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CORPORATE LAW

PROJECT REPORT
ON
SHAREHOLDER’S DEMOCRACY

SUBMITTED TO:

Ms. Navita Aggarwal


(Faculty of Corporate Law)

SUBMITTED BY:

Hemant Kumar Bhagat


ID no: - 012/2012/0598
Semester V

Date of Submission:- 28/04/2018

HIDAYATULLAH NATIONAL LAW UNIVERSITY RAIPUR


CORPORATE LAW

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.

Hemant Kumar Bhagat


ID no: - 012/2012/0598
Semester V

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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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CORPORATE LAW

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.

Scope and Limitation

This project deals only with the position of shareholders in Indian Corporate Sectors.

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CORPORATE LAW

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.

Q1. What is Shareholder’s Democracy?

Q2. Why “Democracy” is used?

Q3. What are the Rights and Powers of Shareholders?

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CORPORATE LAW

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?

Shareholders democracy refers to efforts to increase shareholder power within the


corporation. And this can be done by removing all the obstacles to their voting authority.
Under the Companies Act 2013 the powers have been divided between the Board of Directors
and the shareholders. The directors exercise their powers through meetings of Board of
Directors and shareholders exercise their powers through Annual General Meetings/General
Meetings.

Now before going further we also need to understand whether shareholder’s


democracy which we are talking about is concentrated to public companies or private
companies, and that can be done by seeing the definition which is given under the companies
Act, 1956. Section 2(35) of the Act says that Private company has to limit the number of its
members to 50. And section 2(71) of the Act provide that in public company there can be
unlimited number of members. From the above definition it is clear that in public company
there are unlimited numbers of shareholders but in private company there can be maximum
50 shareholders. The above point makes it clear that concept of shareholder’s democracy is
prevailing more in public companies as compared to private companies.

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CORPORATE LAW

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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CORPORATE LAW

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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CORPORATE LAW

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.

In order to make any institution democratic it has to follow certain sacrosanct


Principles and the reason being that the new democracies are inherently fragile. Once a new
system of government has been designed, agreed to and implemented, the priority is to
consolidate it.

Some of the vital principles of ‘Democracy' are:

Transparency: Transparency refers to openness of the government system. The process of


governing needs to be both visible and understandable to the population. As such, it will
reassure them that it is trustworthy, and encourage their support and co-operation, rather than
risking their alienation .

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

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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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CORPORATE LAW

SHAREHOLDER’S DEMOCRACY

Like in any other Institutional Framework or system of governance in the


Corporations also a system of democracy exits which follows the same principles but with a
less vigor. The directors in a corporations are accountable to the shareholders whereas the
shareholders are required to participate in the decision making process in order to create a
'check and balance' approach and there should be transparency in all the actions of the
corporation whether they are taken by company or by the shareholders. Shareholders
Democracy which is part of corporate democracy means that a company is under the control
of its shareholders. In this every shareholders has equal opportunity to elect and constitute a
board of directors to manage and conduct the affairs of the company. They act under as
agents and trustees for the company in a fiduciary capacity. As such, their meaningful
participation at company meetings is an imperative4.

4
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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CORPORATE LAW

SHAREHOLDER’S RIGHTS

As Hohfeld analyzed that right is always corresponded by duty so it is important to


understand right in relation to duty. In general sense Rights are legal, social, or ethical
principles of freedom or entitlement; that is, rights are the fundamental normative rules about
what is allowed of people or owed to people, according to some legal system, social
convention, or ethical theory. Similarly shareholders’ right includes certain powers of control
over the corporation. The corporation must protect shareholder interests, and perform certain
legal duties in order to preserve shareholders’ prerogatives and options. If the rights of the
shareholders are protected then only concept of shareholder democracy seems to exist. A
shareholder of a company enjoys two kinds of rights they are individual rights and corporate
rights. As an individual a shareholder can enforce his individual rights, where as corporate
rights can be enforced only by a majority of shareholders. The various rights of members of a
company can be grouped under the following heads5.

 CONTRACTUAL AND OTHER 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:

• Right to have its name on the register of members.

• To vote at the meeting of members.

• To receive dividends when declared.

• To exercise the right of pre-emption return of capital on winding up or reduction of share


capital of the company.

 STATUTORY RIGHTS

Under the Companies Act 2013, a person who is a shareholder of the company enjoys
innumerable rights which are as follows:

• The right to receive notice of General Meeting.

• Right to vote at all meetings.

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• The right to appoint proxy and inspect proxy register.

• The right to requisition Extraordinary General Meeting or be a party to joint requisition.

• 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.

• To obtain, on request minutes of proceedings of general meeting as also to inspect the


minutes.

• To participate, in the removal of directors by passing an ordinary resolution.

• Right to determine the composition of the board.

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OBSERVATION MADE BY SUPREME COURT OF INDIA

Supreme Court in landmark case, Life Insurance Cooperation of India V. Escorts Ltd. &
others6 observe certain fundamental rights of shareholders which are as follows7:

• To elect directors and to participate in the management through them.

• To enjoy the profit of the company in shape of dividends.

• To apply to the court for relief in case of oppression and mismanagement.

• To apply to the court for winding up of company.

• To share the surplus on winding up of the company.

6
1986 AIR 1370, 1985 SCR Supl. (3) 909
7
http://indiankanoon.org/doc/730804/
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CORPORATE LAW

IMPORTANCE OF ANNUAL GENERAL MEETING

The Annual General Meeting is a central annual forum of shareholders which


provides shareholders with the opportunity to consider the contents of company’s annual
financial statement, the reports of directors and auditors, choose the composition of the board
of directors of the company and question the management about their conduct of the
company’s affair. It is a forum in which the shareholders in the company, both large and
small, have the opportunity to have their say. And if the concept of shareholder democracy
means anything, it is reflected in the obligations of the companies to hold an annual general
meeting for their shareholders.

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:

• Consideration of annual accounts, director’s report and the auditor’s report;

• Declaration of dividend;

• Appointment of directors in the place of those retiring; and

• Appointment of and the fixing of the remuneration of the statutory auditors.

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VOTING RIGHTS OF SHAREHOLDER

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.

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PARTICIPATION AND ROLE OF PROXY SYSTEM


The large topic of shareholder participation in corporate governance exists in an often
overlooked procedural context that of disclosure and information flow. Informed
participation is as important as participation per se. Furthermore, the distinction between
passive participation in a simple ratification mode and active participation in the agenda-
setting sense is an essential aspect of the overall topic of shareholder participation in
corporate governance. One way by which the participation of the shareholders in the affairs
of the company increased was by way of proxies. It is important that at least from a corporate
democracy standpoint, there ought not be any obstacles to shareholder participation in
corporate governance in the proxy process While it can certainly be argued that greater
shareholder participation in corporate governance is necessary to provide an appropriate
check on directoral abuses, this is only one of several possible arguments in favor of
permitting large shareholders a greater role in the corporate decision making process.
Increased shareholder participation in corporate governance could also produce a second
potential benefit i.e. better decision making. Some directors have made some astonishingly
poor decisions, at least from the economic perspective , over objections by shareholders.

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SECURING DEMOCRACY FOR MINORITY SHAREHOLDERS

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.

Appointment of director elected by small shareholder:


S. 151 of the Companies Act, 2013 provides that, a listed company may have one director
elected by such small shareholders in such a manner and with such terms and condition as
may be prescribed. That means there is one director in the board which is representing
minority shareholders.

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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Information disclosure and audit:


Company law provides for regular accounting information to be supplied to the shareholders
along with a report by the auditors. It also requires that when shareholder approval is sought
for various decisions, the company must provide all material facts relating to these
resolutions including the interest of directors and their relatives in the matter.

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

Shareholder democracy means company is under the control of shareholders. By


analyzing the various sections of the companies Act, 2013 we can conclude shareholder
posses a much power in controlling the affairs of the company. Though the word shareholder
democracy is not defined anywhere in the companies Act 2013. But the term has been used
indirectly in various Sections of the said Act. Thus to conclude we can say that Shareholder
Democracy exist as “Invisible cloak” in the said companies act 2013.

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References

Websites Referred:

 www.google.com
 www.mondaq.com
 www.csstudentsonlineclub.org
 www.indiankanoon.org

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