Corporate Governance
Lesson 04:
Shareholder's Rights
and Responsibilities
Saif Ullah Khan
IMS – University of
Peshawar
Type of Shares
1. Nominal, authorised or registered capital means the sum mentioned in the capital clause of
Memorandum of Association. It is the maximum amount which the company raise by issuing the
shares and on which the registration fee is paid. This limit is cannot be exceeded unless the
Memorandum of Association is altered.
2. Issued capital means that part of the authorised capital which has been offered for subscription to
members and includes shares allotted to members for consideration in kind also.
3. Subscribed capital means that part of the issued capital at nominal or face value which has been
subscribed or taken up by purchaser of shares in the company and which has been allotted.
4. Called-up capital means the total amount of called up capital on the shares issued and subscribed by
the shareholders on capital account. I.e., if the face value of a share is Rs. 10/- but the company
requires only Rs. 2/- at present, it may call only Rs. 2/- now and the balance Rs.8/- later. Rs. 2/- is the
called-up share capital and Rs. 8/- is the uncalled share capital.
5. Paid-up capital means the total amount of called up share capital which is actually paid to the
company by the members.
Types of Shares
1. Equity shares means that part of the share capital of the company which are not preference shares.
2. Preference Shares means shares which fulfill the following 2 conditions. Therefore, a share which is does not
fulfill both these conditions is an equity share.
• It carries Preferential rights in respect of Dividend at fixed amount or at fixed rate i.e. dividend payable is
payable on fixed figure or percent and this dividend must paid before the holders of the equity shares can
be paid dividend. If the company has the option not to pay the dividends when it does not declare a
profit, such shares are called Non – Commulative Preference Shares. When the company must pay a
dividend even if it must pay it in later years, such shares are called Commulative Preference Shares.
• It also carries preferential right regarding payment of capital on winding up or otherwise. It means the
amount paid on preference share must be paid back to preference shareholders before anything in paid to
the equity shareholders. In other words, preference share capital has priority both in repayment of
dividend as well as capital. When such shares must be repayed after certain period they are called
Redeemable Preferance Shares, while when they can only be repaid after the winding up of the
company, they are calle Non – Redeemable Preference Shares.
Debenture
· A Debenture is a debt security issued by a company (called the Issuer),
which offers to pay interest in lieu of the money borrowed for a certain
period. In essence it represents a loan taken by the issuer who pays an
agreed rate of interest during the lifetime of the instrument and repays
the principal normally, unless otherwise agreed, on maturity.
· These are long-term debt instruments issued by private sector
companies. These are issued in denominations as low as Rs 1000 and
have maturities ranging between one and ten years. Long maturity
debentures are rarely issued, as investors are not comfortable with such
maturities.
· Debentures enable investors to reap the dual benefits of adequate This Photo by Unknown author is licensed under CC BY-SA.
security and good returns. Unlike other fixed income instruments such
as Fixed Deposits, Bank Deposits they can be transferred from one party
to another by using transfer from.
Type of Debentures
1. Non-Convertible Debentures (NCD): These instruments retain the debt character and cannot be
converted into equity shares
2. Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in
the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at
the time of subscription
3. Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's
notice. The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same
status as ordinary shareholders of the company.
4. Optionally Convertible Debentures (OCD): The investor has the option to either convert these
debentures into shares at price decided by the issuer/agreed upon at the time of issue
5. Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer
company. So, if the issuer fails on payment of either the principal or interest amount, his assets can be
sold to repay the liability to the investors
6. Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults on
payment of the interest or principal amount, the investor must be along with other unsecured creditors
of the company
Rights of the Shareholders
1. Receive Information
2. Board Elections
3. Proposal Submission a
4. Participation in Meetings
Pertinent Information
1. Changes in company control
2. Acquisition or disposition of significant assets
3. Bankruptcy or receivership
4. Certifying accountant changes
5. Director resignation
6. Entry into a material agreement that is not in the ordinary course of business
7. Termination of a material course agreement that is not ordinary
8. Creation of a material obligation under an off-balance-sheet arrangement
9. Triggering events that accelerate or decrease a direct financial obligation or off-balance-sheet arrangement
10. Costs associated with exit or disposal activities
11. Material impairments
12. Failure to satisfy a continued listing rule or standard
13. Changes or restatements of previously issued financial statements, related audit reports, or completed
interim reviews
Proposal Submission
• The shareholder must own at least 1% of the company’s stock, have owned it
for at least one year, and must commit to continual ownership through the
voting date.
• The shareholder may not submit more than one proposal per voting period.
• The proposal may not be more than 500 words in length and must not relate to
any prohibited proposal content.
This Photo by Unknown author is licensed under CC BY-SA-NC.
Meetings
1. Statutory Meeting
2. Annual General Meeting
3. Extraordinary General Meeting (EGM)
4. Class Meeting
Duties of the Shareholders
1. To remain informed.
2. To be vigilant.
3. To participate and vote in general meetings.
4. To exercise one’s rights on one’s own, or as a group.
Responsibilities of Share Holders in
Family Businesses
1. Be knowledgeable about company operations (products, services, locations, top managers, industry,
competition, measures of performance)
2. Be knowledgeable about basic company finances and be able to read and ask questions about the
income statement and balance sheet of their company
3. Attend shareholder meetings
4. Understand board member qualifications and participate, when useful, in the screening of board
members
5. Constructively question management and offer suggestions to management in appropriate settings,
while not interfering with management
6. Be a positive emissary for the company publicly support management decisions
7. Keep appropriate company information in strict confidence and recognize that shareholders are not
entitled to all company information on demand
8. Where possible, and useful, generate business leads
9. Where possible, and useful, provide additional investment capital
Shareholder Activism
and Residuary Powers
• Shareholder activism is a way in which the shareholders
can influence a corporation’s behavior by exercising their
rights as owners.
• Residuary Powers: There arise some situations that the
Board is unwilling or unable to act. In such situations, it
is permissible for the general meeting to exercise
the powers vested in the Board of Directors.
Examples
• In 2012, The Children’s Investment Fund (TCI), a UK based
hedge fund with AUM of more than $5 billion, initiated a legal
action against Coal India’s directors and the Government of
India for under-pricing of coal resulting in lesser profits to Coal
India. TCI, at that time, held 1% of Coal India’s shares
which accounted for 10% of the total outstanding shares held
by the public.
• In 2014, Knight Assets, another UK based fund, engaged with
Tata Motors to list the shares in the American stock markets.
The investor believed the DVRs were undervalued in the
Indian markets and listing in US could enhance
shareholder value.
