Lesson V Agents & Institutions in Corporate Governance - Rights & Privileges of Shareholders (SH)

Introduction: CG is needed to create a Corporate Culture of Consciousness, Transparency and Openness. It deals with the Companys ability to take managerial decisions vis--vis its claimants, in particular its shareholders apart from other stakeholders. Most fundamental theoretical basis of CG is Agency Costs. The divergence in objectives between Ownership and Management leads to Agency cost underpinning the need for CG. As discussed earlier two broad solutions to address the issue of reduction of Agency Costs are: Financial and Non-Financial disclosures Independent Oversight of Management consisting of two aspects: Role of Independent Statutory Auditors Role of BOD of Company Long Term Shareholder value A CG Code to have real meaning must focus on listed companies financed largely by Equity or Debt requiring them to adhere to codes and policies that make them Accountable and Value Oriented to the Investing Public. Shareholders can contribute to bringing about good CG. It is appropriate in this context to see what the rights of shareholders are under the Companies Act 1956. Rights of Shareholders: These rights are conferred on members of the company either by the Indian Companies Act 1956, Memorandum of Association (MOA), Articles of Association (AOA) of the company, or by General Law, especially those relating to Contracts under the Indian Contract Act, 1872. Some of the important Rights of Shareholders as stressed by the above Acts are enumerated hereunder: i. ii. iii. iv. v. To obtain MOA, AOA and certain Resolutions on request. To have the Share Certificates within 3 months of allotment To transfer shares ow other interests in the company subject to the manner provided by AOA Right to appeal to the Company Law Board (CLB) if a company refuses to register/transfer shares. Similar procedure can be followed if the company fails to rectify register of Members Has a preferential right for purchase of share on pro-rata basis in case of a further issue of shares - be it preferential or rights similarly he has the right to renounce all or any of the shares in favour of any other person Right to apply to Court to have any variation/abrogation of his rights, set aside Right to inspect the register/index of members, annual returns, register of charges/investments not held by company in its own name without any charge

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viii. ix. x. xi. xii. xiii. xiv. xv.

Entitled to receive notices of General Meetings to attend such meetings and vote either in person/proxy Entitled to receive a copy of the Statutory Reports/Copies of Annual Report of Directors, annual Accounts and Auditors Reports Right to participate in the appointment of Auditors/election of Directors at AGM of companies Right to apply to CLB for calling AGM, if not held within prescribed time limit Can require directors to convene an Extraordinary General Meeting (EGM) of company and apply to CLB in the event of refusal Entitled to obtain copies of Minutes of Proceedings of AGM/EGM Right to participate in declaration of dividend at AGM, and receive his/her dividend duly Right to: Demand Poll Apply to CLB for Investigation of Affairs of Company Remove a Director before expiry of Office, as per certain guidelines Make an application to the CLB in case of Oppression and Mismanagement Make an application to High Court for Winding up of Company under certain circumstances and participating in passing a special resolution that the company be wound up by the court or voluntarily Participate in the surplus assets of the company, if any, on its winding up

Shareholders may not even be aware of their rights. This leads invariably to unscrupulous managements taking the unwary investors/shareholders for a ride. Views of various committees on the Issue of Rights of shareholders: Various Committees have been set up to guide shareholders with regard to good CG Practices especially with reference to protection of their long term interests and the continuity of the company on a sound basis. I: Working Group on the Companies Act 1996 This Group made the following recommendations: i. ii. iii. iv. Recommended many financial as well as non-financial disclosures calling for greater transparency in the accounting of organisations Called for a tabular form containing details of each directors remuneration and commission as part of the Directors Report Any cost incurred in using the services of a Group Resource Company is to be separately disclosed In respect of funds raised from the general public a separate statement on end-use of such funds how much raised versus stated/actual project cost amount utilised

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v. vi. vii.

upto the end of the financial year vis--vis milestones achieved where the residual funds are kept and invested in what form In Non-Financial disclosures details of relatives of Directors either as Employees or Board Members to be made part of Directors Report Any interest of Directors in contracts of the company to be indicated Loans to Directors to be disclosed under 3 categories in an annexure to Directors Report viz: Housing, Medical Assistance, and Education

Based on these recommendations many changes were introduced in the Companies Bill 1997. Since most of the recommendations were not mandatory the impact on CG was not adequate. II: CII Report on CG - 1996 CIIs code, The Desirable Code of Corporate Governance was the first of its kind in India and is recognised as one of the best in the world. The objective of CII was to develop and promote a code of CG to be adopted by Indian Corporates in the Public Sector and Private Sector. The initiative of CII flowed from public concerns regarding the protection of Investors Interest especially the small investor and to move towards international standards in terms of disclosure of information by the Corporate Sector and to develop a high level of public confidence in business and industry. This code required additional information for Shareholders: High and Low Monthly Average of share price in a major stock exchange where company is listed for the reporting year Granular details of business segments upto 10% companys turnover, giving share in Sales Revenue, Review of operations, Analysis of market trends, and Future prospects Since the recommendations were not mandatory most companies did not take them seriously. CII was the first, however, to come out with its version of the Audit Committee. III: Kum+aramangalam Birla Committee 1999 SEBI as custodian of Investor Interests constituted an 18 member committee chaired by Birla, on CG mainly to protect Investors Interests. The Committee made 25 recommendations 19 of which were mandatory and enforceable. Listed companies were obliged to comply with these on account of contractual obligation arising out of the listing agreement with Stock Exchanges. It was felt that under Indian conditions a Statutory rather than a Voluntary code was far more effective and meaningful. The Committee settled for two categories of recommendations Mandatory and Non-mandatory especially with regard to shareholders. Recommendations relating to Shareholders: Shareholders are owners of the company as such they have certain rights and responsibilities. They are not expected to assume responsibility of the management of Corporate Page | 3

affairs. Shareholders delegate as owners of the company, many responsibilities to the Directors who are responsible for Corporate Strategy and Operations. This relationship brings in accountability of the Board and Management to shareholders of the company. This is the hallmark of True CG, where shareholders exercise Control without getting involved in the day-to-day functioning of the company. Responsibility of shareholders: AGMs to be used as a forum by shareholders, for ensuring that the company is being stewarded for maximising the interests of shareholders an opportunity to air their grievances if any and to get their doubts clarified. Shareholders must show a greater degree of interest and involvement in the appointment of Directors and Auditors by asking for: Brief Resume Expertise in specific functional areas Names of other companies where he/she is a director and various sub committees of the Board where a member Rights of Shareholders: In addition to the rights conferred on Shareholders (SH) under the Companies Act 1956 the committee recommended:i. SH to be informed and participate on decisions concerning fundamental change, both under Companies Act, as also in respect of material changes like takeovers, division of company, sales of assets, change in capital structure leading to change in control or confer disproportionate equity ownership and control. Presentation to analysts to be hosted on website of company and send it to Stock Exchange, where the share of the company is listed, for hosting on their website Half-yearly results including summary of significant events shall be sent to each household of SH Company to have appropriate systems in place which will enable shareholders to participate effectively and vote in shareholder meetings. SHs to be apprised of rules and voting procedure. AGMs not to be held at inconvenient venue or time and to ensure that it is not inconvenient or expensive for SH to cast their vote In respect of key decisions/material changes provision to be made for postal ballot. (SEBI already made recommendations to CLB on this aspect) Board Committee under chairmanship of Non-Executive Director should be formed to specifically look into redressing shareholder complaints such as transfer of shares, non-receipt/declaration of dividend, non-receipt of Balance Sheet. Management to be sensitised to redress of grievances. Process of Share Transfer to be entrusted to Registrars/Transfer Agents.

ii. iii. iv.

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IV: Nareshchandra Committee 2002 NC Committees report on Audit & Corporate Governance has taken forward the recommendations of the Kumaramangalam Birla Committee Report. 1. Two major recommendations of the committee were: Representation of Independent Directors on the Companys Board Composition of Audit Committee 2. The Committee recommended that all audit committee members should be independent directors. 3. Stringent guidelines defining the relationship between auditors and their clients , including that an audit firm should not derive more than 25% of its business from a single corporate client, were laid down. 4. NC Committee stressed that at least 50% of the audit team working on the accounts of a company need to be rotated once every 5 years. 5. It drew up a list of prohibited non-audit services more or less on the lines of SOX Act. 6. Committee further recommended an array of disclosures to tighten the role of auditors. 7. CEO/CFO to certify companies annual accounts 8. Setting up of Quality Review Boards 9. To allay the fears of individuals from becoming Directors, the committee came up with recommendations to exempt them from criminal and civil liabilities under various Acts. Though law has provided for every SH to have access to information, very rarely organisations make the information available. To address this disability various committees have been created to intervene in such matters. V: Narayanamurthy Committee 2003 This committee primarily focussed on Investors and Shareholders as they are the prime constituencies of SEBI. As per the committee report, in order to enhance Long-term shareholder value through CG companies should agree to the following conditions: 1. In case of appointment of a new director/reappointment of a director, shareholders must be provided with: Resume in brief Expertise in functional areas Names of the companies in which the person holds directorship/membership of committees of the Board 2. Quarterly Results, presentation made to analysts, to be hosted on Companys website and on the website of the Stock Exchanges where the share is listed. 3. Board level committee to look into Shareholders/Investors Grievances e.g: Transfer of shares, non-receipt of annual results, non-receipt of dividend, replacement of lost share certificates 4. The Committee asserted the Shareholders right to receive from the company halfyearly results including summary of significant events during the previous 6 months. Page | 5

5. The committee favoured the facility of Postal Ballot to such shareholders who cannot personally attend the AGM of the company so as to participate effectively in Corporate Democracy and decision making process Key issues to be decided by postal ballot include: i. Alteration of MOA ii. Sale of substantial portion/whole of the company iii. Sale of investments iv. Making a further issue of shares through preferential allotment v. Corporate Restructuring vi. Entering a new business unrelated diversification vii. Variation in rights to class of securities viii. Matters relating to change of management Guidelines for Investors/Shareholders: SEBI The Indian Capital Market Regulator has made it known that a shareholder enjoys following rights. Guidelines for Investors/Shareholders have been brought out in a book A Quick Reference Guide for Investors. Rights of Shareholder as an Individual: i. ii. iii. iv. v. vi. vii. viii. ix. x. To receive share certificates on allotment/transfer To receive copies of abridged annual report, Balance Sheet, Profit & Loss accounts & auditors report To participate/vote in AGM either personally or via proxy To receive dividends in due time as approved in AGM To receive corporate benefits such as rights shares, bonus, etc. once approved To apply to CLB to call or direct convening the AGM To inspect the minute books of the general meetings and receive copies thereof on request To proceed against the company by way of civil/criminal proceedings To apply for winding up of company To receive residual proceeds of assets, after settlement of secured creditors

Rights of Shareholder as a Group: i. ii. iii. iv. To requisition an EGM To demand a poll on any resolution To apply to CLB to cause investigations in any company To apply to CLB for relief in cases of oppression and mismanagement

Rights of Debenture Holders: i. ii. iii. iv. To receive interest/redemption proceeds in due time To receive a copy of the Trust Deed on request To apply for winding up of company if it fails to pay its debt To approach the Debenture Trustee with the debenture holders grievance

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Shareholders Responsibilities: i. ii. iii. iv. To remain informed To be vigilant To participate & vote in AGM on crucial issues To exercise right, if required, as an Individual/Group

Trading in Securities A shareholder has a right to sell securities that he holds at a price and time that he may choose. He can do so personally with another person or through a recognised stock-exchange. Conversely he has a right to buy securities on a similar basis. All sales are to be effected via a valid, duly completed stamped Transfer Deed When dealing through a stock-exchange, counter-party risk is virtually absent due to trade/settlement guarantees offered by the stock exchange mechanism or else via arbitration under the aegis of the exchange. In an exchange trade, services of a SEBI registered broker/sub-broker are to be availed. Transfer of Securities that the company has recorded in its books may be done through a change in the title of ownership of the securities effected, either privately or through an exchange transaction. On receipt of the shareholders request for transfer the company proceeds to transfer securities as per the provisions of law. In case of any technicality where it cannot transfer the title, the company returns the securities giving reasons for not doing so known as Company objection. Depository & Dematerialisation of Shares: Shares are traditionally held in Physical or paper form. Inherent weaknesses here are loss/theft/forged/fake certificates cumbersome and time consuming process for transfer of shares. To eliminate this a new system called Depository System has been established. Depository is a system which holds shares in electronic accounts and has the following advantages: a) b) c) d) e) f) g) Shares cannot be lost, stolen or mutilated. Genuineness is ensured Transfer/transmission can be done immediately Transaction costs are usually lower than physical segment No risk of Bad Delivery Bonus/rights shares allotted to investors get credited immediately Periodical statements of Transactions/Holdings are received

Depository Participant is an agent of the Depository to open an account. Shares are dematerialised. Implementation of steps that ensure lasting shareholder value varies amongst companies depending largely on top management support, nature and diversity of business portfolio, degree of decentralisation, size, global reach, employee mix, culture and management style. Bringing about long term shareholder value is appropriate for a corporate and competitive pressure, greater awareness amongst shareholders, good reputation, institutional shareholders will ensure that it stays. Page | 7

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