Rights of Shareholders Under The Companies Act
Rights of Shareholders Under The Companies Act
Rights of Shareholders Under The Companies Act
COMPANIES ACT
B. S. Kothari*
John Galbraith in his book The New Industrial State has observed
that "the annual meeting of the large American Corporal ion is perhaps our
most elaborate exercise in popular illusion". The same applies with equal
force in India. The shareholder in a large company does not feel like
attending the general meetings as all the powers vest in the directors or
controlling shareholders. He is only interested in the value of his shares
and dividends. If he finds that he is not getting a good yield or there are
no prospects of appreciation in the value of his shares, he changes his
investment to shares of other companies. The present paper attempts to
show the reforms desired to strengthen the position of the shareholders.
Rights of Shareholders
The rights of the shareholders may be broadly divided into three
categories:
Voting Rights
Every member of a company limited by shares and holding any
equity share capital shall have a right to vote in respect of such capital
on every resolution placed before the company and his voting right on a
poll shall be proportionate to his share of the paid up equity capital of
the company." A member holding any preference share capital shall
have a right to vote only on resolutions which directly affect the rights
attached to preference shares. 22 Every equity shareholder has a right to
vote upon such questions as the company is legally competent to deal
with even if he may have a personal interest in the subject-matter opposed
to or different from the general or particular interests of the company."
The shareholder's vote is a right to property and prima facie may be
exercised by a shargholder as he thinks fit in his own interest."! If
a shareholder's name is entered in the register of shareholders of the
company, he cannot be prevented from enjoying the right to vote
on the ground that his Dame has not been on the register for
any specified period before the date of voting." A company cannot
by its articles of association or otherwise impose a restriction that a
shareholder holding less than a minimum number of shares shall not be
entitled to vote. 28 However, section 181 permits a company to put
restrictions on the exercise of the voting right on two grounds, namely, (I)
non-payment of calls, or (2) when the company has any right of lien and
exercises it. A private company not a subsidiaw of a public company is
exempted from the operation of section 182 and can, therefore, put
restrictions on the exercise of voting rights of members in its articles of
association in addition to the above grounds.
Prior to the Companies Act 1956, the persons who did not have
much financial interest in the company could control the voting rights and
dominate the affairs of the company by issuing and owning deferred or
founders' shares with disproportionate voting rights. The disproportionate
or excessive voting rights on share capital issued before the commencement
of tbe Companies Act 1956, have ceased to exist by the end of the year
after the commencement of the Act. The paid up capital of the company
is the pivot around which the voting rights revolve and as such no
artificial majority can be created by persons not having a financial stake
in the affairs of the company. The Act recognises two kinds of capital,
namely equity share capital and preference share capital. A private
company unless it is a subsidiary of a public company is, however, free
, r
26. CA section 182. See also Pasari Flour Mills Limited. In reo (1962) 32 Compo Cas.
~
Rights of Shareholders under tJz~ Companies Act 213
Postal Voting
The resolutions are required to be passed at the general meeting of
the shareholders and hence postal voting is not allowed. It should be
considered whether postal voting should be allowed in India in the case of
big public companies whose shareholdings are spread all over the country."
,
Gower has very rightly said that. general referendum is by far the best
method of obtaining the views of the members as a whole but the fiction is
preserved that the result is determined after oral discussion at a meeting
and by those present thereat all hough everyone knows that personal
attendance is the exception rather than the rule and that the result is
normally determined by proxies lodged before the meetingis even held.
lb) In the case of private company, by one member having the right
to vote on the resolution and present in person or by proxy if
not more than seven members are personally present, and by
two members present in person or by proxy if more than seven
members are personall] present. '
(c) By any member or members present in person or by proxy and
having not less than one-tenth of the total voting power in
respect of the resolution, or
. (d) By any member or members present in person or by proxy and
holding shares in the company conferring a right to vote on
the resolution being shares on which an aggregate sum has been
paid whieh is not less than one-tenth of she total sum paid up
on all the shares conferring that right.
II would appear from the above that a proxy may demand or may
join in demanding a poll.
31., Parashurom Dattaram Shamdusani v. Tata Industrial Bank Ltd., A.LR. (I92S)
Bombay 49.
216 Some Problems 'of Monopoly and Company Law
32. Hereinafter the Government means Central Government unless otherwise slated.
33. CA section t55.
34. (I96t)31 Compo Cas. 387.
35. (1963)33 Camp, Cas. 534.
36. E.I. Sombero Ltd., 111 re (1958)28 Compo Cas. 619.
Rights of Shareholders under the Companies Act 217
which the board recommends for being paid by way of dividend. The
board is bound to give full information and explanations in its report on
every reservation, qualification or adverse remark contained in the
auditors' report.
..
The directors, at present, are not bound to give reasons in the board
report regarding the non-declaration of dividends, even where the profits
of the company are sufficient to declare the dividend. It should be made
compulsory on the part of directors, where no dividend hac; been declared
in spite of sufficient profits, to give the reasons for ploughing back the
profits and to annex a statement explaining the uses of such funds. There
should also be a provision..in tbe Act for issuing half-yearly working report
by the directors so that the shareholders are posted with the latest develop-
ments in the company. This will create confidence in the investors and
will help in the growth of the corporate sector.
42. Bimal Sing" Kothari v. Muir Mills Company Limited, (1952)22 Compo Cas.
~ 248.
222 Some Problems, of Monopoly and Company Law
(i) that the business of the company is being conducted with intent
to defraud its members, creditors or otherwise for a fraudulent or
unlawful purpose,
(iii) that the members of the company have not been given all the
information with regard to its affairs which they might reasonably
expect. c
43. Barium Chemicals LId. v. Company Law Board, (1966)36 Compo Cas. 639.
Rights of Shareholders under tile 'Companies Act 223
44. •
(1965)35 Comp. Cas. 351.
224 Some Problems of Monopoly and Company Law
should be deleted from this section thereby breaking the link with winding
up so that all that would have to be proved would be 'oppression' in the
wider Sense. Every member of the company is entitled to have the affairs
of the company conducted fairly, properly, regularly and according to law
and therefore it does not seem proper why the power to approach the Court
should not be given to every member instead of allowing it to a specified
number of shareholders only.
The Courts have been given wide powers under section 402 to deal
with the petitions under section 397 and 398 to award compensation to
shareholders who have been oppressed to remove th~ directors and other
managerial personnel and order the appointment of directors on the
principle of proportional representation and m3Y provide for the regulation
of the conduct of the company's affairs.
The Government has also been vested with the powers under section
408 to prevent mismanagement or oppression The Government can
appoint two persons as directors to hold office for a period not exceeding
three years or may direct the company to provide for proportional
representation for appointment of directors by amending the articles of
of association of the company. The Government can also prevent changes
in the board of directors likely to affect the company prejudicially.
place within the city other than the registered office,4t to pay interest out
of the capital.s" to allow the holding of an office of profit by the directors
or their relatives etc. ,51 to authorise remuneration by way of commission
to a director who is neither in the whole-time employment of the company.
nor a managing director;" to '"give loans to companies un"'der the same
management, etc. 53
(c) Where the company has availed itself of the option given to it
under section 265 to appoint not less than two-third of the
total number of directors according to the principle of propor-
tional representation.
49. CA section 163.
SO. CA section 208.
51. CA section 314.
52•• CA section 309(4).
53. CA section 370.
228 • Monopoly and Company Law
Some Problems of
Conclusions :
I. A right of inspection should be given to the shareholders to
Rights of Shareholders under t,'le Companies Act 229