In this blog post, Aranya Saha, a student of Jogesh Chanda Chaudri Law College, Calcutta University, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the provisions for the protection of the rights of minority shareholders present in the Companies Act, 2013
Introduction
The Indian Companies Act, 2013 defines the term, ‘share’ as the capital running a company. Capital is the nucleus of a company. A share in a general sense is a portion of the actual sum which is quite similar to that of a ‘share’ in respect of a company. A share is considered to be the smallest unit into which the capital of a company is divided. The share is flexible in nature as it can be easily transferred as provided by the article of the company.
There are many kinds of shares which a company can legally issue under the Companies Act. Mainly they are categorized under two heads, preference, and equity share. Equity shares are considered to be the lower risk and earn a fixed rate of dividend every year, whereas, preference shares are preferred by the people who are challenging in nature. The later have a high risk of earning as well as losing profits but are still preferred because the person holding such share have voting rights. The people who own such shares are known as shareholders. They are considered to be the actual owner of the company.
Who are Shareholders
The shareholders or the stockholders can be a person, firm, institution or a company. A person must have at least one share to get the dividend which is payable by the company. The dividend depends on the progress of the company. If the companies’ progress is healthy only then the dividend is declared. The shareholders do not constitute the management or the working of the company. They only contribute their capital to the company and are not responsible for any aspect of the profit or loss made by the company. Nor can they share the ownership of assets of the company. They are only entitled to get the dividend paid and a share of capital in case the company winds up.
Types of Shareholders
The shareholders can mainly be divided under two heads, the majority shareholders, and the minority shareholders. The majority shareholders are the parent company of an amalgamate. It holds 50% of the share capital of the company. The minority shareholders hold less than 50% of the share capital. The minority shareholders also include small shareholders who hold very less share of the company.
The small shareholder is categorized under the group who buy shares of INR 20,000 or less or any other sum as been prescribed by the law. The shareholders who hold the majority of the shares are liable to various duties which are prescribed. They have duties based on the trust between the trustee and the beneficiary. The majority shareholders must safeguard the interest of the minority shareholders. In general, it is found that the majority shareholders abuse and misuse their power. There is no balance between the two categories of shareholders. The powerful shareholders have control over the management of the company. Hence, they can easily misuse the power for personal benefit. The discussion taken by the majority shareholders are binding upon the minority shareholders.
Interest of the Small Shareholders
The new Companies Act, 2013 fixes the crack above towards the protection of the interest of the small shareholders. Various sections and provisions are amended in this respect. To protect their interest, some directors are appointed by the small shareholders. Directors are not mandatory but are done if it is a public company having paid up capital of Rs. 5 crores and the number of minority shareholders is 1000 or more. The companies are bound to appoint such directors, where 1/10 or more shareholders give a notice of the appointment. This appointment should be before 14 days of the general meetings. The director is appointed for three years, and he should be a minority shareholder. And once he is appointed, he cannot be appointed as an MD or WTD. The interest of such small shareholder is maintained by giving them such powers. Still, it is not adequate because majority shareholder has wider powers in this respect.
The new Companies Act came up with more provisions so that the interest of the small shareholders do not vanish. There are 6 Sections which deals with the safeguarding the interest of the small shareholders or other depositors. When there is injustice being made by any managerial personnel, any member of the company may act against it and file a complaint. The conduct must be prejudice to public interest. If the tribunal has reasonable ground to believe that affairs of the company are conducted in a prejudice manner or that the decision is made in an arbitrary manner by the management at the time of winding up. The tribunal may take necessary steps as it may reduce its share capital or regulate its sale of share. It may further remove the managing director and recover undue gain from him. It may also take control to conduct the affairs of the company in future and any other steps which the Tribunal deems fit. Section 6 of the Companies Act, 2013 comes forward with class action, to safeguard actions of the members and the depositors. It restricts the company from committing any breach which is against the will of the shareholders.
Various other provisions are being stated by the Companies Act, 2013. One of such provision states that, when a company merges with another, if it is found that the majority shareholders hold 90% or more shares in such case the minority shareholders are given an opportunity to sell their shares. The minority shareholders are given equal opportunity to sell their shares. The company must make payment to the small shareholders so, that they should not be omitted. In a Board meeting, the minority shareholder has the power to stop the special resolution, because approval of 75% of the shareholders is needed. Further, in the balance sheet the profit or loss earned by the minority shareholder must be separately shown. The directors are further responsible for safeguarding the interest of the small shareholders. Hence, the small shareholders are entitled with power to appoint one director. The tribunal is deemed to be very effective for settling matters regarding the small shareholders. In certain cases, the share capital of a company is divided into various classes of shares which lead to differentiating the rights of the shareholders. The lower class consisting of the small shareholders may approach the Tribunal for justice if he is unhappy with the differentiation.
Conclusion
In every sphere, it is found that the weaker section is dominated by, the stronger one. The weaker section cannot do anything other than following the decision made by the strong. To some extent, this happens with the shareholders of the company. And here, majority shareholders are considered as strong because they have a large investment in the share capital of the company as compared to minority shareholders. It is found that these two classes of shareholders often collide and minority shareholders interest are exploited. To bridge this gap, the Companies Act, 2013 came up with such provisions so that the interest of the small shareholders may be regained. Without them, the small shareholders would have withered away by now, but presently they are safeguarding their interest in purchasing shares of various companies.
Reference:
- http://indialawjournal.com/volume6/issue-2/article5.html
- The Indian Companies Act, 2013
