Modules for Investors
From Spectator to Shareholder
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What are the rights and duties of a shareholder?
Essentially, shareholders are owners in a company to reap benefits of a business’ success. A shareholder can be a person, company, or organization with at least a minimum of one share in a company’s stock. Shareholders play an important role in the framing profits of the company. There are two main types of shareholders:
1. Equity Shareholders
As the name suggests, they are owners of a company’s equity. These shareholders enjoy voting rights over matters concerning the company. Moreover, they can also exercise the aforementioned rights, including filing class-action lawsuits against any matter that can harm the company.
2. Preference shareholders
Preferred shareholders are prioritised over Equity Shareholders when considering a company’s profit distribution. On the other hand, they do not hold a right to vote in matters pertaining to a company’s executive decisions. Also, preference shareholders are entitled to fixed dividend rates, even if said company’s profitability is at stake.
Though both Equity Shareholders and Preference Shareholders see their value increase with the positive performance of the company. However, it is the Equity Shareholders that experiences higher capital gains or losses.
Importance of Shareholders
Along with earning profit by investing in a company’s stocks, these shareholders also play an important role in operating, financing, governing and controlling various aspects of a business. For instance:
1. Company operations
These shareholders directly influence company operations by appointing senior management personnel. For instance, investors choose to invest in stocks that can meet their expected earnings, thus keeping companies under regular force to meet their sales and profit estimations.
2. Financing a company
Companies receive financing from shareholders in lieu of ownership rights. Start-ups and private businesses can also raise funding by way of private placements or share issues to select funding institutions and individuals.
3. Governing a company
Board members of public companies are required to maintain transparency with the list of shareholders regarding its business condition and operations. In fact, senior leaders of such companies spend time, discussing matters pertaining to the company’s governance with market analysts, shareholders and such entities.
4. Control over a company
Shareholders can utilise their powers over opting to choose the personnels to control a company’s operations. For example, shareholders can effectively prevent takeover attempts, if they don't agree upon the sufficient price.
Thus, with control over the majority of aspects of a company’s operations, shareholders play a significant role in its overall performance and profits.
Shareholders’ Roles and Rights:
1. Appointment of directors
Shareholders play a direct role in the appointment of directors, with passing of an ordinary resolution. 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.
Apart from this shareholder also can challenge any resolution passed for the appointment of a director in the general body meeting.
2. Legal action against directors
Shareholders also can bring legal action against the director by the rules laid down in the Companies Act 2013. They are:
- Any act done by the director in any manner which is prejudicial against the affairs of the company.
- Any act done which is beyond the law or against the constitution.
- When the assets of the company are being transferred at an undervalued rate.
- When there is a diversion of funds of the company.
- Any act done in a mala fide manner.
- Appointment of company auditors
3. Right to appoint the company auditors.
Under Companies Act 2013, the first auditor of the company is to be appointed by the board of directors. Furthermore, the shareholders at the annual general body meet at the recommendation of directors and audit committee. The appointment is usually done for a period of five years and further can be approved by passing a resolution in the annual general body meeting.
4. Voting rights
Shareholders also have the right to attend and vote at the annual general body meeting. Every company registered in India is required to comply with the provisions in the Companies Act 2013. It is mandatory for every company to hold at least one annual general meeting. At the meeting, various mandatory agendas are discussed such as, adoption of financial statements, appointment or ratification of directors and auditors etc.
When a resolution is brought by members of a company then according to companies act 2013 it can be passed only by the means of voting by the shareholders. Companies Act 2013 recognizes following types of voting:
- Voting by the showing of hands
- Voting done by polling
- Voting done by electronic means
- Voting by means of postal ballot
A shareholder also has a right to appoint a proxy on his behalf when he is unable to attend the meeting. Though the proxy is not allowed to be included in the quorum of the meeting in case of voting, it is allowed by following a procedure mentioned in the Companies Act 2013.
5. Right to call for general meetings
Shareholders have the right to call a general meeting. They also can approach the Company Law Board for the conduction of general body meetings, if it is not done according to the statutory requirements.
6. Right to inspect registers and books
As shareholders are the main stakeholders in a company, they have the right to inspect the accounts register and also the books of the firm and can ask questions about the same if they feel so.
7. Right to get copies of financial statements
Shareholders have the right to get copies of financial statements. It is the duty of the company to send the financial statements of the company to all its shareholders either in a quarterly or annual statement.
8. Winding up of the company
Before the company is wound up the company has to inform all the shareholders about the same and also all the credit has to be given to all the shareholders.
What Liabilities Does a Shareholder Have?
There are very few risks with becoming a shareholder in a company. The underlying reason for this is that a company is a separate legal entity.
It is also worth noting that you may take on a much wider range of liabilities than a normal shareholder if you are also a director of the company. This may occur if you have powers that are ordinarily reserved for directors. Directors are responsible for the management of the company and its day-to-day affairs. Under the law, director’s duties place a heavier burden on directors than on shareholders.
Duties of shareholders
The main duty of shareholders is to pass resolutions at general meetings by voting in their shareholder capacity. This duty is particularly important as it allows the shareholders to exercise their ultimate control over the company and how it is managed. Shareholders can vote in one of two ways: on a show of hands or through a poll vote where each vote will be proportionate to the number of shares held by each shareholder. A show of hands is usually the preferred method of voting that takes place at general meetings.
There are two resolutions that can be voted on at a shareholders meeting: an ordinary resolution, and a special resolution.
1. Ordinary resolution
An ordinary resolution is passed by the shareholders if a simple majority of shareholders present at the meeting vote in favour of the proposal. Therefore, more than 50% of the votes cast must be in favour, usually displayed through a show of hands.
2. Special resolution
A special resolution is sometimes required by the Companies Act in certain cases; for instance, to change the Articles of Association, or for other important or sensitive matters. The Articles can also require a special resolution. For a special resolution to be passed, a 75% majority must vote in favour. If there is no specific mention of what type of resolution is required, the presumption is that there will be a vote on an ordinary resolution.
Now that you know the Rights & Duties of a shareholder i.e How to start trading in equities? it’s only logical that we move on to the next big question -The taxes and finances of Insurance To discover the answer, head to the next chapter.
A quick recap
- A shareholder can be a person, company, or organization with at least a minimum of one share in a company’s stock.
- There are two types of shareholders i.e Equity Shareholders and Preference Shareholders.
- Shareholders directly influence company operations by appointing senior management personnel.
- Shareholders also have the right to attend and vote at the annual general body meeting.
- The main duty of shareholders is to pass resolutions at general meetings by voting in their shareholder capacity.