CHAPTER 4

RIGHTS AND PRIVILEGES OF

SHAREHOLDERS
 OBJECTIVES

The chief purpose and objective of corporate

governance is the continued creation and
maintenance of long-term shareholder value.
While stressing the rights of shareholders as
the legitimate owners of a corporation - as
reinforced by the recommendations of
various committees - this chapter outlines
the processes and mechanism of investor
protection.
 Chapter Outline
 Introduction
 Rights of Shareholders
 Views of Various Committees on the Issue
 Poor Track Record of Shareholder
Protection
 Grievance Redressal Process
 Introduction

Corporate governance is needed to create a

corporate culture of consciousness,
transparency and openness. It refers to a
combination of laws, rules, regulations,
procedures and voluntary practices to enable
companies maximise shareholders’ long-term
value.
Theoretical Basis - Agency Costs

The most fundamental theoretical basis of

corporate governance is agency costs.
Shareholders are the owners of joint-stock, limited
liability company, and are its principals. By virtue
of their ownership, the principals define the
objectives of the company. The management,
directly or indirectly selected by shareholders to
pursue such objectives, are the agents. While the
principals might assume that the agents will
invariably do their bidding, it is often not so.
 Two broad instruments that reduce agency
costs and hence, improve corporate
governance, are

 Financial and non-financial disclosures

 Independent oversight of management, which

consists of two aspects - The first relates to the
role of the independent, statutory auditors and
the second aspect of independent oversight is the
board of directors of a company
 Rights of Shareholders

A Shareholder of a Company

1. has a right to obtain copies of the Memorandum of

Association, Articles of Association and certain
resolutions and agreements on request on payment of
prescribed fees (Section 39);

2. has a right to have the certificate of shares held by

him within 3 months of the allotment;
 Rights of Shareholders (contd.)

3. has a right to transfer his shares or other interests in

the company subject to the manner provided by the
Articles of the Company;

4. has a right to appeal to the Company Law Board if the

company refuses or fails to register the transfer of
shares;

5. has the preferential right to purchase shares on a pro-

rota basis in case of a further issue of shares by the
Company. Moreover, he/she also has the right of
renouncing all or any of the shares in favour of any
other person;
 Rights of Shareholders (contd.)

6. has a right to apply to the Company Law Board for the

rectification of the register of members;

7. has the right to apply to the Court to have any

variation or abrogation to his/her rights set aside by
the Court;

8. has the right to inspect the register and the index of

members, annual returns, register of charges, and
register of investments not held by the Company in its
own name without any charge. He/she can also take
extracts from any of them;
 Rights of Shareholders (contd.)

9. is entitled to receive notices of general meetings

and to attend such meetings and vote thereat
either in person or by proxy;

10. is entitled to receive a copy of the statutory

report;

11. is entitled to receive copies of the annual report

of the directors, annual accounts and auditors’
report;
 Rights of Shareholders (contd.)

12. has the right to participate in appointment of auditors

and the election of directors at the annual general
meeting of the Company;

13. has a right to make an application to the Company

Law Board for calling annual general meeting if the
Company fails to call such a meeting within the
prescribed time limits;

14. can require the directors to convene an extraordinary

general meeting by presenting a proper requisition as
per the provisions of the Act and hold such a meeting
on refusal;
 Rights of Shareholders (contd.)

15. can make an application to the Company Law

Board for convening an extraordinary general
meeting of the company where it is impracticable
to call such a meeting either by the directors or by
the members themselves;

16. is entitled to inspect and obtain copies of minutes

of proceedings of general meetings;

17. has a right to participate in declaration of

dividends and receive his/her dividends duly;
 Rights of Shareholders (contd.)

18. has a right to demand poll;

19. has a right to apply to the Company Law Board

for investigation of the affairs of the Company.

20. has the right to remove a director before the

expiry of the term of his office;
 Rights of Shareholders (contd.)

21. has a right to make an application to the Company

Law Board for relief in case of oppression and
mismanagement;

22. can make a petition to the High Court for the

winding up of the Company under certain
circumstances;

23. has a right to participate in passing of a special

resolution that the company be wound up by the
Court or voluntarily; and

24. has a right to participate in the surplus assets of the

company, if any, on its winding up.
VIEWS OF VARIOUS COMMITTEES ON
THE ISSUE

Working Group on the Companies Act

The Working Group on the Companies Act set up by

the Govt. of India has recommended many financial
as well as non-financial disclosures. These disclosures
call for greater transparency in the accounting of the
organization.
VIEWS OF VARIOUS COMMITTEES
ON THE ISSUE (contd.)

Working Group on the Companies Act

The Company should also maintain a register which

discloses interests of directors in any contract or
arrangement of the Company and the fact that such a
register is made and is open for inspection needs to
be made known to the shareholders.

Details of loans to directors should be disclosed as an

annex to the Directors' Report
 CII’s Committee on Corporate
Governance
The objective of the CII was to develop and promote a
Code of Corporate Governance

This Report required listed companies to give the

following information under "Additional Shareholder's
Information“

 High and low monthly averages of share prices in a

major Stock Exchange where the Company is listed for
the reporting year.

 Greater detail on business segments upto 10% of

turnover, giving share in sales revenue, review of
operations, analysis of markets and future prospects.
 Kumar Mangalam Birla Committee

 The Committee made 25 recommendations, 19 of

them 'mandatory', that is, these were
enforceable.

 This Committee made some recommendation

especially with regard to shareholders.
 Recommendations Relating to
"Shareholders"

 This relationship, brings in the accountability of

the boards and the management to the
shareholders of the Company.
 Responsibilities of shareholders

 The shareholders must, show a greater degree of

interest and involvement in the appointment of
the directors and the auditors. They should
indeed demand complete information about the
directors before approving their directorship.
 Responsibilities of shareholders (contd.)

The Committee recommended, a

shareholder must be provided with the
following information:

 A brief resume of the director;

 Expertise in specific functional areas; and

 Names of companies in which the person also holds the
directorship and the membership of committees of the
board. This is a mandatory recommendation.
 The Naresh Chandra Committee

The Naresh Chandra Committee report on

'Audit and Corporate Governance' has taken
forward the recommendations of the Kumar
Mangalam Birla Committee on Corporate
Governance.

 Representation of independent directors on a

Company's board, and
 The composition of the audit committee
 The Naresh Chandra Committee
(contd.)
 The Committee has laid down stringent
guidelines defining the relationship between
auditors and their clients.

 The Committee recommended that along with its

subsidiary, associates or affiliated entities, an audit firm
should not derive more than 25 percent of its business
from a single corporate client.
 The Naresh Chandra Committee (contd.)

The Committee has further recommended

 Tightening of the noose around the auditors by asking

them to make an array of disclosures,

 Called upon chief executive officers and chief financial

officers of all listed companies to certify their
companies’ annual accounts, besides suggesting

 Setting up of quality review boards for the Institute of

Chartered Accountants of India (ICAI), the Institute
of Company Secretaries of India (ICSI) and Institute
of Cost and Works Accountants of India, (ICWA) and a
Public Oversight Board similar to the one in the United
States.
 THE NARAYANA MURTHY COMMITTEE

 This SEBI-appointed committee on corporate

governance, which submitted its Report on February 8,
2003, has in its own words “primarily focused on
investors and shareholders, as they are the prime
constituencies of SEBI.”

 The committee recommended that in order to achieve

the objectives of corporate governance and to realise
long term shareholder value, companies should agree
that
 THE NARAYANA MURTHY COMMITTEE
(contd.)

a) in case of the appointment of a new director or

reappointment of a director, the shareholders
must be provided with the following
information :

(i) A brief resume of the director;

(ii) Nature of his expertise in specific functional
areas, and
(iii) Names of companies in which the person also
holds the directorship and the membership of
committees of the board.
 THE NARAYANA MURTHY COMMITTEE
(contd.)

b) Information like quarterly result, presentation made

by companies to analysts shall be put on company’s
web-site or shall be sent in such a form so as to
enable the stock exchange on which the company is
listed to put it on its own web-site.
 THE NARAYANA MURTHY COMMITTEE
(contd.)

c) “a board committee under the chairmanship of a

non-executive director shall be formed to
specifically look into the redressing of shareholder
and investors complaints such as transfer of
shares, non-receipt of balance sheet, declared
dividends etc. This committee shall be designated
as ‘shareholders/Investors Grievance Committee!.
 THE NARAYANA MURTHY COMMITTEE
(contd.)

d) “to expedite the process of share transfers the

board of the committee shall delegate the power
of share transfer to an officer or a committee or to
the registrar and share transfer agents. The
delegated authority shall attend to share transfer
formalities at least once in a fortnight”.
 THE NARAYANA MURTHY COMMITTEE
(contd.)

Shareholders ‘Right’s and Postal Ballots

 The Narayana Murthy Committee asserted

shareholders ‘rights to receive from the company
half-yearly declaration of financial performance
including summary of the significant event during
the past six months.
THE NARAYANA MURTHY COMMITTEE
(contd.)

The Committee recommended the facility of Postal

Ballot to such of those shareholders who cannot
participate in AGM of the company they have
invested in, so as to participate effectively in
corporate democracy and in the decision-making
process. Key issues that may be decided by postal
ballots could include
 THE NARAYANA MURTHY COMMITTEE
(contd.)
a) Alternation in the memorandum of association;
b) Sale of whole or substantially the whole of the
undertaking;
c) Sale of substantial investments in the companies;
d) Making a further issue of shares through preferential
allotment or private placement basis;
e) Corporate restructuring;
f) Entering into a new business not germane to the
existing business of the company
g) Various rights attached to class of securities; and
h) Matters relating to change in management.
 Fly-by-night operators swindle
shareholders’ money.

 Since 1990, more than Rs. 60,000 crores were

collected from prospective shareholders by
several companies that did the vanishing trick.
Though their names are posted in the web, none
of the Directors or promoters has been
prosecuted either by the Registrar of Companies
or the Securities and Exchange Board of India
who can file criminal complaints against them
under
 Guide For Investors / Shareholders

 (SEBI), in its guidelines to investors /

shareholders, titled “A Quick Reference Guide for
Investors” published recently makes its known
that a shareholder of a company enjoys the
following rights :
 Rights of a shareholder, as an individual

 To receive the share certificates on allotment or

transfer as the case may be in due time.

 To receive copies of the abridged Annual Report, the

Balance Sheet and the Profit & Loss A/c and the
Auditors’ Report.

 To participate and vote in General Meetings either

personally or through proxies.

 To receive Dividends in due time once approved in

General Meetings

 To receive corporate benefits such as rights, bonus etc.

once approved.
 Rights of a shareholder, as an individual
(contd.)
 To apply to Company Law Board (CLB) to call or direct the Annual
General Meeting.

 To inspect the minute books of the General Meetings and to

receive copies thereof.

 To proceed against the company by way of civil or criminal

proceedings.

 To apply for the winding-up of the Company.

 To receive the residual proceeds.

 Rights of a shareholder, as an individual
(contd.)
Besides the above rights one enjoys as an individual
shareholder, one also enjoys the following rights as a
group of shareholders:

 To requisition an Extra-ordinary General Meeting.

 To demand a poll on any resolution.

 To apply to CLB to investigate the affairs of the

company.

 To apply to CLB for relief in cases of oppression and/or

mismanagement.
Rights of a shareholder, as an individual
(contd.)

As a debenture-holder, one has the right

 To receive interest/redemption in due time.

 To receive a copy of the trust deed on request.

 To apply for winding up of the company if the

company fails to pay its debt.

 To approach the Debenture trustee with your

grievance.
 Shareholders’ Responsibilities
 To remain informed

 To be vigilant

 To participate and vote in general meetings

 To exercise one’s rights on one’s own, or as a

group.
 Grievance Redressal (contd.)

Avenues always available to the investor to seek

redressal of his complaints are :

(i) Complaints with stock Exchange, SEBI and

Dept. of Company Affairs.

(ii). Complaints with Consumers Disputes

Redressal Forums

(iii). Suits in the Court of Law.