Rights & Duties Attached to Shares
Authored by - Ruma Minj
Keywords - Shares, Shareholder, Preference shares, Equity shares, Rights and Duties related to shares.
Shares are an instrument for raising capital for a business by distributing them to investors. It is a unit of ownership that represents an equal proportion of a company’s capital. The companies in India are established and governed by the Companies Act 2013. This article seeks to elaborate on the rights and duties attached to shares in a more comprehensive manner.
It entitles the shareholders to an equal claim on the profit and losses of the company. There are mainly two types of shares that are equity shares and preference shares which shall be discussed. In addition to this, there are commonly two types of companies which are established in our country; firstly, public limited companies and secondly, the private limited companies. In the territory of India, citizens mostly prefer open private limited firms because of lesser restrictions and more benefits. Furthermore, shares and shareholders are an integral part of these companies, regardless of the nature of the company.
A shareholder who is commonly referred to as a stockholder is any person, company, or institution that owns at least one share of a company’s stock. Shareholders play a very important role in the framing of the by-laws and profits of the company.
Different Types of Shares
As per Section 43 of the Companies Act 2013, the share capital of the company is of two types; Preference Shares and Equity Shares.
Preference Share Capital
Preferential shares are preferential in nature. During the liquidation of the company, the shareholders holding preferential shares are paid out first after settling the debts of the creditors of the company. However, preferential shareholders do not have any kind of voting rights. These shares are further classified into various kinds and some of them are as follows:
1. Cumulative Preference Shares.
2. Non-cumulative Preference Shares.
3. Participating Preference Shares.
4. Non-participating Preference Shares.
5. Convertible Preference Shares.
6. Non-convertible Preference Shares.
7. Redeemable Preference Shares.
8. Irredeemable Preference Shares.
Equity Share Capital
Equity Shares is also known as ordinary shares. These shares are one of the most common types of shares. These are equal in value and also impart various rights such as voting rights, dividends, etc. to the shareholders. These shares are traded in the stock exchange and are issued at a face value.
The Motive Behind Issuing Shares
The three reasons for issuing shares in the share market are as follows:
1. New finances.
2. Market valuation for the company.
3. A mechanism for an investor to trade shares.
Reason for Investing in Shares
When an investor invests money in the stock market, it has the potential to grow instead of merely keeping the money in the savings account. The investor can derive profits from shares through capital gains and income.
There are various rights available to a shareholder and are as follows:
1. Appointment of Directors
Shareholders play an important role in the appointment of directors. An ordinary resolution is required to be passed by the shareholders for the appointment. Apart from this, shareholders can also appoint various alternate directors. Additional directors can also challenge any resolution passed for the appointment of a director in the general body meeting.
2. Legal Action against Directors
Shareholders have the power to bring legal action against the director by the rules laid under the Companies Act 2013.
3. Voting Rights
Shareholders also have the right to attend and vote at the annual general body meeting. Every company registered in India should comply with the provisions of the Companies Act 2013. It is mandatory for every Indian company to hold an annual general meeting once every year. When a resolution is brought by company members then according to companies Act 2013 it can be passed only by the means of voting by the shareholders.
Companies Act 2013 recognizes the following types of voting:
· Voting by the showing of hands.
· Voting is done by polling.
· Voting is done by electronic means.
· Voting by means of postal ballot.
4. Right to Participate in General Meetings
Shareholders have the right to participate in the general meeting. They have a right to hire a director of a company for the extraordinary general meeting. They can also approach the Company Law Board in order to conduct a general body meeting, in case, it is not done according to the statutory requirements.
5. Right to Transfer Shares or other Interest in the Company
Securities or other interest of any member in a public company are freely transferable under Section 44 of Company Act, 2013. Shareholders of a public company have freely transferable shares without any restriction on the transferability of shares. In the case of private companies, approval of the Board of directors may be necessary before any transfer of shares.
6. Right to Inspect Registers and Books
The shareholders are the main stakeholders in a company and they have the right to inspect the accounts register and the books of the firm.
7. Right to Get Copies of Financial Statements
Shareholders have the right to get copies of financial statements. It is the duty of the company to provide the financial statements of the company to its each and every shareholder, either quarterly or annual statement.
8. Winding up of the Company
Before the company is wound up,it is the duty of the company to inform all the shareholders about the winding and all the credit has to be provided to all the shareholders.
9. Other Shareholders’ Rights
· When the sale of any material of the company is done, the shareholders must be provided the amount which they are entitled to receive.
· In case a company is converted into another company then it must take prior approval of shareholders.
· Right to approach the court, in case of insolvency.
Apart from the rights of shareholders, there are also several responsibilities and duties of shareholders that they must perform. These duties of shareholders include:
· Shareholders should participate in the general body meetings so that they can oversee and advise on the matters.
· Shareholders should consult on the matters of finance and other matters related to the same.
· Shareholders should be in touch with other members of the company so that they can be updated on the work progress of the company.
Shareholders play a significant role in the functioning of a company. They have various rights which include the appointment of the company’s director, auditor, voting rights, and having an opinion when the company goes insolvent. With every right comes a corresponding responsibility which the shareholder must carry out diligently for working efficiently.