This document provides an overview of shareholder rights in India for small investors. It discusses fundamental rights that shareholders have, including voting rights proportional to share ownership, rights to dividends and company assets, rights to transfer shares and inspect company records. It also outlines specific shareholder rights according to the Companies Act of 2013, such as rights to access documents, attend meetings, and apply to courts for oppression or mismanagement. The document further explains corporate actions like rights issues and bonus issues that impact shareholder ownership and defines differential voting rights shares that carry less voting power.

2. SAM GHOSH
Shareholder Rights
in India for Small
Investors

3. UUID: 55684cba-028a-11e9-8ead-17532927e555
This ebook was created with StreetLib Write
http://write.streetlib.com

4. Table of contents
WHO AND WHY OF THIS BOOK 2
FUNDAMENTAL RIGHTS THE OF
SHAREHOLDERS 4
RIGHTS BASED ON COMPANIES ACT
2013 6
CORPORATE ACTIONS: RIGHTS AND
BONUS ISSUE 9
DIFFERENTIAL VOTING RIGHTS (DVR)
SHARES 14
USEFUL LINKS 16
1

5. WHO AND WHY OF THIS
BOOK
Au​thor In​for​ma​tion
Sam Ghosh is an Investment Advisor and
Founder of Wisejay Pvt. Limited. He has
an MBA in Finance from University of Cal‐
gary, Canada, completed all three levels of
the CFA pro​gram of​fered by the CFA In​si​ti​‐
tute, USA and holds various NISM certifi‐
cates.
Why this book?
When we buy a share of a company,
what exactly do we exactly get? It can be a
paper document or a dematerialised docu‐
ment. But, what does the document sig‐
nify?
The first and foremost thing to understand
2 WHO AND WHY OF THIS BOOK

6. that a share represents a partial ownership
in a company. The ownership is not lim‐
ited to the claim of the future profits and
assets of the company, but also extends to
the way the company is being managed.
This book will help shareholders under‐
stand these con​cepts.
Copy​right
All rights reserved. No part of this publi‐
cation may be reproduced, distributed, or
transmitted in any form or by any means,
including photocopying, recording, or
other electronic or mechanical methods,
without the prior written permission of
Wisejay Private Limited, except in the case
of brief quotations embodied in critical re‐
views and certain other noncommercial
uses permitted by copyright law. For per‐
mission requests, write to support@
wisejay.com, addressed “Attention: Permis‐
sions Co​or​di​na​tor,” at the ad​dress be​low.
3WHO AND WHY OF THIS BOOK

7. FUNDAMENTAL RIGHTS
THE OF SHAREHOLDERS
Apart from claim on the profits of the
company, shareholders get voting rights in
the matters affecting the whole company.
Now, the voting rights may vary based on
the type of share. Generally, the voting
rights are proportional to the part of paid
up capital investor’s stock holding repre‐
sents. But, there can be exceptions. Such as,
in case of Differential Voting Rights, the
voting rights are lesser than the proportion
of paid up capital. Also, in case of preferred
shares, the voting rights are only limited to
the issues affecting the preferred share
cap​i​tal.
Shareholders have the right to receive
the dividends if the board declares divi‐
dend. Share​hold​ers also have the right over
4 FUNDAMENTAL RIGHTS THE OF …

8. the residual assets of the company (after
paying off the debt holders) in case of liq‐
ui​da​tion.
Shareholders have the right to transfer
the shares and receive the financial state‐
ments of the com​pany.
Also, shareholders have the right to inspect
records and books of the corporation and
take legal action against the directors and
the managers of the company in case of
any wrong​do​ing.
5FUNDAMENTAL RIGHTS THE OF …

9. RIGHTS BASED ON
COMPANIES ACT 2013
Let us see what Companies Act 2013 has to
say about share​hold​ers’ rights.
1. Ac​cess of doc​u​ments and records
As per section 136 of the Act, every share‐
holder of the company has a right to re‐
ceive financial statements of the company
along with the auditor’s report and any
other related document. The shareholders
also have the right to receive report of the
cost au​di​tor.
As per section 190 of the Act, in case of a
public company the shareholders have the
right to inspect the contracts for the ap‐
pointment of the managing or whole time
di​rec​tor.
6 RIGHTS BASED ON COMPANIES A…

10. The shareholders also have right to get ac‐
cess to many other documents (by paying
prescribed fee if required) such as a deben‐
ture trust deed (section 71), register of
charges (section 87), register of Members,
Deben​ture hold​ers and In​dex Reg​is​ters, An​‐
nual Returns (section 94), Minutes Book of
General Meetings (section 119), Register of
Contracts (section 189), Register of Direc‐
tors (sec​tion 171), etc.
2. Sec​tions 96,100,105 and 107
of the Act give the shareholders right to
attend the meeting of the shareholders and
exercise voting right either in person or
through proxy.
3. Other Rights:
i. To receive share certifications as per sec‐
tion 46 and right to transfer share certifi‐
cates as per sec​tion 44 and 56.
ii. To receive dividend when declared and
resist increases in liability without written
con​sent.
7RIGHTS BASED ON COMPANIES A…

11. iii. Re​ceive rights shares as per sec​tion 62.
iv. To ap​point di​rec​tors as per sec​tion 152.
v. To share the surplus assets in case of liq‐
ui​da​tion as per sec​tion 320.
vi. Section 241 and 242 gives the sharehold‐
ers the right to apply to the National Com‐
pany Law Tribunal (NCLT) in case of op‐
pression or mismanagement my the man‐
age​ment of the com​pany.
vii. Section 48 which covers the changing the
rights attached the shares on any class, also
gives the dissenting shareholders' rights to apply
to the NCLT to can​cel such vari​a​tion.
8 RIGHTS BASED ON COMPANIES A…

12. CORPORATE ACTIONS:
RIGHTS AND BONUS
ISSUE
Corporate Actions are events initiated by com‐
pany which materially impact the financial struc‐
ture of a company. These actions can have mate‐
rial effects on the bondholders as well. These ac‐
tions need to be approved by the board of direc‐
tors and may need ap​proval from the share​hold​ers
through special resolutions. Some examples of
corporate actions are dividends, rights issue,
bonus is​sue, etc.
RIGHTS IS​SUE
Consider a company wants to raise
money by is​su​ing more shares. This will in​‐
crease the subscribed capital for the com‐
pany. According to the section 62 of the
Companies Act 2013, companies need to
9CORPORATE ACTIONS: RIGHTS A…

13. offer shares first to the existing equity
share​hold​ers in pro​por​tion to their paid-up
share capital in the company before going
to any other person. Listed companies also
need to follow SEBI (ICDR) Regulations,
2009 along with the Companies Act, 2013.
A company needs to send a letter of offer
specifying number and price of the shares
offered and timeline of validity of the offer
(15-30 days), etc. Holders of Employee
Stock Options are also eligible for these
rights. The rules relating to the rights issue
are also applicable when new shares are is‐
sued as an option linked to debentures gets
exercised. A company needs to make a
reservation of equity shares for outstand‐
ing partial and fully convertible debt in‐
struments and those reserved shared need
to be issued at the time of the rights issue
and will bear the same terms of the equity
shares of​fered through a rights is​sue. Listed
companies also need to make advertise‐
ment for the rights issue as per section 55
of the SEBI (ICDR) Reg​u​la​tions, 2009.
The rights issue shares are generally of‐
fered at a lower price than the market
10 CORPORATE ACTIONS: RIGHTS A…

14. price. The shareholder may ignore the
rights offer which will be considered as re‐
jected after issue period, can decline the of‐
fer or sell (or transfer without considera‐
tion) the rights to another person (depend‐
ing on the terms in the Article of Associa‐
tion of the company). In practice, compa‐
nies allow shareholders to apply for addi‐
tional shares beyond their entitlement be‐
cause some shareholders may neither ap‐
ply for shares under their entitlement nor
transfer their rights to others and those
shares may be available for issuance to
those shareholders who desire additional
shares.
The main idea behind rights issue is that,
the issuance of new shares may dilute the
own​er​ship per​cent​age of the ex​ist​ing share​‐
holders. The Companies Act ensures that
the existing shareholders get notification
and a choice to maintain percentage own‐
er​ship in the com​pany.
BONUS IS​SUE
11CORPORATE ACTIONS: RIGHTS A…

15. Bonus issue is also called equity dividends.
As the name suggests, these shares are is‐
sued to the existing shareholders without
any consideration. The number of bonus
shares depends on the existing sharehold‐
ing per​cent​age.
According to section 63 of the Companies
Act, 2013, fully paid-up bonus shares can
be is​sued only from free re​serves, se​cu​ri​ties
premium account and capital redemption
reserve account. Bonus shares cannot be is‐
sued capitalising reserves created by the
reval​u​a​tion of as​sets.
Bonus shares increase the paid-up capital
as well as the liquidity of the shares. One
needs to realise that even though the num‐
ber of issued shares increases along with
the paid-up capital, the total share capital
for the company remains unchanged be‐
cause the is​suance of bonus shares is just an
accounting entry without any economic
value to the shareholders. Actually the eq‐
uity value per share decreases with the is‐
suance of the bonus shares as number of
shares increase. This is why share price
12 CORPORATE ACTIONS: RIGHTS A…

16. should decrease just after a company an‐
nounces bonus shares. Ratios such as Earn‐
ing Per Share (EPS) and Book Value per
Share de​creases pro​por​tion​ally to the num​‐
ber of new shares issued. In practice, as liq‐
uidity of the share increases and bonus is‐
sue sends a signal that the company is in
good financial health, the demand for the
shares and the market value of the com‐
pany may in​crease fol​low​ing a bonus is​sue.
Both rights issue and bonus issue in‐
crease the paid-up capital of the company.
But, in case of the rights issue, the com‐
pany receives cash on the issuance of new
shares and that means an in​crease in the to​‐
tal equity of the company. As the number
of shares increases, earning per share de‐
creases, but book value per share does not
decrease. On the other hand, bonus issue
increases the number of shares without
any receipt of cash. That means both the
earnings per share as well as the book value
per share de​creases.
13CORPORATE ACTIONS: RIGHTS A…

17. DIFFERENTIAL VOTING
RIGHTS (DVR) SHARES
WHAT IS A DVR SHARE ?
When we buy a share of a company, we get
two dif​fer​ent kinds of ben​e​fits –
1.
Monetary benefits which include the
claim on the net assets (net of liabilities) of
the company and claim on future earnings
(net of interest payable to the debt holders
and pref​er​ence share​hold​ers).
2 . A right to participate in the decision
making of the company. This is known as
vot​ing rights.
Generally, each equity stock contains one
vot​ing right.
14 DIFFERENTIAL VOTING RIGHTS (…

18. Now, consider you are the promoter of
the company. You need to raise capital for
some investment, but you do not want to
give away the voting rights. Because voting
rights dictate the control of the company,
issuing new shares with equal voting rights
can make the com​pany a takeover tar​get.
So, you issue shares with less voting
rights say one voting right for 10 shares as
in the case of ‘A’ Ordinary shares of Tata
Motors. This type of shares is called Differ‐
ential Voting Right shares. Now, even if the
company can raise capital, the control is di‐
luted to a much less ex​tent.
Note: Issuance of DVRs is guided by Chapter IV
of the Companies ( Share Capital and Deben‐
tures) Rules, 2014. Some of the mandatory con‐
ditions for issuance of DVR are – track record of
distributable profits in the previous three years
and maximum twenty-six percent of the total post-
issue paid up equity share capital after the is‐
suance.
15DIFFERENTIAL VOTING RIGHTS (…

19. USEFUL LINKS
Share​holder Rights
Rights and Bonus Is​sues in In​dia
Dif​fer​en​tial Vot​ing Rights
16 USEFUL LINKS