The concept of shareholders’ democracy in the present day corporate world denotes shareholders’ supremacy in the governance of the business and affairs of corporate sector either directly or through their elected representatives. The Government of India, has been endeavoring to disperse the shareholdership as widely as possible to avoid concentration of ownership in few hands.
History
During the last few decades, there has been unprecedented growth in Indian Capital Market amidst introduction of variety of economic reforms. As a result investor participation in the economic reforms process has accelerated. But a large and sustained investor participation will depend much on the presence and effectiveness of regulatory framework which aims to ensure overall fairness to investors and bring about a high degree of confidence in the market.
Introduction
It is a widely acclaimed fact that in any corporate enterprise the shareholders are the owners. But in fact they are seldom able to exercise any ownership rights except to sometimes cast votes at Annual General Meetings. The members therefore, are only passive investors rather than active participants in the governance of the corporate process. Still the directors, as per law, are answerable to the shareholders’, may be at least for two reasons, one the shareholders are directly concerned with the economic viability of the investee company so to feel sure about the safety of their investment and secondly being the recognised owners of the company to enforce their rights to control the company as and when the company enters into contractual relationship with third persons thereby incurring greater obligation.
Thus the shareholder’ democracy can play an important role in stimulating the Board of directors, raising company performance, and ensuring that the community at large takes a greater interest in industrial progress.
Meaning : Democracy means the rule of people, by people and for people. In that context the shareholders democracy means the rule of shareholders, by the shareholders’, and for the shareholders’ in the corporate enterprise, to which the shareholders belong. Precisely it is a right to speak, congregate, communicate with co-shareholders and to learn about what is going on in the company.
Recognising the Supreme Authority of the shareholders’
Recognising the Supreme Authority of the shareholders, the Companies Act has given authority to them to appoint directors at the Annual General Meetings to direct, control, conduct and manage the business and affairs of the company.
Two Segments: Under the Companies Act, 2013 the powers have been divided between two segments: one is the Board of Directors and the other is of shareholders. The Directors exercise their powers through meetings of Board of directors and shareholders exercise their powers through Annual General Meetings/General Meetings.
Although constitutionally all the acts relating to the company can be performed in General Meetings but most of the powers in regard thereto are delegated to the Board of directors by virtue of the constitutional documents of the company viz. the Memorandum of Association and Articles of Association.
Section 179 : Under Section 179 of the Companies Act, 2013, a general power has been conferred on the Board of directors. Board of directors of a company shall be entitled to exercise all such powers and to do all such acts and things, as the company is authorised to exercise and do.”
Proviso to this section restricts the power of the Board of directors to do things which are specifically required to be done by shareholders in the General Meetings under the provisions of Companies Act or Memorandum of Association or the Articles of Association.
Thus the Companies Act has tried to demarcate the area of control of directors as well as that of shareholders. Basically all the business to be transacted at the meetings of shareholders is by means of an ordinary resolution or a special resolution.
Transacted at meetings of shareholders
Some of the businesses which can be transacted at meetings of shareholders are:
1. Alteration of Memorandum of Association and Articles of Association.
2. Further issue of share capital.
3. To transfer some portions of uncalled capital to reserve capital to be called up only in the event of winding up of the company.
4. To reduce the share capital of the company.
5. To shift the registered office of the company outside the state in which the registered office is situated at present.
6. To decide a place other than the registered office of the company where the statutory books, required to be maintained may be kept.
7. Payment of interest on paid-up amount of share capital for defraying the expenses on Construction when plant cannot be commissioned for a longer period of time.
8. To appoint auditors
9. To approach Central Government for investigation into the affairs of the company.
10. To allow Related Party Transaction
11. To allow a director, partner or his relative to hold office or place of profit.
12. Payment of commission of more than 1% of the net profits of the company to a managing or a whole time director or a manager.
13. To make loans, to extend guarantee or provide security to other companies or make investment beyond the limit specified.
14. To borrow money and to charge out the assets of the company to secure the borrowed money.
15. To appoint directors.
16. To increase or reduce the number of directors within the limits laid down in Articles of Association.
17. To cancel, redeem debentures etc.
18. To make contribution to funds not related to the business of the company.
certain obligations towards the shareholders
In view of the rights conferred on shareholders to be exercised at General Meetings, the Act casts an obligation on the directors to send notices for convening general meetings or else the meetings shall be declared to be void as also all proceedings transacted thereat.
Apart from the rights which are vested in the shareholders to be exercised in relation to the conduct of the business of the company, the directors of the company have certain obligations towards the shareholders.
Two Broad Duties
The courts have determined two broad duties to be performed by a director:
1. Duties of utmost care and skill in managing the affairs of the company or else be liable for damages.
2. Fiduciary duties to act bona fide in the interest of the company, not to exercise powers for collateral benefit and not to earn profit from the position as a director.
Conclusion
- Despite the powerful weapons handed over to the shareholders by the Companies Act, the shareholders have not been able to use them and most of the provisions remain dead provisions and have not been used by the shareholders as potential weapons to correct any wrongful act on the part of the directors or to give them any directions.
- Consequently, the Board of directors of a large number of companies are elected only by a few shareholders who attend the Annual General Meetings and those who can muster sufficient number of proxies and can demonstrate their voting power. Government Companies are an exception.
- In Government Companies all the directors are appointed on the advice of the Government by the President of India or the Governor of concerned State. Hence, theoretically it can perhaps be said that the shareholders democracy is absolute in such companies.
- In other companies, however, the shareholders democracy is dependent upon the voting strength of shareholders and also to a great extent on the availability of members attending their General Meetings either by themselves or through their proxy.
- This again depends on the proximity of Registered Office of the company to the place of residence of the shareholders. Apart from this most of the shareholders do not have enough time to spare from their busy schedules to concern themselves with the affairs of the company in which they have invested.
- Besides, they are not always educated enough and experienced enough to be conversant with the working of the joint stock companies.
- Although the concept of shareholders’ democracy has been enshrined in the Companies Act, yet, because of the aforementioned deficiencies and flaws in the general body of shareholders as a whole, it is not reflected in the constitution of the Boards of directors of many companies in India.
- The Companies Act provided an opportunity to shareholders to participate in the decision making process by introducing provisions relating to passing of resolutions in respect of certain matters through e-voting.
Achieving the shareholders’ democracy:
For achieving the shareholders’ democracy, the shareholders have to unite and organise themselves on national, state and district levels and get their associations registered under the Societies Registration Act or any other applicable statute so that their voice is heard and they can assert themselves and safeguard the interests of their members. Constitution of such associations should be suitably amended so as to insist upon all the non-Government companies to allot a minimum number of shares to such associations of shareholders so that these associations can attend the Annual General Meetings of all the companies and make sure that the directors elected to company Boards reflect a fair representation.
Important circular : Click here
Important Link : Click Here
