Introduction
The backbone of any corporate entity is shareholders. The rights and protections of the shareholders are crucial to licensing the smooth working and governing of companies in India. The Companies Act 2013 Secures the balance between management control and ownership rights of shareholders. This blog discusses the salient provisions, rights of shareholders, the criticisms, and the reforms under Indian corporate law.
Companies Act, 2013 Key Provisions
The Companies Act of 2013 contains provisions about the protection of shareholders’ interests and the right to speak in matters which matter largely. Below are some such critical provisions:
- Right to Vote:
Shareholders have the right to vote on very important corporate matters such as the election or removal of directors, corporate restructurings, and even transactions, such as mergers and acquisitions. Section 108 discusses how the voting process can take place through different ways — a show of hands, e-voting, and postal ballots.
- Right to Transfer Shares:
There is a legal right of shareholders to transfer their shares for specified reasons, so long as such transfers are consistent with the articles of association of the company (Section 56). It gives shareholders liquidity of their shares and at the same time provides a way to remove themselves from the company if they want.
- Right to Receive Dividends:
The company is obligated to pay shareholders declared dividends. Section 123 of the Companies Act specifies the provisions for the declaration and payment of dividends so that shareholders get their due return on their investment.
- Right to Information and Inspection:
Statutory registers can be inspected by shareholders (and other prescribed persons) and certain financial statements found (Section 92). Moreover, they have the right to know about the financial health of the company and the way it manages its affairs through its governance and major decisions.
- Minority Shareholders’ Protection:
The Act has several mechanisms to provide special protection for minority shareholders. Minority shareholders may bring class action suits against company management or conduct if they feel that has been bad for their interests and section 245 allows it.
- Right to Call for a Meeting:
Under Section 100, shareholders that own, at least 10% of shares, have the right to request the board to convene an extraordinary general meeting (EGM) to address an urgent matter. If the board does not act delegates of the shareholders can hold the meeting themselves.
Criticisms and Challenges of Shareholders’ Rights in India
Despite the robust legal framework, shareholders in India face several challenges and criticisms:
Lack of Active Participation:
This results in a power concentration among institutional investors or promoters who do not actively participate in company meetings or voting procedures and have many shareholders (especially retail) in their name it is true but not active.
Opaque Governance:
Shareholders have a right to information, but in many cases, companies are not forthcoming with information which makes shareholders assessment of the true health of the company’s financial and governance more difficult.
Limited Influence of Minority Shareholders:
Although existing law provides minority shareholders with protection, in practice their voice in decisions is often minimal. Promoters (majority shareholders) tend to use their perceived control over the company to the possible detriment of minority interests.
Slow Judicial Process:
The Companies Act empowers shareholders to seek redressal through class action suits and other legal channels but, as is true everywhere, the judicial process in India takes its time and deters shareholders from taking legal action.
Reforms and the Way Forward
During recent years there have been many reforms in the Indian legal system to strengthen shareholders rights and yet there is still much room for improvement. Some ongoing and proposed reforms include:
Strengthening E-voting Mechanisms:
The implementation of electronic voting (e-voting) under the Companies Act has increased shareholders’ participation in the decision processes. Nevertheless, additional reforms will enhance the accessibility of e-voting to retail shareholders and will increase transparency in the voting process.
Enhanced Disclosure Norms:
It has been pushed for higher corporate governance standards by the Securities and Exchange Board of India (SEBI). In fact, SEBI has recently asked companies to disclose more about related party transactions and promoter holding, making information accessible to shareholders.
Improving Minority Shareholder Influence:
Improving the actual impact of minority shareholders is a major area for reform. The law does permit them to pursue a class action suit, but future reforms could insert new mechanisms to give some minority shareholders a bigger voice in corporate decision-making: greater voting rights, or an increased presence on the board based on a particular circumstance.
Speedier Dispute Resolution:
Recently, the establishment of new specialized courts like the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) has established a sort of mechanism to settle corporate disputes faster. Shareholders would be provided quicker remedies if further reforms to reduce the backlog and increase the efficiency of these tribunals were made.
Conclusion
The protection and appreciation of shareholders’ rights are important and necessary to build the environment of a fair, transparent, and accountable corporate world. The Companies Act, of 2013, is an essential framework for the protection of shareholders, as well as the balance of power within the corporate body, which it manages between its management and its owners. However, there are still gaps to attend to within these safeguards. While much of the work has been done on these problems, there are still issues that are to be solved like limited transparency, protection for minority shareholders etc.
Given that the corporate sector in India is evolving, these ‘problems’ will have to be dealt with to develop the corporate scene properly. Progress toward a more balanced and equitable environment will require the strengthening of corporate governance practices, motivating greater shareholder participation and more prompt and expeditious legal remedies, with the ever-growing companies and shareholders calling out their rights, a balance between the control of management and the power of ownership influence will become necessary for maintaining a thriving corporate ecosystem based on fairness and integrity.
Author(s) Name: Agastya Kaushik (ILS Law College, Pune)
