This article has been written by Ms. Preksha Bothra, a 4th year BA LLB student from BMS College of Law, Bengaluru.
Introduction:
The Companies Act, 2013 is the primary legislation governing the rights of shareholders in India. Shareholders are considered the owners of a company, and their rights play a critical role in the corporate governance of a company. Shareholders have various rights, including the right to vote, the right to participate in the management of the company, the right to receive dividends, and the right to access information. However, the rights of shareholders may vary depending on the type of shares held by them. In this article, we will discuss the variation of shareholders’ rights in Indian company law.
Types of Shares:
Before we delve into the variation of shareholders’ rights, it is essential to understand the different types of shares that a company can issue. The two primary types of shares are:
- Equity Shares:
Equity shares, also known as ordinary shares, are the most common type of shares issued by companies. Equity shareholders have voting rights and are entitled to dividends declared by the company. Equity shareholders are considered the owners of the company, and their ownership is proportionate to the number of shares held by them.
- Preference Shares:
Preference shares are a type of shares that carry a fixed dividend and are paid before the payment of dividends on equity shares. Preference shareholders do not have voting rights, except in certain circumstances, and are not considered owners of the company. Preference shares are generally issued to investors who seek a fixed return on their investment.
Variation of Shareholders’ Rights:
The rights of shareholders may vary depending on the type of shares held by them. Let us discuss the variation of shareholders’ rights in detail.
- Voting Rights:
Equity shareholders have the right to vote on all matters relating to the company, including the election of directors, approval of financial statements, and approval of major business transactions. The voting rights of equity shareholders are proportional to the number of shares held by them. For example, if a shareholder holds 10% of the equity shares, he or she will have 10% of the total voting rights of the company.
Preference shareholders, on the other hand, do not have voting rights, except in certain circumstances. These circumstances include:
- If the company fails to pay dividends on preference shares for a specified period, the preference shareholders may be entitled to vote on all matters relating to the company until the arrears of the fixed dividend are paid.
- If the company fails to redeem the preference shares on the specified date, the preference shareholders may be entitled to vote on all matters relating to the company until the preference shares are redeemed.
- Dividend Rights:
Equity shareholders are entitled to receive dividends declared by the company in proportion to the number of shares held by them. The dividends on equity shares are declared by the board of directors and are subject to the availability of profits.
Preference shareholders are entitled to a fixed dividend that is paid before the payment of dividends on equity shares. The fixed dividend is usually a percentage of the face value of the preference shares. The company must pay the fixed dividend on preference shares before paying dividends on equity shares.
However, if the company fails to pay the fixed dividend on preference shares for a specified period, the preference shareholders may be entitled to participate in the distribution of surplus profits. Surplus profits are profits that are left over after the payment of all expenses, including dividends on equity shares and the fixed dividend on preference shares.
- Right to Participate in the Management of the Company:
Equity shareholders have the right to participate in the management of the company by attending general meetings, asking questions, and voting on important matters. The management of the company is entrusted to the board of directors, who are appointed by the shareholders.
Preference shareholders do not have the right to participate in the management of the company, except in certain circumstances. If the company fails to pay the fixed dividend on preference shares for a specified period, the preference shareholders may be entitled to appoint a certain number of directors on the board of the company.
- Right to Information:
Shareholders have the right to access certain information about the company. This information includes the annual report, financial statements, minutes of general meetings, and other important documents. Shareholders can exercise this right by requesting the company to provide the relevant information.
However, the right to information may vary depending on the type of shares held by the shareholder. Equity shareholders have the right to access all information about the company, while preference shareholders may not have access to certain information.
Shareholders have certain rights under the Companies Act, which include the right to vote, the right to receive dividends, the right to inspect books of accounts, the right to attend meetings, and the right to transfer shares. These rights are essential for shareholders to protect their interests in the company and to ensure that the management of the company is accountable to them.
However, these rights are not absolute, and they are subject to variation under certain circumstances. The Companies Act provides for the variation of shareholders’ rights in three situations, which are discussed below.
- Variation of Rights Attached to Shares:
Under Section 48 of the Companies Act, the rights attached to shares can be varied by altering the Memorandum and Articles of Association of the company. This requires the approval of at least three-fourths of the shareholders present and voting in a general meeting. The variation of rights attached to shares may affect the dividend entitlement, voting rights, or any other right associated with the shares.
For example, in the case of Berger Paints India Ltd. v. Rathi Dye Chem Ltd. (2006), the company passed a resolution to reduce the voting rights of certain shareholders from 1 vote per share to 1 vote per 10 shares. The Bombay High Court upheld the validity of the resolution, as it was passed in accordance with the provisions of the Companies Act.
- Variation of Share Capital:
Under Section 61 of the Companies Act, the share capital of a company can be varied by altering the Memorandum and Articles of Association of the company. This requires the approval of at least three-fourths of the shareholders present and voting in a general meeting. The variation of share capital may affect the number of shares issued, the face value of shares, or the rights attached to shares.
For example, in the case of Tata Consultancy Services Ltd. v. State of Andhra Pradesh (2016), the company proposed to increase its authorized share capital from Rs. 4 crore to Rs. 6 crore. The Andhra Pradesh High Court upheld the validity of the resolution, as it was passed in accordance with the provisions of the Companies Act.
- Reduction of Share Capital:
Under Section 66 of the Companies Act, the share capital of a company can be reduced by altering the Memorandum and Articles of Association of the company. This requires the approval of at least three-fourths of the shareholders present and voting in a general meeting. The reduction of share capital may be done to extinguish or reduce the liability of the company’s shareholders, or to return surplus capital to the shareholders.
For example, in the case of Mohd. Iqbal Abdul Kadar v. Secunderabad Properties Ltd. (2018), the company proposed to reduce its share capital by extinguishing the liability of certain shareholders. The Telangana High Court upheld the validity of the resolution, as it was passed in accordance with the provisions of the Companies Act.
Conclusion:
In conclusion, shareholders are the owners of a company, and their rights play a crucial role in the corporate governance of a company. The Companies Act, 2013 provides for various rights of shareholders, including the right to vote, the right to participate in the management of the company, the right to receive dividends, and the right to access information.
The variation of shareholders’ rights depends on the type of shares held by them. Equity shareholders have the right to vote, participate in the management of the company, and receive dividends in proportion to the number of shares held by them. Preference shareholders, on the other hand, have a fixed dividend and may not have voting rights or the right to participate in the management of the company, except in certain circumstances.
Therefore, it is crucial for shareholders to understand their rights and the type of shares they hold to make informed decisions and protect their interests. It is also important for companies to ensure that the rights of shareholders are protected and that they comply with the relevant laws and regulations.