Rights and Privileges Rights and Privileges of Shareholdersof Shareholders

Theoretical Basis - Theoretical Basis -

Agency Costs Agency Costs

Fundamental theoretical basis of Fundamental theoretical basis of corporate governance is agency costs corporate governance is agency costs

Shareholders are the owners of the joint-stock, Shareholders are the owners of the joint-stock, limited liability company and are the principalslimited liability company and are the principals

The management directly or indirectly selected The management directly or indirectly selected by the shareholders pursue the objectives of the by the shareholders pursue the objectives of the company defined by the principalscompany defined by the principals

Though it is presumed that the management may Though it is presumed that the management may carry out this responsibility, it often may not be carry out this responsibility, it often may not be the case as the objectives of the management in the case as the objectives of the management in real practice could differ from those of the real practice could differ from those of the shareholders which may lead to agency costs shareholders which may lead to agency costs

Instruments that may reduce the Instruments that may reduce the

agency costsagency costs Financial and non-financial Financial and non-financial

disclosuresdisclosures Independent oversight of Independent oversight of

management consisting of two management consisting of two aspects:aspects:

1.1. The role of the independent statutory The role of the independent statutory auditorsauditors

2.2. Independent oversight by the board Independent oversight by the board of directors of a companyof directors of a company

Long-term Shareholder Long-term Shareholder Value Value

Universally, it is accepted that the objective of Universally, it is accepted that the objective of “good” corporate governance is to “maximize the “good” corporate governance is to “maximize the long-term shareholder value”. There have been long-term shareholder value”. There have been various committees and boards various committees and boards that have been set up that have been set up both internationally and both internationally and in India to improve in India to improve the quality of corporate the quality of corporate governance. governance. We need to at this stage We need to at this stage understand the rights of understand the rights of the shareholders laid the shareholders laid down by the Indian down by the Indian Companies Act of 1956. Companies Act of 1956.

Rights of ShareholdersRights of Shareholders

These rights are conferred on the shareholders These rights are conferred on the shareholders either by the Indian Companies Act of 1956 or by either by the Indian Companies Act of 1956 or by the Memorandum of Articles of Association of the the Memorandum of Articles of Association of the company or by the general law, especially those company or by the general law, especially those relating to contracts under the Indian Contract relating to contracts under the Indian Contract Act of 1872. Following are some of the rights of Act of 1872. Following are some of the rights of the shareholders based on the above acts of the the shareholders based on the above acts of the country: country:

1.1. To obtain copies of the memorandum of To obtain copies of the memorandum of association , Articles of Association, and copies of association , Articles of Association, and copies of certain resolutions and agreements on request, on certain resolutions and agreements on request, on payment of prescribed feespayment of prescribed fees

2.2. To get the share certificates within 3 months of the To get the share certificates within 3 months of the allotmentallotment

3.3. The right to transfer the shares or other interests in The right to transfer the shares or other interests in the company subject to the provisions in the the company subject to the provisions in the articles of the company articles of the company

4.4. The right to appeal to the Company Law Board if The right to appeal to the Company Law Board if the company refuses/fails to register the transfer of the company refuses/fails to register the transfer of sharesshares

5.5. Has the preferential right to purchase the share on Has the preferential right to purchase the share on a pro-rata basis in case of further issue of shares a pro-rata basis in case of further issue of shares and holds the right to renounce all or a part of the and holds the right to renounce all or a part of the shares in favor of any other person shares in favor of any other person

6.6. Holds the right to apply to the Company Law Board Holds the right to apply to the Company Law Board for the rectification of the register of members for the rectification of the register of members

7. Is entitled to receive notices of general meetings and to 7. Is entitled to receive notices of general meetings and to attend such meetings and vote either in person or by attend such meetings and vote either in person or by proxyproxy

8. Is entitled to receive a copy of the statutory report8. Is entitled to receive a copy of the statutory report9. Entitled to receive copies of the annual report of directors, 9. Entitled to receive copies of the annual report of directors,

annual accounts, and auditor’s reportannual accounts, and auditor’s report10. Has the right to participate in the appointment of auditors 10. Has the right to participate in the appointment of auditors

and the election of directors at the AGMs of the company and the election of directors at the AGMs of the company 11.11. Has the right to request the Company law board for calling Has the right to request the Company law board for calling

AGM in case the company does not convene the meeting AGM in case the company does not convene the meeting 12.12. Can request the directors to convene extra-ordinary AGMsCan request the directors to convene extra-ordinary AGMs13.13. Is entitled to inspect and obtain copies of the minutes of Is entitled to inspect and obtain copies of the minutes of

the AGMsthe AGMs14.14. Has the right to participate in declaration of dividends and Has the right to participate in declaration of dividends and

receive dividends dulyreceive dividends duly15.15. And many more And many more

Investor ProtectionInvestor Protection

Strong investor protection is associated Strong investor protection is associated with effective corporate governance. with effective corporate governance. Investors typically entertain high Investors typically entertain high expectations of the company’s expectations of the company’s performance; steady income and capital performance; steady income and capital growth from the securities are expected growth from the securities are expected results. A mismatch of the final results. A mismatch of the final outcome and the expectations of the outcome and the expectations of the investors could increase the risks taken investors could increase the risks taken by them.by them.

Investors finance companies by taking Investors finance companies by taking certain risks. Investors may get denied of certain risks. Investors may get denied of income and capital growth by the managers income and capital growth by the managers or board of directors – known as “insiders”. or board of directors – known as “insiders”. This may be due to the misappropriation of This may be due to the misappropriation of the income or wealth by the “insiders” either the income or wealth by the “insiders” either covertly or overtly. This will shake up the covertly or overtly. This will shake up the confidence of the investors in the company confidence of the investors in the company and its management. This could adversely and its management. This could adversely impact the overall investment climate in the impact the overall investment climate in the country and slow down economic growth of country and slow down economic growth of the country. the country.

How Do Insiders Steal How Do Insiders Steal Investors’ Funds?Investors’ Funds? The insiders, both managers and controlling shareholders The insiders, both managers and controlling shareholders

can expropriate investors in a variety of ways:can expropriate investors in a variety of ways:1.1. In some countries they simply steal the earnings and in In some countries they simply steal the earnings and in

others they make elaborate arrangements to divert profits.others they make elaborate arrangements to divert profits.2.2. Insiders may sell the output or assets of the firm to another Insiders may sell the output or assets of the firm to another

entity they own at below market prices. Such transfer entity they own at below market prices. Such transfer pricing and asset stripping are largely of the nature of pure pricing and asset stripping are largely of the nature of pure and simple thefts by insiders. and simple thefts by insiders.

3.3. Expropriation also takes the form of appointing under-Expropriation also takes the form of appointing under-qualified family members as managers or at excessive qualified family members as managers or at excessive executive pay. executive pay.

4.4. Expropriation through insiders selling additional securities Expropriation through insiders selling additional securities in the firm they control to another firm they own at lower in the firm they control to another firm they own at lower market pricesmarket prices

The minority shareholders and creditors thus become far The minority shareholders and creditors thus become far more vulnerable more vulnerable

Rights to Information and Rights to Information and Other RightsOther Rights Investor protection is not attainable Investor protection is not attainable

without adequate and reliable corporate without adequate and reliable corporate information. All Investors whether they information. All Investors whether they are shareholders or investors have an are shareholders or investors have an inalienable right to have certain inalienable right to have certain corporate information. All rights corporate information. All rights provided to the investors by the law provided to the investors by the law cannot be exercised by the cannot be exercised by the shareholders unless the companies in shareholders unless the companies in which they hold securities, share with which they hold securities, share with them such information. them such information.

Creditors too have certain rights and Creditors too have certain rights and these are to be protected. Minority these are to be protected. Minority shareholders have same rights as shareholders have same rights as majority shareholders in dividend majority shareholders in dividend policies and in accessing new security policies and in accessing new security issues. Non-controlling shareholders issues. Non-controlling shareholders need the right to have their votes need the right to have their votes counted and respected. For example, counted and respected. For example, the Birla committee had recommended the Birla committee had recommended postal ballot for shareholders in certain postal ballot for shareholders in certain situations. situations.

Corporate Governance through Corporate Governance through Legal ProtectionLegal Protection Corporate Governance reforms in most Corporate Governance reforms in most

countries are meant to protect the rights of countries are meant to protect the rights of the outside investors including the the outside investors including the shareholders and creditors. These reforms shareholders and creditors. These reforms focus on expanding financial markets: focus on expanding financial markets:

To facilitate external financing of new firmsTo facilitate external financing of new firms To infuse large foreign investments in existing To infuse large foreign investments in existing

firms firms To promote external commercial borrowings to To promote external commercial borrowings to

help local firms access foreign capital by listing help local firms access foreign capital by listing the firms in the overseas stock marketsthe firms in the overseas stock markets

To move away from concentrated ownerships To move away from concentrated ownerships To expose native firms to foreign competition To expose native firms to foreign competition

Impact of Investor Protection Impact of Investor Protection on Ownership and Control of on Ownership and Control of Firms Firms In many countries, firms are owned and In many countries, firms are owned and

controlled by promoter families and in controlled by promoter families and in such closely held firms, insiders may use such closely held firms, insiders may use every opportunity to abuse rights of other every opportunity to abuse rights of other shareholders and steal their profits shareholders and steal their profits through devious means. through devious means.

Investor protection also provides an Investor protection also provides an impetus for the growth of capital markets. impetus for the growth of capital markets. When investors are protected from the When investors are protected from the insider expropriation, they tend to pay insider expropriation, they tend to pay more for securities which makes it more for securities which makes it attractive for the entrepreneurs to issue attractive for the entrepreneurs to issue securities. securities.

Through investor protection, financial Through investor protection, financial markets can develop with ease and markets can develop with ease and perfection. This promotes economic growth perfection. This promotes economic growth through:through:

1.1. Enhancing savings and capital formationEnhancing savings and capital formation2.2. Channelising these into real investmentsChannelising these into real investments3.3. Improving the efficiency of capital allocation since Improving the efficiency of capital allocation since

capital flows into more productive uses capital flows into more productive uses

Research studies point out that countries with Research studies point out that countries with well-developed financial markets regulated well-developed financial markets regulated by laws, allocate investment across industries by laws, allocate investment across industries more in line with growth opportunities more in line with growth opportunities