All retail shareholders should be aware of their rights

Photo: Mint
Photo: Mint


Demand for due transparency and better corporate governance can get them a supply response

If you buy a company’s share, you buy a tiny part of its business. You become an owner. You may expect to call some of the shots now. But can you? Do you really become an owner in that sense? Do you have a say in big ticket decisions? Notably, do you now have a right to object? Such questions have grown more relevant. The issue was in the spotlight in September 2021, when Invesco as a 17.88% shareholder tried calling an extraordinary general meeting (EGM) of Zee Entertainment Ltd. Zee objected to this.

Similar cases of shareholder activism have been seen at Eicher Motors, Balaji Telefilms and others. Rarely have Indian citizens been so fascinated with stock markets. Individual investors rose by 14.2 million in 2020-21 alone. Under the rules of the Securities and Exchange Board of India, all listed companies must maintain a minimum public float of 25% of their equity. Yet, few Indian retail investors seem aware of shareholder rights.

Let’s look at the general rights available under the Companies Act of 2013 (CA). It provides for the right to: 1) Receive information, at the very least by way of a copy of annual return extracts and audited financial statements along with an auditor’s report; 2) Get dividends in case a company announces payouts; 3) Attend and vote at general meetings, both annual and extraordinary; 4) Vote on changes to memoranda or articles of association at a general meeting; 5) Requisition and convene an EGM if shareholders holding at least 10% of the company’s paid-up capital request its board of directors; 6) Appoint and remove directors or auditors by voting in a general meeting; and 7) Vote by electronic means if the entity is a listed company or has at least 1,000 members.

Among the special rights available under Indian company law, shareholders have the right to: 1) Protection of minority owners, as at least 100 shareholders or 10% of the total number can approach the National Company Law Tribunal for relief from oppression and mismanagement ( 20% of members can apply in the case of firms without share capital); 2) Approve specified related-party transactions that exceed prescribed thresholds; 3) Initiate class-action suits, provided they have the requisite numbers; 4) Derivative actions, like those set out in the Code of Civil Procedure, 1908, which even a single shareholder can initiate; 5) Apply to the Serious Fraud Investigation Office via the Central government’s ministry of corporate affairs, which is the corporate sector’s primary regulator in India, in case they have reason to do so; 6) Exit the company in certain specified circumstances; 7) Redressal of grievances, as any shareholder with concerns can write to the registrar of companies under the ministry of corporate affairs and/or make use of a public grievance portal named CPGRAMS to file and track complaints at the click of a mouse or tap of a screen.

These rights, however, seldom get exercised. This may be on account of either shareholder ignorance or promoter resistance.

Let’s take a closer look. When promoters set up a company, they put their heart, sweat and money into making the enterprise successful. They are the ones who stomach the initial struggles. They are the ones with a unique vision for growth. That’s why they wish to command the show. Often, they feel that distant investors have no business doing business without knowing how to do business. They are wary of shake-down artists. Many business leaders also believe that even the most well-meaning shareholders have a short-term perspective, with immediate returns being their principal focus. Hence, they discourage shareholder activism.

Having weighed the merits of both arguments, it’s time to answer the questions posed at the start.

When you own a share in a company:

1) Can you call the shots? No, unless there is mismanagement, oppression or fraud by the company’s top brass or promoters.

2) Do you really become an ‘owner’ of a company by just buying its shares? Yes. Shareholders are the true owners of a company. They bear the fruits of profits and suffer its losses.

3) Do you now have the right to take big-ticket decisions? In the normal course of business, no. But if your interests are adversely affected and you have requisite numbers on your side, you may.

4) Do you have a right to object? Certainly. Every shareholder can register his or her consent or dissent by voting. But it is advisable that you remain a silent partner in growth if the promoters are trustworthy and the company is generating wealth for you and the nation at large. If it’s otherwise, you must not back down and would be best advised to go full throttle.

A shining example in India of well-managed shareholder expectations was the case of Maruti Suzuki. When faced with shareholder dissent in January 2014 against installation of a factory in Gujarat by Japan’s Suzuki Motor Corp, India’s top carmaker tried not to crush the opposition. Instead, it reworked its plans for about 20 months to gain shareholder consent. This is an exceptional case of a company taking its shareholders into confidence for the benefit of all.

The Indian shareholder needs to ‘become’ a vigilant partner of a company instead of just ‘being’ an owner of shares. S/he must aspire not to be a speed-breaker in the firm’s journey, but act as a value-enhancing guide.

If there is demand, there will be supply. If you as a shareholder demand better corporate governance and due transparency, trust me, you will get a supply response.

Ankita Lahoty is a civil services officer in the ministry of corporate affairs, currently posted as deputy registrar of companies, Gujarat & Dadra Nagar Haveli. These are the author’s personal views.

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