CONCEPT OF SHAREHOLDERS: A CRITICLE

STUDY
A final research proposal submitted in partial fulfilment of the course Company
Law I, Semester — VII during the Academic Year 2020-2021.

Submitted by
Sudarshan Kumar, 181653
B.B.A.,LL.B(Hons.)

Submitted to M/s Nandita S. Jha

October ,2020

Chanakya National Law University,

Nyaya Nagar, Mithapur

800001, Patna

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 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.B.A.,LL.B (Hons.) Project Report entitle
“CONCEPT OF SHAREHOLDERS: A CRITICLE STUDY” submitted at Chanakya
National Law University, Patna
is an authentic record of my work carried out under the supervision of

M/s Nandita S. Jha. I have not submitted this work elsewhere for any other
degree or diploma. I am fully responsible for the contents of my Project Report.

(Signature of the Candidate)

Sudarshan Kumar
Chanakya National Law University, Patna

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 ACKNOWLEDGEMENT

I am very thankful to everyone who has supported me, for I have completed my
project effectively and moreover on time. I am equally grateful to M/s Nandita S. Jha.
He gave me moral support and guided me in different matters regarding this topic. He
has been very kind and patient while suggesting me the outlines of this project and
correcting my doubts I thank him for his overall support.

Last but not the least, I would like to thank everyone who helped me in gathering
different information, collecting data and guiding me. I also thank my friends who
were there with their suggestions and comments for my project.

Sudarshan Kumar

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 Chapterisation
1. Declaration By The Candidate
2. Acknowledgement
3. Introduction
4. Types Of Shareholder
5. Functions, Duties and Rights Of Shareholder
6. Difference Between Shareholder And Stakeholder
7. Difference Between Shareholder And Members
8. Conclusion
9. Bibliography

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Objective of the Study :

1. To study about types of shareholders.

2. To know the provisions given under companies act, 2013 on the right and
duties of shareholders.
3. To get to know about the basic concepts of shareholders under companies act,
2013.

Research Methodology:
The researcher has adopted doctrinal method of research. The researcher would like to follow
doctrinal method for this research. The researcher had gatherer data from both the primary
and secondary sources

Source of data

The following are source of data:-

 Books
 Website
 Newspapers

Scope of study

The project deals with ‘CONCEPT OF SHAREHOLDERS.’ It informs the readers

about nature and concept of shareholders given under companies act, 2013 . It also
provide information about the functions , rights and types of a shareholders. It also
deals with the difference between shareholders and stakeholders.

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 Introduction

A shareholder, commonly also referred to as a stockholder, is a person, company, or

institution that owns at least one share of a company’s stock, which is known as equity.
Because shareholders are essentially owners in a company, they reap the benefits of a
business’ success. A single shareholder who owns and controls more than 50% of a
company's outstanding shares is known as a majority shareholder, while those who hold less
than 50% of a company’s stock are classified as minority shareholders .In many cases,
majority shareholders are company founders. In older companies, majority shareholders are
frequently descendants of a company founders. In either case, by controlling more than half
of a company’s voting interest, majority shareholders wield considerable power to influence
key operational decisions, including the replacement of board members, and C-level
executives like chief executive officers (CEOs) and other senior personnel. For this reason,
companies often attempt to avoid having majority shareholders amongst their ranks.
Furthermore, unlike the owners of sole proprietorships or partnerships, corporate
shareholders are not personally liable for the company's debts and other financial obligations.
Therefore, if a company becomes insolvent, its creditors cannot target a shareholder’s
personal assets. These rewards come in the form of increased stock valuations, or as financial
profits distributed as dividends. Conversely, when a company loses money, the share price
invariably drops, which can cause shareholders to lose money, or suffer declines in their
portfolios’ values.1

The term shareholder is not define in the companies act, 2013. So we have to look to the
different dictionary for its definition.

According to Cambridge Dictionary, a shareholder is

a person who owns shares in a company and therefore gets part of the company's profits and
the right to vote on how the company is controlled.

The same dictionary provides its definition in Business English as shareholder is a person or
organization that owns shares in a company2.

According to Collins dictionary,

1
https://www.investopedia.com/terms/s/shareholder.asp
2
https://dictionary.cambridge.org/dictionary/english/shareholder

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A shareholder is a person who owns shares in a company.3

The corporate finance institute define shareholder in following terms: -

A shareholder can be a person, company, or organization that holds stock(s) in a given

company. A shareholder must own a minimum of one share in a company’s stock or mutual
fund to make them a partial owner. Shareholders typically receive declared dividends if the
company does well and succeeds.

Also called a stockholder, they have the right to vote on certain matters with regard to the
company and to be elected to a seat on the board of directors.4

So, after going all the definitions the basic definition of shareholder is that a shareholder is a
person who owns or hold share in a company. Some dictionary also elaborates some right,
characteristics, etc. of shareholder. The term share is defined in the companies act, 2013
under section-2(84). According to which, ―share means a share in the share capital of a
company and includes stock.5 So, share is a portion of share capital. The term share capital is
not defined companies act,2013 but the term authorized share capital is defined in the act
under section 2(8). According to which, authorized capital or ―nominal capital means such
capital as is authorized by the memorandum of a company to be the maximum amount of
share capital of the company.6

3
https://www.collinsdictionary.com/dictionary/english/shareholder
4
https://corporatefinanceinstitute.com/resources/knowledge/finance/shareholder/
5
Section-2(84) of companies act,2013.
6
Section -2(8) fo companies act, 2013

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 Types of shareholder

There are basically two type of shareholder. They are: -

 Individual shareholder
 Institutional shareholder

Individual shareholder consists of natural person whereas Institutional shareholder consists of

a body corporate, LIC, a bank, etc. Institutional shareholders represented by their
representative.

Types of shareholders based on type of authorised share capital they hold. According to
section 43 of companies act, 2013 there are two type of authorised share capital. They are: -

 Equity share capital

 Preference share capital

Equity share capital is also known as equity share and preference share capital is also known
as preference share. The shareholder who hold equity share is known as equity shareholder
and the person who holds preference share is known as preference shareholder. So on this
basis there are two type of shareholder. They are: -

 Equity shareholder
 Preference shareholder

Equity shareholder

According to section 43 of companies act, equity share capital comes with—

(i) with voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such
rules as may be prescribed.

So, equity shareholder are of two kinds equity shareholder with voting rights and with
differential voting rights. They are also known as residual claimant. The life time of equity
shareholder is for entire life of the company unless the shareholder itself voluntarily exist or
transfer the share.

Preference shareholder

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According to section 43 of companies act, 2013, the preference share comes with –

(i) fixed dividend

(ii) fixed rate of interest of dividend

the explanation to section also provide certain preferential right over equity shareholder in
respect of :-

a. payment of dividend, either as a fixed amount or an amount calculated at a

fixed rate, which may either be free of or subject to income-tax; and
b. repayment, in the case of a winding up or repayment of capital, of the amount
of the share capital paid-up or deemed to have been paid-up, whether or not,
there is a preferential right to the payment of any fixed premium or premium
on any fixed scale, specified in the memorandum or articles of the company;

The preference shareholder time period is 20 years with an exception in the case of
infrastructure company it is 30 years.

The preference share is non-convertible in nature unless otherwise mention. It is participatory

in nature with respect of dividend unless otherwise specifically mention. It is cumulative in
nature unless otherwise mention. And every preference share is redeemable in nature after
2013 act as there is no issuing of non-redeemable preference share. So as these are the
characteristics of preference share so as the characteristics of the preference shareholders.

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 Function, Rights & Duties of shareholder

There are basically two function of shareholders. They are: -

 Supply of Capital by purchasing share.

 To install governance mechanisms

Right of shareholders

Right of shareholder under companies’ act can be divided into two categories. They are:-

 Individual membership rights

 Corporate membership rights

Source of right of shareholders are: -

 Statute
 Memorandum of association & Articles of Association
 Common law rights attached to a share like voting rights, transfer right, etc.

Individual Membership rights

It is those right when a company and a shareholder come into contact.

1. Right to receive notice, attend & call meeting

Under section 101 of companies act,2013 a shareholder has right to receive a notice of
meeting of not less than clear twenty-one days either in writing or through electronic mode in
such manner as may be prescribed with a proviso that a general meeting may be called after
giving a shorter notice if consent is given in writing or by electronic mode by not less than
ninety-five per cent. of the members entitled to vote at such meeting. The notice contains the
place, date, day and the hour of the meeting and shall contain a statement of the business to
be transacted at such meeting.

Under section 96 every shareholder has right to attend Annual General Meeting which Every
company other than a One Person Company shall in each year hold in addition to any other

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meetings, a general meeting as its annual general meeting and shall specify the meeting as
such in the notices calling it, and not more than fifteen months shall elapse between the date
of one annual general meeting of a company and that of the next.7

Under section 100 of companies act, 2013, every shareholder has right to call a extraordinary
general meeting. It can be called by board, board on requisition by shareholders,
shareholders; if the board defaults.

2. voting rights

Section 47 of companies’ act provides voting rights to shareholders. According to which,

every member of a company limited by shares and holding equity share capital therein, shall
have a right to vote on every resolution placed before the company; and his voting right on a
poll shall be in proportion to his share in the paid-up equity share capital of the company.

Every member of a company limited by shares and holding any preference share capital
therein shall, in respect of such capital, have a right to vote only on resolutions placed before
the company which directly affect the rights attached to his preference shares and, any
resolution for the winding up of the company or for the repayment or reduction of its equity
or preference share capital and his voting right on a poll shall be in proportion to his share in
the paid-up preference share capital of the company:

Provided that the proportion of the voting rights of equity shareholders to the voting rights of
the preference shareholders shall be in the same proportion as the paid-up capital in respect of
the equity shares bears to the paid-up capital in respect of the preference shares:

Provided further that where the dividend in respect of a class of preference shares has not
been paid for a period of two years or more, such class of preference shareholders shall have
a right to vote on all the resolutions placed before the company.8

3. Right of shareholder by show off hands

At any general meeting, a resolution put to the vote of the meeting shall, unless a poll is
demanded under section 109 or the voting is carried out electronically, be decided on a show
of hands.9

4. Right to appoint proxy

7
Section- 96 of companies act,2013
8
Section -47 of companies act, 2013
9
Section – 107 of companies act, 2013

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Any member of a company entitled to attend and vote at a meeting of the company shall be
entitled to appoint another person as a proxy to attend and vote at the meeting on his behalf.
It has a restriction that a proxy shall not have the right to speak at such meeting and shall not
be entitled to vote except on a poll.10 One person can make proxy for 50 persons in no(s) but
it should not exceed 10 percent of total paid up capital.

5. Right of member to receive a share certificate under section -46 of the companies act.

6. Right to get a copy of memorandum of association, minutes of meeting, articles of

association under section – 17 of companies act, 2013.

7. Right to transfer of share 11

Every share holder have a right to transfer of share in case of public company but in case of
private company if the restriction is given in Article of association then there must be
restriction according to provision of Article of association.

8. Right to inspection which is given under various section related to different things.
Section – 94(3) talks about inspection of document and statutory report. Section- 119 talks
about inspection of minutes of meetings, section – 171 talks about inspection of register of
directors & key managerial prospectus.

Corporate membership rights

Corporate membership rights exercise only in class, groups and it is always in the interest of
the company and exercises only through derivative action like filling a plaint, etc. The
member derive power from Article of association and Memorandum of association.

It is exercises for following purpose: -

 Section 5(3)- alteration in Article of association

 Section 12(5)- shifting of registered office.
 Section 13(11)- alteration of memorandum of association
 Section 13(8)- alteration of object clause.
 Section 27(1)- alteration to the terms of contract
 Section 48(1)- variation of voting rights, etc.
10
Section -105 of companies act,2013
11
Section- 56 of the companies act,2013

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Rights of minority descent shareholder which is given under section 244, Right to apply
under section 241 which talks about act of oppression or mismanagement also comes under
corporate membership rights.

Appointment of directors

Shareholders play an important role in the appointment of directors. An ordinary resolution is

required to be passed by the shareholders for the appointment. Apart from this, shareholders
can also appoint various types of directors. They are:

 An additional director who will hold the office until the next general body meeting;
 An alternate director who will act as an alternate director for a period of 3 months;
 A nominee director;
 Director appointed in the case of a casual vacancy in the office of any director
appointed in a general meeting in a public company.12

Shareholders’ Duties

There are also responsibilities and duties of shareholders which they should perform. Besides
several rights which they have, there exists several duties. They are:

 Shareholders should be in touch with other members of the company so that they can
see the work progress of the company.
 Shareholders should consult on the matters of finance and other topics.
 Shareholders should participate in the general body meetings so that they can see and
also can advise on the matters which they feel is not going good.

12
https://blog.ipleaders.in/shareholders-rights-duties/

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 Difference between Shareholder and Stakeholder
Shareholder and Stakeholder are often used interchangeably, with many people thinking that
they are one and the same. However, the two terms don’t mean the same thing. Shareholders
are owners of the company. Shareholders have the right to exercise a vote and to affect the
management of a company., but they are not liable for the company’s debts. A shareholder is
a person or an institution that owns shares or stock in a public or private operation. They are
often referred to as members of a corporation, and they have a financial interest in the
profitability of the organization or project.. For example, a shareholder might be an individual
investor who is hoping the stock price will increase because it is part of their retirement
portfolio. Shareholder may also work in the business. Benefit directly from increases in the
value of the business

The money that is invested in a company by shareholders can be withdrawn for a profit. It
can even be invested in other organizations, some of which could be in competition with the
other. Therefore, the shareholder is an owner of the company, but not necessarily with the
company’s interests first.

Whereas Stakeholders can be:

 Senior management

 Project leaders

 Team members on the project

 Customers of the project

 Resource managers

 Line managers

 User group for the project

 Subcontractors on the project

 Consultant for the project

Therefore, stakeholders can be internal, such as employees, shareholders and managers—

but stakeholders can also be external. They are parties that are not directly in a relationship
with the organization itself, but still the organization’s actions affect it, such as

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 suppliers, vendors, creditors, the community and public groups. Basically, stakeholders are
those who will be impacted by the project when in progress and those who will be impacted
by the project when completed.

Stakeholders tend to have a long-term relationship with the organization. It’s not as easy to
pull up stakes, so to speak, as it can be for shareholders. However, their relationship to the
organization is tied up in ways that make the two reliant on one another. The success of the
organization or project is just as critical, if not more so, for the stakeholder over the
shareholder. Employees can lose their jobs, while suppliers could lose income.

Stakeholders are more concerned with longevity of their relationship with the organization
and a better quality of service. That is, people working on a project or for an organization are
likely more interested in salaries and benefits than profits.

Shareholders, on the other hand, are more concerned with stock prices, dividends and results.
They have a financial interest in the success of the organization, not the individuals who work
there. Shareholders are more likely to advocate for growth, expansion, acquisitions, mergers
and other acts that will increase the company’s profitability.

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 Difference between members and shareholders

The terms shareholders and members are commonly used as synonyms, as one can become a
member of the company, except by way of holding shares. In this way, a member is a
shareholder and a shareholder is a member. The statement is true but not completely, as it is
subject to certain exceptions, i.e. a person can become the holder of shares through transfer,
but is not a member, until the transfer is entered in the register of members. In the same way,
the transferor of shares lacks shareholding but continues as a member, until entries are made
in the company’s books regarding the transfer. 13Likewise, there are a few more points of
difference between member and shareholder which are discussed below.

The term member is defined under section 2(55) of companies act, 2013. According to which
― member, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be deemed to have
agreed to become member of the company, and on its registration, shall be entered
as member in its register of members;
(ii) every other person who agrees in writing to become a member of the company
and whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a
beneficial owner in the records of a depository;

so, a person whose name is entered in the register of members of a company, is the registered
member of the company. The register includes every single detail about the member like
name, address, occupation, date of becoming a member, etc. It also includes every person
who holds company’s shares and whose name is entered as the beneficial owners in
depository records. Whereas a shareholder is a person who owns or holds share in the
company is shareholder. The shareholders are the owners of the company, i.e. to the extent of
the share capital held by them.

The following are the key differences between members and shareholders:

 A member is a person who subscribed the memorandum of the company. A

shareholder is a person who owns the shares of the company.

13
https://keydifferences.com/difference-between-members-and-shareholders.html

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 The term member is defined under section 2 (27) of the Indian Companies Act, 1956.
Conversely, the term shareholder is not defined in the Indian Companies Act, 1956.
 The bearer of a share warrant is not a member, but the bearer of a share warrant can
be a shareholder.
 All shareholders whose name are entered in the register of members are the members.
On the other hand, all members may not be the shareholders.
 In the case of a public company, there must be a minimum of 7 members. There is no
such cap on the maximum number of members. Similarly, a private company can
have a minimum of 2 and maximum of 200 members. As opposed to shareholders,
there is no minimum or maximum limit, in the case of a public company.

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 Conclusion

Shareholders thereby play an important role in the functioning of a company. They have
various rights which include the appointment of the company’s director, auditor etc., to
voting rights and having a say when the company goes insolvent. With every right, comes a
corresponding responsibility which the shareholder must carry out diligently.A shareholder is
a person who owns shares in a company and therefore gets part of the company's profits and
the right to vote on how the company is controlled. It is different from stakeholders although
in common sense both speaks as a synonym. As a Stakeholders can be owners and
shareholders, employees of the company, bondholders who own company-issued debt,
customers who may rely on the company to provide a particular good or service, suppliers
and vendors who may rely on the company to provide a consistent revenue stream. So,
stakeholders are a larger term which consist shareholders. The same case is with the members
and shareholders. Members define under section 2(55) of companies act, 2013, according to
which shareholders is a part of members. All shareholders whose name are entered in the
register of members are the members. On the other hand, all members may not be the
shareholders.

There are two types of shareholders, Individual shareholder consists of natural person and
Institutional shareholder consists of a body corporate, LIC, a bank, etc. Institutional
shareholders represented by their representative. If we go through the type authorised share
capital shareholders can be divided in two different categories, Equity shareholder and
Preference shareholder. Both have different characteristics according to share they hold like
equity shareholders have voting rights whereas preference shareholders have preference over
equity when it comes to division of dividends. There are certain duties of shareholders like
appointment of directors to run the company, to participate in the general body meetings so
that they can see and also can advise on the matters which they feel is not going good, etc.

So, a shareholder are essentially owners in a company, they reap the benefits of a business’
success. These rewards come in the form of increased stock valuations, or as financial profits
distributed as dividends. Conversely, when a company loses money, the share price
invariably drops, which can cause shareholders to lose money, or suffer declines in their
portfolios’ values.

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 Bibliography

Statutes
 THE COMPANIES ACT, 2013

Books
 Paul L Davis, Introduction To Company Law, 3rd Edition
 Avtar Singh, Company Law, 17th Edition

Sites
 https://www.tutor2u.net
 www.dictionary.cambridge.org
 www.collinsdictionary.com
 www.corporatefinanceinstitute.com
 www. blog.ipleaders.in
 www. keydifferences.com
 www. Economictimes.com
 https://www.projectmanager.com

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