SYNOPSIS

TITLE
SHAREHOLDERS RIGHT TO PARTICIPATE IN THE MANAGEMENT OF THE COMPANY
STATEMENT OF PROBLEM:
Which rights are been given to the shareholders of the company and are the really
exercised?

HYPOTHESIS:
In order to conduct a research work, some important hypotheses are to be formulated.
The focal points and assumptions are normally available through the formulation of
hypothesis. The major hypotheses developed on the basis of study of available literature
and evaluation of primary as well as secondary data and work done earlier including
related studies is that:
Shareholders are the real owners of the company and get a real opportunity to exercise
their rights connected with their participation in the company

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REVIEW OF LITERATURE:
Articles Referred:
Kaizuka Masaaki, Corporate Governance in Asia OECD Principals and Beyond,
Fourth Round Table on Capital Market Reform in Asia09-10 April 2002.
Baums Theodor, Shareholder Representation and Proxy Voting in the European
Union: A Comparative Study, Paper, presented at the Conference on Comparative
Corporate Governance Hamburg, May 15-17, 1997.
Muller Kaspar, Corporate Governance and Globalisation The Role and
Responsibilities of Investors.
Duhamel

Vincent,

Shareholder

Rights

and

the

EquitableTreatment

of

Shareholders, The Fourth Asian Roundtable on Corporate Governance, Mumbai,

India, 11-12 November 2002.
Green Margarita, Protection of shareholder rights.
Nestor Stilpon, OECD Principles of Corporate Governance on Shareholder
Rights and Equitable Treatment: Their Relevance to the Russian Federation.

Books Referred:

Datey V.S., Student Guide to Corporate Law, (Taxmann Allied Service, 5 th ed.,
2002).

Other Source:

Report of the Kumar Mangalam Committee on Corporate Governance

Recommendations Relating to Shareholder.

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OBJECTIVE OF THE STUDY

The following Aims and Objectives have been identified for this project.
1.

To examine the rights of the shareholders given by the company

2.

To examine how corporate governance is related to shareholders rights.

3.

To examine the International Scenario of corporate governance related to

shareholders rights.

RESEARCH METHODOLGY
This is a Doctrinal Research project and the relevant material for this project has been
collected from the primary as well as secondary sources. Doctrinal Research is a research
as we all know that it is based on the principles or the propositions made earlier. It is
more based on the sources like books of the library, and through various websites. At this
point of time it is pertinent to review the literature from where the relevant material has
been collected. For the purpose of the said Research Project the Researcher has collected
the relevant material from books on Companies Act 1956 and also from committee
reports.

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CHAPTERIZATION
Chapter I
INTRODUCTION
Chapter II
SHAREHOLDER RIGHTS
Chapter III
INSTITUTIONAL SHAREHOLDERS
Chapter IV
INTERNATIONAL SCENARIO
Chapter V
CONCLUSION AND SUGGESTIONS

Table Of Contents
Contents

Page No.

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Chapter I

9-10

Chapter II

11-14

Chapter III

15-17

Chapter IV

18-19

Chapter V

20-21

Bibliography

22-23

CHAPTER-I
INTRODUCTION
In the present world corporate governance has become a sensible measure for the long
term success of the company. There has been great interest in corporate governance

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because developing good corporate governance is essential to restore economic vitality

and fostering sustainable economic growth and development.
For shareholders, effective Corporate Governance structures have become important
criteria for selecting the companies in which they wish to invest when making positive
investment decisions. As the investors are interested in long term benefits therefore they
have now started to analyse the corporate governance structure of the companies. The
investors have now started comparing the various companies that which company has
implemented the various recommendations regarding corporate governance as mentioned
in various important codes.
The important purpose of corporate governance is to safeguard the shareholders rights in
the company and also to pay special attention that there should be equal treatment with
the shareholder of same category. Corporate governance practices have emerged in free
market economies as a set of structural arrangements with a aim of developing a
relationship between the management of companies and the interests of its shareholders.
Subsequently, corporate governance concerns extended to the interest of other
stakeholders and eventually to society at large. Therefore a sound corporate governance
system requires that shareholders can actively participate in, and exert influence on,
corporate strategic decision-making. The two important principle of corporate
governance can be elucidate as:
The first principle:
The corporate governance practices should give the shareholders a real opportunity to
exercise their rights connected with their participation in the company.
The second principle:
The corporate governance practices should ensure equal treatment of shareholders who
own the same number of shares of the same type (category).
The shareholders are the owner of the company and by virtue of this they have various
rights and obligation in a company. Some of the basic rights in the company are: ensuring
adequate methods of ownership registration, conveying or transferring shares,
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participating in the companys profits, obtaining information on a timely basis,

participating and voting in general shareholder meetings. Along with these there are
various other rights of the shareholder and one of the most important among all these is
the right to take part in the management of the company. The most important channel for
shareholders to influence how the company has to run is to attend and vote at the general
assembly meetings.

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CHAPTER-II
SHAREHOLDER RIGHTS
PARTICIPATE IN GENERAL MEETINGS:
The shareholders are involved in taking major decisions about the company. These
decisions are basically taken in the general meetings. These decisions are in form of
resolution. Every year there is one meeting of the members has been organized and this
meeting is called as the Annual General Meeting.1 In addition to this if there is any
emergency or need to transact urgent business than an Extra Ordinary General Meeting is
called. The main purpose of the annual general meeting is that the ultimate control of the
company is in hands of shareholders. AGM gives them an opportunity to know about the
working of the working of the company and to make suggestion for the improvement and
progress. They can even change the management if they are not satisfied.
VOTING RIGHT:
Voting at the general meetings of companies is the most valuable and fundamental
mechanism by which the shareholders accept or reject the proposals of the board of
directors as regards the structure, the strategy, the ownership and the management of the
corporation. Therefore shareholder voting is an integral part of the governance structure
of publicly held corporations.
Requiring shareholder consent for any fundamental change in corporate policy is a
safeguard for the residual risk-bearers of a corporation against ex post expropriation by
the management. The right to vote assures the shareholders that without their approval
the basic terms of their investment cannot be altered. Also, vesting voting rights in
shareholders is the only feasible method to implement major improvements of corporate
policy that affect the terms of their investment.
In other words we can say that the voting is the only mechanism available with the
shareholders for exercising an external check on the board and the management. It is
1

Section 166(1). Companies Act.

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important to ensure that those votes are cast in a manner that is most consistent with the
long-term best economic interests of the companys shareholders. Right to vote is one of
the most effective tools for promoting good corporate governance. To maintain this
effective tool all shareholders should receive equitable treatment, including minority and
foreign shareholders and all shareholders should be able to obtain effective redress for
violation of their rights. More specifically:
shares of the same class should have the same vote,
information on the voting right should be provided before the purchase of the
share,
any changes in voting rights should be subject to shareholder vote,
custodians or nominees should cast votes as agreed upon with the beneficial
owner of the shares,
company procedures should not make it unduly difficult or expensive to cast
votes,
insider trading and abusive self dealing should be prohibited, and
members of the board and managment should be required to disclose any material
interest in transactions or matters affecting the corporation

Under the Indian Companies Act, all holders of equity shares as on the date of the Annual
General Meeting are entitled to vote. A members voting right are in proportion to his
share of the paid up capital in the company. 2 In case of share issued with disproportionate
voting right as permissible under Section 86, the voting right will be as per the terms of
the issue of the share.

Postal Ballot:
There is also a concept of postal ballot under the companies Act. The concept has been
stated in the section 192A which has been brought in to force on 15th june 2001. The main
2

Section 87, Companies Act.

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idea behind postal ballot is to confirm the corporate democracy. 3 This is like there are
lakhs of shareholder spread all over the country and it is not possible for all of them to be
present in the meeting. Therefore to remedy this situation this concept has been brought
in this the shareholder can vote by post without attending the general meeting.
Proxy:
If a shareholder of the company is unable to attend the meeting than he can appoint a
proxy to attend the meeting.4 Such another person may or may not be the member of the
company. A proxy is basically one acting for another. Proxy who has been appointed is
entitled to attend the meeting and can vote on behalf of the principal member. Proxy is
acceptable in almost all part of the world for example in Austria, Belium, France, German
and United Kingdom etc.
Along with this there is a new concept emerging and that is of Electronic sending of vote
and some countries have already adopted this concept. For example: Belgian law leaves it
to the companies and their by-laws to decide whether shareholders can vote by mail or in
person. In France Voting by mail is permitted by the law. Shareholders may also vote by
fax, as long as they also mail the official ballot to the company.
Basically all these emerging concept of voting is to give effect to the voting right of the
shareholder. Because the only mechanism available with the shareholders for exercising
an external check on the board and the management is voting. Therefore it is important to
ensure that all the votes have been casted properly.

APPOINTMENT OF DIRECTOR

Datey V.S., Student Guide to Corporate Law, 198(Taxmann Allied Service, 5 th ed., 2002).
4
Section 176, Indian Companies Act.
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3

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The shareholders, who are the ultimate owner of the company are authorized only to take
decision in respect of major policy matter only to the extend specified in the Companies
Act. As we know that there is a divorce between the management and the ownership and
therefore the shareholder cannot interfere in the day to day management of the company.
For the same reason they appoint director to look over the company. Overall supervision
and control of affairs of the company is entrusted to director as appointed by the member.
It is the duty of the directors to pool their knowledge and experiences for the betterment
of the company. Shareholder has right to appoint the directors and to remove them as well

CHAPTER-III
INSTITUTIONAL SHAREHOLDERS
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In the present time many countries of the world have institutional investors who are
making up a significant percentage of the total investment population. In the USA, for
example, institutional investors, including pension funds, hold around 50% of all listed
stock.5 In India also Institutional shareholders have acquired large stakes in the equity
share capital of listed companies.
The institutional investors are now in the process of becoming majority shareholders in
many listed companies and own shares largely on behalf of the retail investors. They thus
have a special responsibility given the weightage of their votes and have a bigger role to
play in corporate governance as retail investors look upon them for positive use of their
voting rights.6
In the recent years the focus of the institutional investors has been changing from that of
trading to longer-term ownership of shares, which has an implication on participation
in the management of the companies in which they invest. Now the institutional
shareholders are focusing more on the long-term relationship with the companies by
retaining the ownership of the shares.The paradigm shift of institutional investors towards
long term ownership of the shares is having a major influence on corporate governance in
the sense that institutional investors require a greater level of accountability and
transparency, and have the back-office resources to ensure that they can play an effective
role as concerned and active shareholders.7
In this regard it is very pertinent to the OECD 8 principles of Corporate Governance. An
important extract from OECD Principles of Corporate Governance:

http://www.commerce.gov.bh/downloads/c_governance/Book1Inside.pdf. <as visited on

25/09/2003.>
6

Report of the Kumar Mangalam Committee on Corporate Governance - Recommendations

Relating to Shareholder Cf.
http://in.geocities.com/kstability/inbank/corpgovern/shareholders.html <as visited on 26/09/2003>.
7

Supra f.n 1
Organization of Economic Corporation & Development.
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8

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Controlling shareholders, which may be individuals, family holdings, bloc alliances, or

other corporations acting through a holding company or cross shareholdings, can
significantly influence corporate behavior. As owners of equity, institutional investors are
increasingly demanding a voice in corporate governance
This extract from the OECD principle reflect the growing interest of institutional
shareholder to participate in the management of the company by having longer term
ownership of the shares in the company.
The Kumar Mangalam Committee Report on Corporate Governance has also made
certain recommendations with regard to the institutional shareholder as to9:
Take active interest in the composition of the Board of Director
Be vigilant
Regular and systematic contact at senior level for exchange of views on
management, strategy, performance and the quality of management.
Ensure that voting intentions are translated into practice Evaluate the corporate
governance performance of the company.

The above recommendations, principles & practices elsewhere in the world have
indicated that institutional shareholders because of their collective stake can sufficiently
influence the policies of the company so as to ensure that the company they have invested
in compliance with the corporate governance code in order to maximize shareholder
value. At the same time the active participation of institutional investors can bring about a
greater scrutiny, accountability and transparency of companies. This makes it doubly
important that institutional shareholders take their role as investors seriously and act
accordingly for the enhancement of good corporate governance.

Supra f.n 2

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CHAPTER-IV
INTERNATIONAL SCENARIO
The development of the OECD Principles of Corporate Governance was sparked by the
Asian financial crisis of 1997-1998.10 At the height of the 1997-98 financial crises, the
OECD was asked by the G7 to develop international standards on corporate governance
that could be useful to OECD Members and non-Member countries alike. In May 1999,
the OECD Principles were formally endorsed by OECD Member countries. While the
OECD Principles were developed with publicly listed companies in mind, many of these
Principles are also applicable to privately-held enterprises. The OECD Principles cover
five main areas: 1) the rights of shareholders; 2) the equitable treatment of shareholders;
3) the role of stakeholders; 4) disclosure and transparency; and 5) the responsibilities of
the board.
In the OCED principles of corporate governance there is a clear mention that the key
shareholder rights are the participation in any decision concerning fundamental corporate
changes and the right to be informed of options to address these changes. These
fundamental changes can be amendments in the corporate chapter; authorization of
additional shares; and extraordinary transactions that result in a fundamental change of
the asset structure. This principle is totally in favor of the shareholder right to take part in
the management of the company.
The second chapter of the Principles emphasizes that all shareholders, including minority
and foreign shareholders, should be treated equitably by controlling shareholders, boards
and management. Insider trading and abusive self-dealing should be prohibited. The
Principles call for transparency with respect to distribution of voting rights and the ways
10

Kaizuka Masaaki, Corporate Governance in Asia OECD Principals and Beyond, Fourth Round
Table on Capital Market Reform in Asia09-10 April 2002, Tokyo, Cf .
http://www.oecd.org/dataoecd/34/3/2077494.pdf. ,< visited on 28/09/2003.>

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voting rights are exercised. They also call for disclosure of any material interests that
managers and directors have in transactions or matters affecting the corporation. 11 At the
international level, the OECD Principles of Corporate Governance have emerged as the
international benchmarks on good corporate governance.
The ICGN12 principles also recognizes the object stated in the OECD principles. The
ICGN principle states that there should not be any major strategic changes in the core
business should not be without the prior consent of the shareholders. The UK Combined
Code (January 1998) states that the process and procedure for conducting annual general
meeting should allow the shareholder to have fair and equal participation. The German
Code (January 2000) states that the confidence of the shareholder and other investors
should be promoted in the international market.
The European Union and its member states are totally in favor of the shareholder
participation in the management. It sates that the shareholder to be treated equitably and
there should be no barrier with regard to the shareholder attending the general meeting,
whether in person or by proxy.
Therefore it is clear that mostly all the countries around the world are now recognizing
the right of the shareholder. Every country all over is now taking steps to make fair and
equitable participation of the shareholders.

11

Nestor Stilpon, OECD Principles of Corporate Governance on Shareholder Rights and

Equitable
Treatment:
Their
Relevance
to
the
Russian
Federation,
Cf.
http://www.imf.org/external/pubs/ft/seminar/2000/invest/pdf/nestor.pdf. < visited on 30/09/2003.>
12

International Corporate Governance Network.

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CHAPTER-V
CONCLUSION AND SUGGESTIONS
The shareholders are really the ultimate owner of the company. They bear all the risk of
the business and stand to gain the profits arising out of it. They have heavy risk on their
shoulders because if the business will have profit then they will also earn dividends but if
the business will incur losses than their money which is involved is also gone.
Shareholder has various rights in the company. One of the important right among them is
the right to participate in the management of the company. Every shareholder has a right
to take part in the management of the company as by participating and voting in the
annual general meeting either personally or through proxies. Taking all the information
about the management of the is also an important right as possessed by the shareholder.
In the present scenario corporate governance is holding very important place in the
corporate world. Every company in the world is trying to incorporate the basic principles
of corporate governance. One of the most important principles of corporate governance
which has been acknowledged all over the world is the shareholder right to participate in
the management of the company and to receive equal treatment.
Therefore it is very clear that for the better performance of the company there should be
proper transparency and shareholders should be well informed about the management of
the company and there should be proper participation on the part of the shareholders.
There are some suggestions with regard to the shareholder participation and the equitable
treatment of the shareholder in the company can be increased.
Separating ownership and management will help to reduce the conflicts between
majority
Shareholders and minority shareholders.
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 Institutional shareholder can be encouraged by the Government policies as it will

improve both the overall quality of investors and companies in which to invest.
There are many ways for governments, institutions, companies and the press and
other media to communicate with the investment community to increase
shareholder participation and confidence.
For publicly listed companies, the primary goal should be to share accurate and
transparent company information with the investment community and to ensure
good performance for all shareholders in the company.
There is a need to make laws in order to improve participation at shareholder
meetings and through the proxy voting process and are looking at allowing greater
reliance on new technology for better corporate governance.
Electronic communication techniques in the transmission of voting instructions
should be encouraged.

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BIBLIOGRAPHY:
Articles Referred:
Kaizuka Masaaki, Corporate Governance in Asia OECD Principals and Beyond,
Fourth Round Table on Capital Market Reform in Asia09-10 April 2002.
Baums Theodor, Shareholder Representation and Proxy Voting in the European
Union: A Comparative Study, Paper, presented at the Conference on Comparative
Corporate Governance Hamburg, May 15-17, 1997.
Muller Kaspar, Corporate Governance and Globalisation The Role and
Responsibilities of Investors.
Duhamel

Vincent,

Shareholder

Rights

and

the

EquitableTreatment

of

Shareholders, The Fourth Asian Roundtable on Corporate Governance, Mumbai,

India, 11-12 November 2002.
Green Margarita, Protection of shareholder rights.
Nestor Stilpon, OECD Principles of Corporate Governance on Shareholder
Rights and Equitable Treatment: Their Relevance to the Russian Federation.

Books Referred:

Datey V.S., Student Guide to Corporate Law, (Taxmann Allied Service, 5 th ed.,
2002).

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Web Sites:

http://www.iccwbo.org/CorpGov/shareholders.asp

http://www.oecd.org/dataoecd/54/18/1920683.pdf.

http://www.ellipson.com/files/debate/debate_summer_02e.pdf

http://www.ffhsj.com/cmemos/030917_workers_committee.pdf

http://in.geocities.com/kstability/inbank/corpgovern/shareholders.html

http://www.oecd.org/dataoecd/34/3/2077494.pdf.

http://www.oecd.org/dataoecd/49/12/2484854.pdf.

http://www.corp-gov.org/bd/db.php3?db_id=423&base_id=3

http://www.imf.org/external/pubs/ft/seminar/2000/invest/pdf/nestor.pdf.

http://www.commerce.gov.bh/downloads/c_governance/Book1Inside.pdf.

Other Source:

Report of the Kumar Mangalam Committee on Corporate Governance

Recommendations Relating to Shareholder.

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