditors have the

right to foreclose on debt and its mortgaged assets in the event of the account becoming a

non-performing loan — defined as one in which payments have not been made for two

successive quarters.

THE RIGHTS OF EMPLOYEES

All employees, workmen or otherwise, have the right to form trade unions. The Industrial

Disputes Act, the Factories Act and the Contract Labour Act say that workers cannot be

fired, retrenched or laid-off without due cause and without following due process. If

anything, these processes are biased in favour of workers. In bankruptcy restructuring,

representatives of workers have the legal right to participate in the proceedings. As

mentioned earlier, in winding up, workers have pari passu rights (along with secured

creditors) to their unpaid wages.

B. Where stakeholder interests are protected by law, stakeholders should have the

opportunity to obtain effective redress for violation of their rights: 8

CREDITORS 8 www.fwd.com.ph/wp-content/uploads/2015/06/Corporate-Governance(C).pdf

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Creditors can, and do, petition the Company Law Board, the Board for Industrial and

Financial Reconstruction (BIFR, the special bankruptcy court under SICA), civil courts,

High Courts and Debt Recovery Tribunals for violation of their rights. This is routinely done

in instances of violation.

WORKERS AND EMPLOYEES

Workers and employees can petition civil courts and High Courts. This is regularly done in

cases of violation. However, workmen of a company are not allowed to file petition for

winding up. Workers may be allowed to appear and be heard in support or opposition of the

winding up petition.

C. Performance-enhancing mechanisms for stakeholder participation should be permitted

to develop.

ESOPs are increasingly becoming popular in companies. The Securities and Exchange Board of

India (SEBI) has prescribed a detailed guideline on the issue of share options (available under

the section on guidelines on www.sebi.gov.in). For unlisted companies, Department of

Company Affairs (DCA) has recently come out with a report on ESOP, Sweat Equity and

Preferential Allotment, which has made detailed recommendations on the subject. This report is

available on www.dca.nic.in.

D. Where stakeholders participate in the corporate governance process, they should have

access to relevant, sufficient and reliable information on a timely and regular

information. 9

All relevant communication from a listed company must be posted on the company’s

website, which includes presentations to analysts. Besides, annual, half-yearly and quarterly

financial results have to be published in national newspapers, sent to the stock exchanges

and SEBI, and be posted on the website.

E. Stakeholders, including individual companies and their representative bodies, should

be able to freely communicate their concerns about illegal or unethical practices to the

board and their rights should not be compromised for doing this.

9 Recommendation of the Council on Principles of Corporate Governance, C(2015)84 

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The Narayana Murthy committee has proposed that all listed companies adopt a whistle

blower policy. According to this proposed policy: “Personnel who observe an unethical or

improper practice (not necessarily a violation of law) should be able to approach the audit

committee without necessarily informing their supervisors. Companies shall take measures

to ensure that this right of access is communicated to all employees through means of

internal circulars, etc. The employment and other personnel policies of the company shall

contain provisions protecting “whistle blowers” from unfair termination and other unfair

prejudicial employment practices.’’

F. The corporate governance framework should be complemented by an effective,

efficient insolvency framework and by enforcement of creditor rights 10

The Sick Industrial Companies (Special Provisions) Act, 1985, popularly known as SICA,

lays down the framework for bankruptcy restructuring of financially distressed companies.

The process, which is supervised by the Board for Financial and Industrial Restructuring

(BIFR), does have its flaws and there is definite scope for improvement.

By law, creditors have prior claim over shareholders. When their contractual obligations are

not met, creditors can demand bankruptcy reorgansation under SICA, file for winding up of

the company or apply for receivership. In addition, since 1993, banks and financial

institutions can take recourse to another alternative— that of filing for recovery of dues at

the Debt Recovery Tribunals (DRTs).

In an important development, the Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002, has been enacted. This Act has three important

aspects: to establish asset reconstruction companies for non-performing loans; to allow for

securitisation of loans and other securities; and to allow expeditious attachment and

foreclosure of NPLs.

HOW TO PROTECT THE RIGHTS OF SHAREHOLDER

The Insurance Regulatory and Development Authority (IRDA) considers a stakeholder to be any

person, group or organization that has a direct or indirect stake in an insurer. This includes

anyone that can affect or be affected by the insurer's conduct, objectives and policies. Further

10 Recommendation of the Council on Principles of Corporate Governance, C(2015)84 

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stakeholder includes Community/Society, Employees, Board, Auditors & Management, Policy

Holders/ Clients,{Insurers, Reinsurers (Players)},Distribution Channels (Brokers, Agents),

Service Providers (Loss Assessors, referral providers, web aggregators Hospitals, TPAs,

Actuaries), Investors/Shareholders, Regulators, Government.

Insurance industry is governed by various Acts, Rules and Regulations framed by the

regulators and the government. Two main Laws that we shall examine to understand how

stakeholder interests are protected are11

1. Companies Law

2. Insurance Law

The Companies Act of 2013 brings modern regulations for the corporate sector to align

with international requirements. The Act purports to deal with –

a) Governance issues

b) Investor protection

c) Fraud mitigation

d) Inclusive agenda and Corporate Social Responsibility

e) Auditors and Directors accountability

f) Reporting framework and

g) Efficient restructuring

The Insurance Regulations define the obligation of insurers and intermediaries and other

related parties and lay down time-frames for compliance that cover the entire life cycle of a

product, starting from its sale to servicing, including at the point of claim to protect

stakeholders from unfair practices.

11 Stakeholder protection 26th April 2014 Under Company Law and Insurance Law, APAS advisory service.

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CONCLUSION

Shareholders and stakeholders find common ground in the basic principles of corporate

governance. Employees can play an active role in strengthening corporate governance systems.

Empowering employees as shareholders will help to ensure that the basic principles of corporate

governance are promoted in the region. Because we are so near the end of the conference and so

full of good food and good ideas, let me distill my project into a few choice points:

Shareholders and stakeholders find common ground in the basic principles of corporate

governance. There is no real conflict between shareholders and stakeholders when it

comes to principles of responsibility, accountability, fairness and transparency

Employees can play an active role in strengthening corporate governance systems

Empowering employees as shareholders will help to ensure that the basic principles of

corporate governance are promoted in the region.

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BIBLIOGRAPHY

LEGISLATION

Companies Act, 2013

Insurance Law

BOOKS

• Avtar Singh, Company Law, 15th Edition, Eastern Book Company, Lucknow, 2013

• A.K Majumdar, Company Law, Taxman Publications, 2013

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