Rights of the Shareholders under Companies Act, 1956

Ravi Mahto*

Introduction

The capital of a company is divided into a number of indivisible units of a fixed amount. These
units are known as shares. 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 articles of the company which constitutes a contract between
him and the company”.1 A share does not merely represent an interest of a shareholder in a
company, while it is a going concern and declares a dividend or while the company is being wound
up. It thus represents a ‘ bundle of rights and obligations’. These rights and obligations are
conferred upon the shareholders of the company. For the purpose of this project however the scope
will be restricted to the rights aspect and the obligation part will be omitted. The scope will be
further narrowed down to only one type of share holders i.e. the equity shareholder, the reason
being the equity shareholders have been given more rights in respect to affairs of the company. The
reason for investigating into the rights of the equity shareholders being that today it is felt that the
shareholders are passive investors whereas the actual management and control being exercised by a
board of directors and other managerial personnel. Shareholders are interested only in the value of
his shares. In this way it seems that they are merely recipient of dividend from the company on
their investment. The separation and the management and control increased gradually increased
because shareholders are distributed over large area in the country. However it does not mean that
shareholders have no rights. Under company law they have been provided so many rights form time
to time because they invest their money and bear the risk.

Regarding rights of shareholders the Supreme Court in a very important case2 held that “a
shareholder has an undoubted interest in a company, an interest which is represented by his
shareholding. Share is a moveable property with in the attributes of such property. The rights of the
shareholders are: -
• To elect director and thus to participate in the management through them.
• To vote on the resolutions at meetings of the company. To enjoy the profits of the
company in the shape of dividends.
• To apply to the court in the case of oppression.
• To apply to the court for winding up of the company.
• A share in the surplus on winding up.
• To apply to the court for relief in case of mismanagement.

From the abovementioned observation of the Supreme Court it is felt that shareholders have so
many rights under the corporate law. In the project the abovementioned and some other important
rights of the shareholders have been discussed.

*5th Year Student, National University of Juridical Sciences, Kolkata

1
CIT Vs United Vaccuum Oil [1966] Comp LJ 187 (SC)
2
LIC of India Ltd. Vs Escorts Ltd. AIR 1986 SC 1370 at 1412
But before we embark into the investigation of the rights of shareholders the distinction between
the types of shareholders needs to be brought about for a basic understanding of what an equity
share is. According to the Companies Act 1956 two types of shares can be issued:
• Preference shares (section 85 (1))
• Equity shares (section 85(2))

The equity shares are those shares, which are not preference shares. In other words, shares which
do not enjoy any preferential right in the matter of payment of dividend or repayment of capital, are
known as equity shares. After satisfying the rights of preference shares, the equity shares shall be
entitled to share in the remaining amount of distributable profits of the company. The dividend on
equity shares is not fixed and may vary from year to year depending on the amount of profits
available. The rate of dividend is recommended by the Board of directors of the company and
declared by the shareholders in the annual general meeting.

In a public company and deemed public company equity shareholders have a right to vote on every
resolution placed in the meeting and the voting rights shall be in proportion to the paid-up equity
capital. As compared to this, the holders of preference shares can vote only on such resolutions,
which directly affect the rights attached to preference shares. However, if the preference dividend is
not paid fully for more than two years, the preference shareholders shall also get voting right on
every resolution of the company. One more very important ting to be kept in mind is the meaning
of the term ‘member’.

‘Member has been defined in section 41 of the act. The definition includes “ Every person holding
a equity share capital of a company and whose name is entered as beneficial owners in the records
of the company” as a member. There isn’t much of a difference between a member and a
shareholder as such. In the case of a company limited by shares the persons whose names are put on
the register of members are the members of the company. They may also be called shareholders of
the company as they are holding shares and are holding them in their in their own right. In such a
situation a member and ‘shareholder’ are interchangeably used to mean the same person. It was
held that unless the context otherwise requires the word ‘member’ under s. 2(27) means a
shareholder excepting a person who is a bearer of a share warrant of the company.3But in case of an
unlimited company or a company limited by guarantee a member may not be a shareholder for such
company may not have a share capital However, sometimes a distinction is maintained between a
member an a shareholder in the case of a company having a share capital under certain
circumstances. These circumstances can be rectified easily.

Therefore any subsequent reference to the term member will be including within its ambit the term
equity shareholder. This clarification was required because the Companies Act has used the term
member in most of the places while conferring rights and it includes within its ambit the equity
shareholders.
One thing more to be kept in mind is that equity shares and the ordinary shares refer to one and the
same thing.

3
Srikanta dutta Vs Venkatashwara Real Estate Enterprises (p.) Ltd [1990] 68 Comp Cases216 (kar)
Financial rights.

Equity shares in financial terminology is sometimes referred to as the “risk capital”, normally
confers on their holders the residue of rights of the company which have not been conferred on
other classes. The equity shares carry the main financial risk if the company is unsuccessful, but
they carry the greatest prospects of financial reward if the venture of the company is successful. It
may be noted that while a company can only have equity share capital, but it cannot have only
preference share capital. By the very definition of “ preference share capital” in section 85,
preference shareholders have certain preferential rights over the equity shareholders. Thus in the
absence of equity share capital there cannot be a preference share capital.4 Thus in the absence of
preference shareholders all the rights of the shareholders such as dividends and repayment of
capital in case of winding up will be enjoyed only by the equity shareholders.

Dividends and share in the surplus profits

What is dividend.- In commercial usage, ‘ dividend’ is the share of the company’s profits
distributed among its members.5In the hands of the recipient it mean the sum paid and received as
the quotient forming the share of the divisible sum payable to the recipient.6 Thus we may say that
the corporate earnings and profits not retained in the business and when distributed among the
shareholders, are known as dividend.

The companies Act does not give any specific power to the companies registered there under to
declare and pay any dividend. The power to pay dividend is inherent in a company and is not
derived from the Companies Act or the Memorandum or Articles of Association although the
Articles generally regulate the manner in which dividends can be declared. However it is not
necessary that the dividends have to be declared every year, it can be declared only when a
company has generated profits. According to section 205 dividends can be declared out of the
following three sources:
• Current profits
• Past reserves created out of profits or credit balance in the profit and loss account
brought forward.
• Out of moneys provided by the government if any

However it has to be kept in mind that profits are not paid from the entire profits. It is paid only
from divisible profits. Only those profits which can legally be distributed to the shareholders of the
company are called divisible profits. If the directors on some fair basis taken a decision as to the
proportion of profits, which should be distributed by way of dividend, the courts do not interfere in
this matter even if larger profits and more dividend could have been paid.7
Dividend on equity shares.- equity shareholders are entitled to be paid a dividend only after all
preference dividends have been paid to date. Although the equity shareholders stand behind in
priority for payment of the dividend, he generally enjoys the privilege of higher dividends. The
preference dividend is fixed and cannot be increased, however large the company profit may be,

4
Bihar State Financial Corp Vs CIT, Bihar (1976) 46 Com Cases 155 (pat-db)
5
Barjor Hoshangi Vakil Vs Mettur Chemical & Industrial Corporation Ltd. [1963] 33 Comp Cases 932
6
Kent Waterworks Vs Lamplough [1904] A.C 27
7
Stewart Vs Sashalite Ltd [1936] 2 All ER 1481
unless the preference shares carry the right to participate in surplus profits. Except in that case,
therefore, the whole of the residual profits of the company after paying the preference dividend
may be paid out as a dividend to the equity shareholders either immediately or in later years
(including the bonus issue). The equity shareholders are further compensated by enjoying the
voting power at general meetings.

Equity shares with differential rights.- The Companies (Amendment) Act , 2000 has introduced a
new variety of equity shares [ vide section 2(46A) and 86 of the Act] which may have differential
rights to govern such shares .As these shares may have differential dividend rights , whether with
or without voting rights, it is to be seen that dividend on these shares is declared / paid in
accordance with rules framed by the central government.

Share in capital on Winding up

Winding up of a company is a process whereby its life is ended and its property administered for
the benefit of its creditors and members.8 An administrator called a liquidator is appointed and he
takes control of the company, collects its assets, pays its debts and finally distributes any surplus
among the members in accordance with their respective rights. In the words of Pennington winding
up or liquidation is the process by which the management of a company’s affairs is taken out of its
directors’ hands, its assets are realized by a liquidator, and its debts and liabilities are discharged
out of proceeds of realization and any surplus of assets remaining is returned to its members or
shareholders9.

In the event of winding up or any other arrangement of repayment of capital, there is a preferential
right on the preference shareholders to be repaid the amount of capital paid- up on such share. If
after that there is some asset left the equity shareholders are paid their paid-up capital. If even after
that there is some surplus left as a general rule it is only the equity shareholder is entitled to a share
in it, unless provided in the articles of the company. (The case of participatory preference shares).
On a winding up, there is no presumption that the preference shareholders are entitled to a share in
the surplus assets. The onus is on them to prove that the their rights were not exhaustively defined
in the articles and that they are entitled to share in the surplus assets after the equity share capital
has been paid. 10. The right of participation in the surplus profits while the company is a going
concern does not by itself entitle the preference shareholders to the right of participation in the
surplus assets on winding up. There must be a specific provision conferring this right upon them.11
In the absence of such a right if they are paid out leaving all the surplus at the disposal of ordinary
shareholders, they cannot complain of any unfairness or prejudicial conduct only on that ground. At
the end of the winding up the company will have no assets or liabilities, and it will therefore be
simply a formal step for it to be dissolved, that is, for its legal personality as a corporation to be
brought to an end.

8
A.K. MAZUMDAR, G.K.KAPOOR, Company Law And Practice, Taxmann, 2003, New Delhi,p.1199
9
Pennington,s Company Law, 5th ed , page 839 as cited in A.K. MAZUMDAR, G.K.KAPOOR, Company Law And
Practice, Taxmann, 2003, New Delhi p.1199
10
Re, John Smith Tedcaster Brewery Co. Ltd. (1952) 2 AlleR 751 (Ch D)
11
Dimbula Valley (Ceylon) Tea Co Ltd. Vs Laurie !1961 ) All ER 769
Al l equity shareholders are entitled to receive offer to subscribe to further issue of capital on
rights bas is. (Section 81)

Section 81(1) of the Companies Act lays down that as a general rule that when ‘rights shares’ are
allotted “such further shares shall be offered to the persons who at the date of the offer, are holders
of the equity shareholders of a company, in proportion, as nearly as circumstances admit, to the
capital paid up on those shares at that date”;12

If a company wishes to increase its subscribed capital after one year of the first allotment of shares
or after two years from the formation of the company, whichever is earlier, by allotment of further
shares (popularly referred to as the ‘rights shares’), it will have to comply with the provisions of
the section. However, Any issue or allotment of shares within two years of the formation of a
company or within 1 year after the first allotment, whichever event occurs earlier, will not be
affected by the requirements of this section. Also, if a special resolution is passed under sub-section
1-A in respect of further allotments, the procedure prescribed by sub-section 1 need not be
followed.

This section is intended to cover cases where the directors intend to increase the capital by issuing
further shares within the authorized limit, because it is within that limit that the directors can decide
further, unless of course they are precluded from even doing that by the Articles of Association of
the company. Accordingly the section becomes applicable only when the directors decide to
increase the capital within the authorized limit, by issue of further shares.13

Allotment to renounce [Sub-section 1(c)]

Sub- section 1(c) allows an equity shareholder to renounce his shares in favour of a third person.
But as this sub-section is subject to the qualification ‘unless the articles of the company otherwise
provide’; in interpreting this clause it is necessary to have due regard to the to the company’s
article. However in order to attract the opening words of this clause, it is not necessary that the
articles of the company must contain an express provision entitling right to renunciation.14

Where however the articles of association of a company restrict the right of renunciation, while
making an offer of ‘rights shares’ accompanied by a right to renounce in favour of a nominee, most
companies reserve to the board the right to refuse to allot the shares to the renouncee either in full
or in part.

Where under section 81(1)( c ) the offeree of new shares exercise his rights to renounce the shares
offered to him in favour of any other person, the nominee gets a right to accept the offer and
complete the contract.

All equity shareholders are entitled to receive fully paid bonus shares. - The issue of bonus
shares by a company is a common feature. When a company is prosperous and accumulates a large

12
S. 81 (1)(a) Companies Act 1956
13
Nanalal Zaver VS Life Insurance Co. Ltd AIR 1950 Sc 172. the judgement in this case was followed by the Supreme
Court in Needle Industries(India ) Ltd Needle Industries Newey (India ) Holding Ltd. AIR 1981 SC 1298
14
ibid
surplus, it converts this surplus into capital and divides the capital among the members in
proportion to their rights. This is done by issuing fully paid shares representing the increased
capital. The shareholders to whom the shares are allotted have to pay nothing. The purpose is to
capitalize profits, which may be available for division, or to utilize quasi capital gains. If the
Articles of Association empower the company, the company can capitalize profits or reserves and
issue fully paid shares of the nominal value equal to an amount capitalized, to its shareholders. But
in some cases, the articles provide for an option to the shareholders to take cash instead of shares.
This would make no difference in the position, except of course to the extent to which the right is
exercised.

Voting Rights of equity shareholders (section 87(1))

Every holder of equity shares [carrying voting rights] shall have a right to vote by virtue of section
87(1) in the resolutions at the meetings of the company. Right of equity shareholders to vote cannot
be prohibited on the ground that he has not held his shares for any specified period before the
meeting or on any other ground 15. But this provision is applicable only in case of a public company
or a private company which is subsidiary of a public company. The provisions in the articles of the
company that only those shareholders will be entitled to vote whose names have been there on the
register for two months before the date of the meeting was held to be in contravention of the act16.
However in case of a private company there may be placed certain conditions on the voting rights
of the equity shareholders.

The grounds on which the right of an equity shareholder may be excluded are (section181)
• Non-payment of calls by a member, or
• Other sum due against the member or
• Where the company has exercised the right of lien on his shares.

The manager of a company is neither entitled to attend a general meeting of the shareholders not to
vote in respect of forfeited shares registered in his name as manager in the trust of the company.17

This section confers voting rights on every members holding an equity share capital however small
it may be. A company cannot by its articles or otherwise deny voting rights to its holders of shares
below a minimum number such as “ only shareholders holding five or more shares are entitled to
vote” and so on; nor can a maximum number of votes be fixed irrespective of the number of shares
held by a member; the only exception being in the case of banking companies.

As for the Rights to have vote recorded it was held in Pender vs Washington18 by Jessel MR while
highlighting the importance of member’s voting rights “ this is an action by Mr Pender for himself /
he is a member of the company. Whether he votes with the majority or the minority he is entitled to
have his vote recorded- an individual right in respect of which he has a right to sue. He has a right
to say, ‘ whether I vote in the majority or minority, you shall record my vote as that is a right of
property belonging to my interest in this company, and if you refuse to record my vote I will

15
section 182
16
Ananthalakshmi Vs H.I.&Ftrust AIR 1951 Mad 927
17
Melbourne Baking Corpn. Ltd. Cos Statute 1864 , (1885)11 VLR 610 Aus
18
(1877) 6 Ch D 70
institute legal proceedings to compel you’. It seems to me it can be maintained as a matter of
substance, and that there is no technical difficulty in maintaining it…”

At a meeting of the shareholders of the company, certain of the shareholders were, according to the
decision of the majority of those present, not allowed to vote; these shareholders instituted for a
declaration that they were entitled to vote in the meeting. It was held that that the plaintiffs had a
cause of action and there was nothing in the Companies Act to exclude the jurisdiction of the civil
court in such a suit.19

Shareholder’s voting agreements.– It also deserves to be pointed out that a shareholder’s vote is a
property right and in general there is no duty to use it for the benefit for any other than the
shareholder. It is open to a member to become bound by contract to exercise voting power as
directed by any other person and that undertaking may be enforced by a mandatory injunction.20

Shareholder’s pooling agreements.- In its decision in Rolta India ltd Vs Venire industries Ltd. 21
the court observed as follows “regarding pooling agreement it may be noted that it is an agreement
between two or more shareholders which generally provides that in exercising any voting rights ,
the shares held by the shareholders shall be voted as provided therein; it is a contract to the effect
that the shares held by them shall be voted as one single unit. The shareholders bind one another to
vote as they mutually agree. In a poling agreement, each shareholder retains sole ownership of
shares binding himself only to vote for a specific person or in a certain way. These agreements are
enforceable because the right to vote is a proprietary right. The right to vote may be aided and
effectuated by a contract. Generally pooling agreements are thought in relation to control of private
companies and smaller public companies.

A pooling agreement may be utilized in connection with the election of directors and shareholders’
resolutions where shareholders have aright to vote. However, a pooling agreement cannot
supersede the statutory rights given to the board of directors to manage the company, the
underlying reason being that the shareholders cannot achieve by pooling agreement what is
prohibited to them, if they are voting individually. Therefore the power of the shareholders to unite
is not extended to contracts, whereby restrictions are placed on the powers of the directors to
manage the business of the corporation.

19
Gobinda Das Vs Akhoy Dey (1905) 10 CWN 906 (Cal DB)
20
Pudephatt Vs Leith (1916) 1 Ch 200
21
(2000) 100 Com Cases 19
rights of shareholders in relation to the affairs of the companies

It is the capital of the equity shareholders that is invested in a company. They are at maximum risk
if the company doesn’t perform well as they are the last persons in sequence to be conferred with
financial rights. On the contrary if the company performs well they are most likely to gain more in
comparison to others. Therefore the Companies Act has conferred wide powers to the equity
shareholders to overlook the affairs and the management of the company, to see that the company
works properly. This chapter will incorporate such rights.

Any member can ask for copy of memorandum and articles of association (Section 39)

The section requires that every agreement and every resolution referred to in section 192 should be
embodied in the Memorandum or Articles and on being required by a member and within seven
days of such requirement a copy of them should be furnished to him, on payment of a fee of one
rupee, by the member. Similarly a member is entitled to an updated copy of a Memorandum of and
Articles of Association on demand. (See section 40).

Section 391 also requires that a copy of the order of Court under that section approving of a
compromise or arrangement with creditors and/or members or sanctioning the reconstruction or
amalgamation should be the next two every copy of the memorandum of the company issued after
such order comes into effect [section 391 (4)]. The object is to give the agreements and resolution
and orders the same importance as the articles of the company.

Members holding not less than percent of the issued shares having not consented to in favour
of resolution before variation of rights may apply to Court for cancellation of the variation in
the rights of shareholders. (Section107)

The reason for giving this right to dissidents is that a group of persons holding a class of shares
may have divergent interests because some have and others have not additional interests in the
company other than as members of that class. Preference shareholders may include some who also
hold ordinary shares. This divergence of interest is a familiar phenomenon in cases where court has
been asked to sanction a scheme of arrangement following class meetings and in such a case the
true position has been stated by Adam J.: "The Court may treat the result of the voting at the
meeting of the class as not necessarily representing the views of the class as such an, and thus
should apply with more reserve in such a case the proposition that the members of the class are
better judges what is to their commercial advantage than the court can be.”22

This section relates to the variation and abrogation of rights attached to shares and has no
application to a cancellation of shares on a reduction of capital. The application must show that
the applicant is authorised by the required percentage of the dissenting shareholders and that he did
not consented to or vote in favour of the resolution. If he is proceeding on behalf of other members
of his class also, he must also show his authority to act for them.23

22
Re Chevron (Sydney ) Ltd., (1963) VR 249at 255
23
Re Urban and Provincial Stores, (1943) 1 All ER 342
Every member has a right to apply to a Company law Board for rectification of register of
members.(section 111)

A private company or a deemed public company when it refuses to register a transfer of or

transmission by operation of law of the right to, any shares debentures or interest therein, it is
required to send notice of refusal to the transferee and transferor or the person giving intimation of
transmission within two months from the date on which the transfer deed or the intimation of the
transmission is delivered to the company. The company is also required to give reasons for such
refusal.24An aggrieved person, being the transferor or the transferee may apply to the company Law
Board under sub-section (2) or (4) against refusal, or for rectification of the register of members, if
his name is entered on the register for sufficient cause ,or for omission of his name from the register
or default in making as an entry of his name in the register. An appeal under sub-section can be
filed within two months from the receipt of the notice of refusal or within four months from the
date of lodgment of transfer application in case no notice is given . There is no limitation period
provided for making an application for rectification of register of members under sub- section 4.
The Company Law Board is empowered to award damages sustained by the aggrieved party and
pass interim orders or stay regarding payment of dividend , allotment of bonus or rights shares. The
board may decide any question relating to the title of the parties and direct registration of transfers.
However no petition can be filed in respect of private company which by its articles has imposed
restrictions against the right to transfer its shares.25

Every member has right to inspect documents and registers to be kept by the company under
the said Act and ask extracts therefrom.( section 167)

In case of default in holding an annual general meeting , as required by section 166, the Company
Law Board may exercise the power to call or direct the calling of the annual general meeting but
only on an application of a member. The underlying policy is to exercise the power only where the
management is found to be unwilling to convene an AGM of the company, with a view to keeping
the shareholders in the dark about the affairs of the company or where the management is unable to
convene the meeting due to party friction or other like reason.26

As to who can apply for an order for holding a meeting, the Company Law Board in its decision27
stated the effect of the section as follows: “it is clear that a member and not a company is
empowered to invoke the provisions of s. 167. …. The company cannot seek directions against
itself. The Company Law Board cannot in the exercise of its inherent powers act in violation of the
law. The discretion has to be applied according to the known principles of law. The application
filed by the company is not in consonance with the provision of s. 167. The defect cannot be
rectified by impleading a member subsequently.”

24
vide sub-section 1
25
vide sub – section 13
26
A RAMAIYA , Guide to the Companies Act, Wadhwa, 2000, Nagpur.p.1559
27
Cannanor Whole Body p Ltd Vs Saibunnissa S.V (1998) Com LJ 518
Corporate bodies being members of the company can appoint representatives to attend
general meetings.(section 187)

The section applies to any body corporate , as defined in section 2(7). It enables the person
authorized, to act as the representative of the body corporate at any meeting of the company and
exercise all the rights and powers which the individual member of a company may have. The
meetings referred to in this section are meetings of the company, such as annual general meetings
and not Board meetings.

It is necessary for this power to be exercised that the company’s name is in the in the register of
members of the company whose meetings are to be attended. Thus, where a company purchased
shares of another company but that other company did not register the company as a shareholder
and the seller of the shares whose name remained in the register. Appointed a representative on the
behalf of the purchaser company , it was held that he was neither a representative nor a proxy and
his votes can be rejected.28 A company, which is holding shares in another company, can attend the
meetings of the other through a representative. Only one such representative can be appointed
irrespective of the amount of shareholding. There is neither any need for nor any question of joint
representatives.29

Every member has right to inspect minutes of general meetings and ask for extract there
from. (Section 196)

A separate book should be kept for minutes of general meetings because of the right of inspection
available to members of the company in respect of minutes of general meetings. A member is
entitled to a copy of the minutes of proceedings of general meetings within seven days after
requesting for it. The right to inspect or be furnished with a copy of the minutes accrues only after
their entry in the books kept for the purpose within thirty days of the conclusion of the meeting as
provided in section 193 . Default in entering the minutes in the books within the time limit provided
is punishable under the section. Minutes are usually open to the inspection of any member on
request. It has been held however that beneficiaries under a trust settlement are not entitled to
inspect the minutes of the meetings of trustees or the agenda prepared for such meetings.30

A member aggrieved by company’s refusal to allow inspection or to supply copies of the minutes
of general meeting can seek redressal by filing a petition before the Company Law Board. It should
be noted that the members’ right of inspection or to require a copy of the minutes of the
proceedings of a general meeting does not extend to minutes of board meetings .The creditors or
the members of the public have no such right of inspection.

Every member is entitled to have copies of accounts and auditor’s report or statement of
salient features. (Section 219)

The section provides for a right of members and other entitled persons to have copies of every
balance sheet , profit and loss account , the auditors report and every other document required to be

28
Coachcraft Ltd. Vs S.V.P Fruit Co. Ltd. (1980)28 Aust LR 319 (PC)
29
Manoj Kumar Vs Mariman Point Building Service (1995) 84 Com Cases559n (mad)
30
Londonderry’s Srttlement Vs Welsh (1965) Ch 19
annexed or attached to the balance sheet including the report of the board of directors 31and
documents in respect of the subsidiary companies, if any 32which is to be laid before the company
in general meeting. The provisions of this section are applicable to all companies, whether public or
private, and whether having share capital or not. Issue, circulation or publication of balance sheet
and profit and loss account without being authenticated in accordance with section 215 and without
the documents required to be annexed or attached thereto is an offence punishable.33

Any member or debenture holder is entitled on demand to be furnished, free of cost , with a copy of
balance sheet and other documents . There is no time limit prescribed for making the demand.
When the company has issued a notice convening the AGM , it is presumed that the balance sheet
etc. are ready and from the date of such notice , a copy thereof may be demanded.

Right of the shareholders to appoint proxy

Section 176 of the Companies Act 1956 provides that: Any member of a company entitled to attend
and vote at a meeting of the company shall be entitled to appoint another person (whether a
member or not) as his proxy to attend and vote instead of himself.

This raises a problem, especially when shareholders resides at a distance, generally to attend the
meetings of company , but through the system of proxies he can make use of his right of vote by
appointing a man of his choice as his proxy . Company is bound to inform the shareholders their
right to appoint a proxy by giving in every notice calling a meeting of the company a statement or
note 'with reasonable prominence' that a member entitled to attend and vote at a meeting of the
company shall be entitled to appoint his proxy to attend and vote instead of himself and that the
proxy need not be a member.34This provision is not applicable to a company unless it is a
subsidiary of a public company and also to companies limited by guarantee not having a share
capital unless their articles provide for proxy voting. However the Act does not provide proxy right
to speak at a meeting, and a proxy is not entitled to vote as well except on a poll

Right of shareholders to convene extra ordinary general meeting (section 169)

Section 169 of the Act empowers specified number of shareholders the right to convene an extra-
ordinary general meeting of the company. In such a situation it is obligatory on part of directors to
call extra ordinary general meeting provided such requisition is made by holders of not less than
one tenth of the equity capital carrying voting rights. In Life Insurance Corporation of India Vs
Escorts ltd 35 the question arose whether the life Insurance Corporation, as a shareholder of Escorts
Ltd has a right to so call an extra ordinary general meeting of the shareholders of the company
under section 169 for the purpose of moving a resolution to remove some directors and appoint
others in their place. The Supreme Court held that the LIC could not be restrained from doing so
nor was bound to disclose its reason for moving the resolutions. Chinappa Reddy J observed:

31
Section 217
32
Section 212
33
Section 218
34
Section 176(2)
35
AIR 1986 SC 1370
“We see that every shareholders of a company has the right subject to statutorily prescribed
procedural and numerical requirements to call an EGM’s. He cannot be restrained from calling a
meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved in the
meeting. Nor are the reasons subject to judicial review.”

Preference shareholders have voting powers only as regards matters relating to the preference
shareholders. They have no voting right and therefore no right to requisitioning in respect of other
matters.

Appointment of directors

According to section 255 , the directors must be appointed by the company in a general meeting . In
case of a public company or of a private company which is subsidiary of a public company unless
the articles provide for the retirement of all directors at every general meeting, at least two third of
the total number of directors must be persons whose period of office is liable to determination by
rotation. In other words, only one third of the total number of directors can be non-rotational
directors.

In case of a private company, which is not a subsidiary of public co. which is not subsidiary of a
public co., if the articles are silent as to the appointment of directors , or do not specifically provide
for the appointment of directors otherwise then in a general meeting than the directors can be
appointed in a general meeting by the shareholders.36

Winding up

Section 439(1)(c ) says that a contributory can petition a court for winding up in certain
circumstances. A contributory includes a holder of fully paid shares. A holder of fully paid shares is
a contributory for the purpose of a petition not because he is liable to contribute but because he may
have interests in winding up. In India a contributory shall be entitled to present a petition for
winding up of a company notwithstanding he is a holder of fully paid shares or that the company
may have no assets at all or may have no surplus assets left for distribution among the shareholders
after the satisfaction of the liabilities. This position presumably stems from the position that a
shareholder has as such has a stake in the affairs of the company irrespective of whether he is
holder of fully paid shares. However the court has complete discretion whether to order winding op
on taking totality of circumstances in account.

Prevention of oppression and mismanagement

Whenever the affairs of a company are being conducted in a manner prejudicial to public interest or
in a manner oppressive to any member or members, an application can be made to CLB under
section 397. Alternatively an application can be made under section 397 when facts would justify
that an winding up order on the ground of “just and equitable” is maintainable but the winding up
would unfairly prejudice the applying member. Section 398 provides for relief in cases of
mismanagement. The section provides that the requisite number of members (as laid down in s.399
) of a company may apply to CLB for appropriate relief on the ground of mismanagement of the

36
section 255(2) as interpreted in swapan das Gupta Vs Navin Chand [1988]3 Comp LJ 6 (Cal)
company if the affairs of the company are being conducted in a manner prejudicial to public
interest or in a manner prejudicial to the interests of the company.

The requisite number of members who must sign the application is given in s. 399.

Investigation in the affairs of the company

Section 235(2) of the Act empowers the CLB to consider an application from a specified number of
shareholders and to declare that an investigation be conducted into the affairs of the company.
Upon such declaration by the CLB, the central Government shall appoint one or more competent
persons to investigate the affairs of the company and to report thereon in such manner as the central
government may direct. The shareholders competent to make an application to the CLB in case of a
company having share capital not less than 200 member or members holding not less than 1/10 the
of the voting rights therein. A single member holding 10% shares in the company is eligible to
make a petition under this section.37

The application by members should be supported by such evidence as the CLB may require for the
purpose of showing that the applicants have good reason for requiring the investigation.38The
central government may before appointing an inspector require the applicant to give security , for
such amount not exceeding 1000 rupees as it may think fit, for payment of the cost of investigation.

The CLB after hearing the parties may declare that the affairs of the company ought to be
investigated and on such declaration the central government shall one or more investigators to
investigate the affairs of the company in such manner as directed by the central government.

Removal of a director by shareholder (Section 284)

Section 284 recognises the inherent right of shareholders to remove the directors appointed by
them. It is not even necessary that there should be proof of mismanagement, breach of trust,
misfeasance or other misconduct on the part of the directors. Where the shareholders feel the
policies pursued by the directors or any one of them are not to their liking, they have the option to
remove the directors by passing an ordinary resolution in the same way as they have the right to
appoint directors by passing an ordinary resolution. Section 284 provides that a company may, by
ordinary resolution passed in general meeting after due receipt of a special notice remove a director
before the expiry of his term of office.

The notice must disclose the grounds on which the director is proposed to be removed. The
disclosure of the ground for removal is a matter of substance and not of form because the directors
concerned are entitled to make a representation in writing against their removal at the meeting . The
company is bound to every member of the company to whom the notice of the meeting has been
sent. It is only after these steps are taken that the resolution can be passed. 39 Also the first proviso
to the Sub-section 1 provides for certain exceptions.

37
Punjab Agro Industries corp ltd. Vs Superior Genetics [2002] 35 SCL 438 (CLB)
38
section 236
39
Queen Kuries & loans Ltd Vs Sheena Jose [1993] 76 Comp as. 821(ker)
A rationale behind the provision can be explained thus: “the need for removal arises because
normally the shareholder s have no right to interfere in the decision taken by the board of directors
subject to any regulation already made in the articles or subject to any regulation already made by
the shareholders. Yet, when the shareholders are not happy with the directors and their functioning,
they must have the option to remove them from the board,”40

CONCLUSION

It is generally perceived that the shareholders are a passive part of a company even though it is their
interest at stake in a company. It might be because of inconvenience on part of the shareholder or
might be simply indifference. They are merely concerned about their financial rights , that is
dividends. But what they fail to realize is that their right of dividend is interwoven with that of
proper functioning of the company. Management, unless it has its own interest involved in the form
of profits willl not be as much interested in the well being and generating better profits. If more and
more profits are to be generated and the company has to do well they need to keep the management
and the directors on their toes so that they work well. This is more so in the case of equity
shareholders who are at the highest risk if the company doesn’t do well. And conversely when the
company does well they are in the most favourable position to make gains.

It is for this reason that a number of rights have been conferred on the equity shareholders. Because
they are at the maximum risk when the company does not do well, opportunity is provided to them
to maximum gains when the company does well, in the form of dividends. They can earn more than
the more secure breed of shareholders that is the preference shareholders if the company does well
and at the same time loose out more at the time of loss. It is because of the high risk that they carry
that they are conferred with voting rights in the meetings. They are provided with rights to keep a
constant vigil on the affairs of the company and have the right to lodge a complaint for non
compliance with the rights they are conferred with or for mismanagement. Further they can get the
affairs of the company investigated if they find something fishy going on. As remedial measures
they have been conferred with the powers of electing a new management or directors or removing
the existing ones. To avoid the inconvenience part to them they are empowered to appoint proxies
for attending meetings.
Thus we have seen that very wide powers have been conferred to the equity shareholders to see to it
that the company runs effectively and properly. The only need is that shareholders remain more
vigilant, aware of their rights and make constant checks so that the directors and the management
always remain on their toes and ensure better returns.

40
A.M Chakraborti as cited in Taxmann p. 648