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Rights and Privileges

of Shareholders
Theoretical Basis -
Agency Costs

 Fundamental theoretical basis of


corporate governance is agency costs
 Shareholders are the owners of the joint-stock,
limited liability company and are the principals
 The management directly or indirectly selected
by the shareholders pursue the objectives of the
company defined by the principals
 Though it is presumed that the management may
carry out this responsibility, it often may not be
the case as the objectives of the management in
real practice could differ from those of the
shareholders which may lead to agency costs
Instruments that may reduce the
agency costs
 Financial and non-financial disclosures
 Independent oversight of management
consisting of two aspects:
1. The role of the independent statutory
auditors
2. Independent oversight by the board of
directors of a company
Long-term Shareholder
Value
 Universally, it is accepted that the objective of “good”
corporate governance is to “maximize the long-term
shareholder value”. There have been various
committees and boards
that have been set up
both internationally and
in India to improve the
quality of corporate
governance.
We need to at this stage
understand the rights of the
shareholders laid down by
the Indian Companies Act of 1956.
Rights of Shareholders

 These rights are conferred on the shareholders


either by the Indian Companies Act of 1956 or by
the Memorandum of Articles of Association of the
company or by the general law, especially those
relating to contracts under the Indian Contract
Act of 1872. Following are some of the rights of
the shareholders based on the above acts of the
country:
1. To obtain copies of the memorandum of association ,
Articles of Association, and copies of certain resolutions
and agreements on request, on payment of prescribed
fees
2. To get the share certificates within 3 months of the
allotment
3. The right to transfer the shares or other interests in the
company subject to the provisions in the articles of the
company
4. The right to appeal to the Company Law Board if the
company refuses/fails to register the transfer of shares
5. Has the preferential right to purchase the share on a
pro-rata basis in case of further issue of shares and
holds the right to renounce all or a part of the shares in
favor of any other person
6. Holds the right to apply to the Company Law Board for
the rectification of the register of members
7. Is entitled to receive notices of general meetings and to attend such
meetings and vote either in person or by proxy
8. Is entitled to receive a copy of the statutory report
9. Entitled to receive copies of the annual report of directors, annual
accounts, and auditor’s report
10. Has the right to participate in the appointment of auditors and the
election of directors at the AGMs of the company
11. Has the right to request the Company law board for calling AGM in
case the company does not convene the meeting
12. Can request the directors to convene extra-ordinary AGMs
13. Is entitled to inspect and obtain copies of the minutes of the AGMs
14. Has the right to participate in declaration of dividends and receive
dividends duly
15. And many more
Investor Protection
 Strong investor protection is associated with
effective corporate governance. Investors
typically entertain high expectations of the
company’s performance; steady income and
capital growth from the securities are
expected results. A mismatch of the final
outcome and the expectations of the
investors could increase the risks taken by
them.
 Investors finance companies by taking certain
risks. Investors may get denied of income and
capital growth by the managers or board of
directors – known as “insiders”. This may be due
to the misappropriation of the income or
wealth by the “insiders” either covertly or
overtly. This will shake up the confidence of the
investors in the company and its management.
This could adversely impact the overall
investment climate in the country and slow down
economic growth of the country.
How Do Insiders Steal
Investors’ Funds?
 The insiders, both managers and controlling shareholders can
expropriate investors in a variety of ways:
1. In some countries they simply steal the earnings and in others they
make elaborate arrangements to divert profits.
2. Insiders may sell the output or assets of the firm to another entity
they own at below market prices. Such transfer pricing and asset
stripping are largely of the nature of pure and simple thefts by
insiders.
3. Expropriation also takes the form of appointing under-qualified
family members as managers or at excessive executive pay.
4. Expropriation through insiders selling additional securities in the
firm they control to another firm they own at lower market prices

The minority shareholders and creditors thus become far more


vulnerable
Rights to Information and
Other Rights
 Investor protection is not attainable
without adequate and reliable corporate
information. All Investors whether they
are shareholders or investors have an
inalienable right to have certain
corporate information. All rights provided
to the investors by the law cannot be
exercised by the shareholders unless the
companies in which they hold securities,
share with them such information.
 Creditors too have certain rights and these
are to be protected. Minority shareholders
have same rights as majority shareholders in
dividend policies and in accessing new
security issues. Non-controlling shareholders
need the right to have their votes counted
and respected. For example, the Birla
committee had recommended postal ballot
for shareholders in certain situations.
Corporate Governance through
Legal Protection
Corporate Governance reforms in most
countries are meant to protect the rights of
the outside investors including the
shareholders and creditors. These reforms
focus on expanding financial markets:
 To facilitate external financing of new firms
 To infuse large foreign investments in existing firms
 To promote external commercial borrowings to help
local firms access foreign capital by listing the firms
in the overseas stock markets
 To move away from concentrated ownerships
 To expose native firms to foreign competition
Impact of Investor Protection
on Ownership and Control of
Firms
 In many countries, firms are owned and
controlled by promoter families and in such
closely held firms, insiders may use every
opportunity to abuse rights of other
shareholders and steal their profits through
devious means.
 Investor protection also provides an
impetus for the growth of capital markets.
When investors are protected from the
insider expropriation, they tend to pay more
for securities which makes it attractive for
the entrepreneurs to issue securities.
 Through investor protection, financial markets
can develop with ease and perfection. This
promotes economic growth through:
1. Enhancing savings and capital formation
2. Channelising these into real investments
3. Improving the efficiency of capital allocation since
capital flows into more productive uses
Research studies point out that countries with
well-developed financial markets regulated by
laws, allocate investment across industries more
in line with growth opportunities