Professional Documents
Culture Documents
PROJECT REPORT
ON
SHAREHOLDER’S DEMOCRACY
SUBMITTED TO:
SUBMITTED BY:
Acknowledgement
First and foremost I would like to thank Ms. Navita Aggarwal, faculty Corporate
Law, Hidayatullah National Law University Raipur, for creating opportunities to undertake
such a valuable project.
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Table of Contents
Abbreviations Used ------------------------------------------------------- Page 1
Objective ------------------------------------------------------------------- Page 2
Methodology -------------------------------------------------------------- Page 2
Scope & Limitation ------------------------------------------------------- Page 2
Research Questions ------------------------------------------------------- Page 3
Synopsis -------------------------------------------------------------------- Page 4
Introduction ----------------------------------------------------------------- Page 5
Democracy as it is understood ------------------------------------------- Page 7
Shareholder’s Democracy ------------------------------------------------ Page 9
Shareholder’s Right -------------------------------------------------------- Page 10
o Contractual and other Rights
o Statutory Rights
Observation made by Supreme Court of India ------------------------- Page 9
Importance of Annual General Meeting -------------------------------- Page 12
Voting Rights of Shareholder -------------------------------------------- Page 14
Participation and role of Proxy System --------------------------------- Page 15
Securing Democracy for minority shareholders ----------------------- Page 16
Conclusion ----------------------------------------------------------------- Page 18
References ----------------------------------------------------------------- Page 19
o Websites referred
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Abbreviations Used
acc. - Accessed
AGM - Annual General Meeting
AIR - All India Reporter
Am - After Meridian
SCR - Supreme Court Report
Supl. - Supplementary
html - Hyper Text Markup Language
http - Hyper Text Transfer Protocol
pm - Prime Meridian
www. - World Wide Web
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Objective
The basic objective behind this project is to study and understand the concept of
Shareholder’s Democracy under the light of shareholder’s rights, Importance of Annual
General Meeting, shareholder’s power with respect to directors and to deny the pre-existing
hypothesis that minority shareholders are always suppressed with respect to their voting right
in the Annual General Meeting.
Methodology
The project is descriptive in manner. The notions of the project are completely related
to speculative study. The source of data for this project is secondary in nature i.e. including
books, articles, journals and online resources.
This project deals only with the position of shareholders in Indian Corporate Sectors.
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RESEARCH QUESTIONS
This project deals with the topic “Shareholder’s Democracy”. With reference to it
following research questions had been framed, which are discussed in this project.
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SYNOPSIS
Like in any other Institutional Framework or system of governance, in the
Corporations also a system of democracy exists which follows the same principles but with a
less vigour. The concept of shareholder’s democracy in the present day corporate world
denotes the shareholder supremacy in the governance of business and the affairs of corporate
sector either directly or through their elected representatives. The above concept of
shareholder democracy is subjected to rights and power of shareholders. For example,
shareholders have a right to appoint directors, change the constitution of the company and to
declare the dividends of the company. At this juncture there occurs a question which we will
be dealing with later, that are these rights subjected to majority shareholder and minority
shareholder voting?
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INTRODUCTION
"The highest measure of democracy is neither the 'extent of freedom' nor the 'extent of
equality', but rather the highest measure of participation ". A. d. Benoist
Organized Industry and organized labor have, in modern democratic society, become
giant and powerful social forces. To this great-organized corporate power in modern
industrial democracy must be added other forces that differ in importance from country to
country. In United States the charitable foundations, a by-product of corporate growth,
exercises an increasing influence of its own. In a number of European Countries, on the other
hand such as Great Britain, Germany or in the Scandinavian States, the consumer co-
operatives, and organizations which have grown from small non-profit making co-operative
ventures into powerful movements. In India such consumer movements did not gained much
recognition so the legislative framework remain supreme in the area of check and balance on
the Corporations. One of the institutions in the Corporate Setup is that of the Shareholders.
Indeed this is the only institution which is theoretically empowered to influence and even
frame corporate decisions. managers of their company. The first control mechanism lies in
the voting rights that are normally attached to ordinary shares. An ordinary share usually
confers on its holders the right to cast one vote on all matters put to the vote at the
shareholders meeting.
There are two main ways in which shareholders can exert control over the Thus, in a
company which has a conventional capital structure, every ordinary shareholder has the right
to have a say in the corporate decision making process by virtue of his shareholding. This
control mechanism is some times referred to as control in the form of 'voice'. The second
form of control is based on the market forces, where there is an active market in a company's
shares, its shareholder from time to time express their dissatisfaction by selling their shares1.
Herein we are concerned with the 'voice' aspect of the corporate control process. This
process is basically an attribute of democracy which has been imported in the corporate set
up so as to confer upon the shareholders some rights and control instruments. In the modern
shareholding culture we find that the democratic control mechanisms that have been provided
to the shareholders are actually being used through proxies. Our law gives such a cushion to
the busy shareholders to get them represented in a meeting through proxies. Now this
1
http://lawprojectsforfree.blogspot.in/2010/09/company-law-shareholders-democracy-its.html
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mechanism has become predominant and is being used so often that the real objective of this
so called 'voice, as control mechanism is loosing its importance and effectiveness2.
2
http://www.mondaq.com/india/x/286620/Shareholders/Supremacy+Of+Shareholders+Their+Democracy+In+Li
ne+With+New+Act+2013 [acc.08/10/2014, 08:30 am]
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DEMOCRACY AS IT IS UNDERSTOOD
Democracy is a term derived from two Greek words, 'demos' and 'cratia'. 'Demos'
means the people and 'cratia' means power. In short, it means the power of the people .
However as Finer observes, "Democracy has come to mean so many different things, some
very hostile to each other, that the word needs careful analysis if misunderstanding and idle
controversies are to be avoided, and if possible, quite legitimate differences of connotation,
and its very varied institutional arrangements are to be revealed"3.
Accountability: Accountability refers to the answerability of government to the law and to the
people - an essential ingredient of a new democracy. As long as the government remains, in
real terms, answerable to the population, a self-sustaining regulatory process is set in motion .
3. Participation: When people feel a part of the system, they take a share of responsibility for
it and play a role in making it work. At a basic level, the electoral process symbolizes such
participation. Voting is a fundamental part of being involved in governance by having a real
say in the choice of government. But participation must exist between elections too.
An analogy can be drawn from a comparison between political governance set up and the
corporate setup, the power relationship between the shareholders and the corporation vis a vie
citizens and state. The flow of power and responsibility in both the systems could be
compared to understand the concept after all both the setups have a natural entity
(shareholders and citizens) and legal entity (company and state). If we take the democratic
3
http://www.csstudentsonlineclub.org/t663-shareholder-democracy-has-long-way-to-go-in-india
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setup then we see a body of people who are elected by masses and are called peoples
representatives. They make laws and policies for governance of the state. They are
accountable to the people at least when they go to seek fresh mandate. Similarly in the
corporate setup we see shareholders who could be compared to citizens of the state, and the
directors as their elected representatives. These directors are entrusted with a responsibility of
conducting the business of the organization and the overall governance of it. They are
responsible to the shareholders and in the annual general meeting they have to face the people
who had elected them. A company is also a form of government which is governed by the
Board of directors (as per the concept of Corporate Governance) and the shareholders the
voters who take part in the election process and elects the board of directors. It is an internal
mechanism of a company to govern itself but this also follows the principles of democracy
for its efficient running, allowing a say of every Shareholder and to create a check and
balance system.
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SHAREHOLDER’S DEMOCRACY
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http://www.mondaq.com/india/x/286620/Shareholders/Supremacy+Of+Shareholders+Their+Democracy+In+Li
ne+With+New+Act+2013 [acc.09/10/2014, 11:00 pm]
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SHAREHOLDER’S RIGHTS
By virtue of the contract with the company a member of the company and any other
member, via the memorandum or articles, is entitled to enjoy rights such as:
STATUTORY RIGHTS
Under the Companies Act 2013, a person who is a shareholder of the company enjoys
innumerable rights which are as follows:
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• To obtain copies of memorandum and articles of the company programs of prescribed fee.
• To transfer of shares subjected to the provision of the Company Act and Article of
Associations.
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Supreme Court in landmark case, Life Insurance Cooperation of India V. Escorts Ltd. &
others6 observe certain fundamental rights of shareholders which are as follows7:
6
1986 AIR 1370, 1985 SCR Supl. (3) 909
7
http://indiankanoon.org/doc/730804/
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At every AGM the following matters must be discussed and decided. Since such
matters are discussed at every AGM, they are known as ordinary business. All other matters
and business to be discussed at the AGM are special business. The following matters
constitute ordinary business at an AGM:
• Declaration of dividend;
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The shareholders’ vote is a right of property, and prima facie may be exercised by a
shareholder as he think fit in his own interest. A company is also contractually bound to each
member to act in accordance with the power grant to the constitution. A member can exercise
his right even in a manner adverse to what others may think the interest of the company,
providing his vote be bonafide and not contrary to public policy. Every member of a public
company limited by shares holding equity shares will have votes in proportion to his share in
paid up equity capital of the company. Generally, preference shareholders do not have any
voting rights8. However, they can vote on matters directly relating to the rights attached to the
preference share capital. Any resolution for winding up of the company or for the reduction
or repayment of the share capital shall be deemed to affect directly the rights attached to
preference shares. The voting rights which we are talking are available to both the
shareholder i.e. majority and minority shareholders. They both vote in Annual General
Meeting, but vote cast by minority shareholder are not of much importance, when the
resolution is passed by simple majority. But when the resolution is passed by special
majority, the vote cast by majority shareholder becomes equally important as to majority
shareholders. S. 47 of the Act, also talks about the voting rights of shareholders. The Articles
of Associations & Memorandum of Associations also provides for the voting rights.
8
http://www.csstudentsonlineclub.org/t663-shareholder-democracy-has-long-way-to-go-in-india
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The past few years have witnessed a silent revolution in Indian corporate governance
where managements have woken up to the power of minority shareholders who vote with
their wallets. In response to this power, the more progressive companies are voluntarily
accepting tougher accounting standards and more stringent disclosure norms than are
mandated by law. As it is always said that minority shareholder are always oppressed by
majority shareholders, they are not properly entertain in the Annual General Meeting is a
wrong perception. Because there are various provision and measure under the Companies Act
2013 which protect the Minority shareholder and same time secure democracy for them.
Some of measurers given are as follows;
Proportional Representation:
S. 163 of the Act provides for the option to adopt principle of proportional representation for
appointment of directors. Ordinarily, directors are appointed by simple majority vote on the
resolutions moved for their appointment. As a result majority shareholders controlling 51
percent or more votes may elect all directors and a substantial minority, as high as 49 percent,
may find no representation on the Board. In order to enable the minority shareholders to have
a proportionate representation on the Board, Section 163 of the Companies Act gives an
option to companies to appoint directors through s system of proportional representation. The
section provides that a company may provide in its Articles for the appointment of not less
than 2/3rds of the total directors according to the principle of proportional representation by
single transferable vote or some system of cumulative voting or otherwise. Such appointment
shall be made once in every three years.
Special Majority:
Another safeguard is that certain major decisions have to be approved by a special majority
of 75% or 90% of the shareholders by value.
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Now we can conclude that there are various safeguards available to minority shareholder
and they are not oppressed by majority shareholder. And the safeguards discussed above are
securing democracy for minority shareholder.
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Conclusion
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References
Websites Referred:
www.google.com
www.mondaq.com
www.csstudentsonlineclub.org
www.indiankanoon.org
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