Unit-2 Members and their Rights and Duties

A shareholder, commonly referred to as a stockholder, is any person, company, or institution that owns at least one
share of a company’s stock. Because shareholders are a company’s owners, they reap the benefits of the company’s
successes in the form of increased stock valuation. Shareholders play an important role in the framing and profits of the
company. Shareholders are the owner of the company. They are the main stakeholders in the company. There are two
types of shareholders:
1. Equity Shareholders
Equity shareholders are the main stakeholders in a company and when the time of dividend distribution comes the
preference shareholders would get the first.
2. Preference shareholders
Preference shareholders generally have no voting rights because of their preferred status. They receive fixed dividends,
generally larger than those paid to common stockholders, and their dividends are paid before common shareholders.
The number of shareholders in a company depends upon the type of company which they are opening.
 For a one-person company, one person is required.
 For a private limited company, two persons are needed.
 For a public limited company, a minimum of seven persons are required.
Rights of a Share Holder
There are various rights available to a shareholder. Different type of rights has been discussed below:
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 types of directors. They
are:
a) An additional director who will hold the office until the next general body meeting;
b) An alternate director who will act as an alternate director for a period of 3 months;
c) A nominee director;
d) Director appointed in the case of a casual vacancy in the office of any director appointed in a general meeting in
a public company.
Apart from this shareholder also can challenge any resolution passed for the appointment of a director in the general
body meeting.
2. Legal action against directors
Shareholders also can bring legal action against director by the rules laid down in the Companies Act 2013. They are:
a) Any act done by the director in any manner which is prejudicial against the affairs of the company.
b) Any act done which is beyond the law or against the constitution.
c) Fraud.
d) When the assets of the company are being transferred at an undervalued rate.
e) When there is a diversion of funds of the company.
f) Any act done in a mala fide manner.
3. Appointment of company auditors
Shareholders also have a right to appoint the company auditors. Under Companies Act 2013, the first auditor of the
company is to be appointed by the board of directors. Further the shareholders at the annual general body meeting at
the recommendation of directors and audit committee. The appointment is generally done for five years and further can
be ratified by passing a resolution in the annual general body meeting.
4. 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 in every year. The meeting can be held anywhere at the head office of the company or any
other place as given by the company. At the meeting, there are various mandatory agendas which are to be discussed.
These include the adoption of financial statements, appointment or ratification of directors and auditors etc.
When a resolution is brought by members of a company then according to companies act 2013 it can be passed only by
the means of voting by the shareholders. Companies Act 2013 recognizes following types of voting:
a) Voting by the showing of hands – Every member present in the meeting has one vote. So, in this type of voting
shareholders vote just by showing of hands.
b) Voting done by polling – In this type of voting the chairman or the shareholders’ demand for a poll. However, in
case of differential rights as to voting, a particular class of equity shares may also have weighted voting rights.
 c) Voting done by electronic means– every company who has more than 1000 shareholders has to put up a facility
of voting through online means. Every member should be provided with the means of voting of online.
d) Voting by means of postal ballot– any resolution in the meeting can also be passed by means of a postal ballot.
A shareholder also has a right to appoint proxy on his behalf when he is unable to attend the meeting. Though the proxy
is not allowed to be included in the quorum of the meeting in case of voting, it is allowed by following a procedure
mentioned in the Companies Act 2013.
5. Right to call for general meetings
Shareholders have the right to call a general meeting. They have a right to direct the director of a company to can all
extraordinary general meeting. They also can approach the Company Law Board for the conduction of general body
meeting, if it is not done according to the statutory requirements.
6. Right to inspect registers and books
As shareholders are the main stakeholders in a company, they have the right to inspect the accounts register and also
the books of the firm and can ask questions about the same if they feel so.
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 send the financial
statements of the company to all its shareholders either in a quarterly or annual statement.
8. Winding up of the company
Before the company is wound up the company has to inform all the shareholders about the same and also all the credit
has to be given to all the shareholders.
Other Shareholders’ Rights
a) When the sale of any material of any company is done then the shareholders should get the amount which they
are entitled to receive;
b) When a company is converted into another company then it requires prior approval of shareholders. Also, all the
appointment has to be done according to all the procedures and also auditors and directors have to be done;
c) Right to approach the court in case of insolvency.
Shareholders’ Duties
There are also responsibilities and duties of shareholders which they should perform. Besides several rights which they
have, there exists several duties. They are:
a) Shareholders should participate in the general body meetings so that they can see and also can advise on the
matters which they feel is not going good.
b) Shareholders should consult on the matters of finance and other topics.
c) Shareholders should be in touch with other members of the company so that they can see the work progress of
the company.
Dividends
The dividend is the return on the share capital that shareholders subscribe to and pay to a company. Section 2(35) of
the Companies Act of 2013 defines the term ‘dividend’ as “dividend includes any interim dividend”. A dividend,
according to the dictionary, is a sum paid to creditors of an insolvent estate or an individual’s share of it as loan interest
or profit. However, in business parlance, a dividend is the portion of the company’s profit distributed to its members.
There is a very minute difference between an interim dividend and a final dividend. While a final dividend is a liability for
the company and can be enforced once it is declared by members of the general meeting, a declaration of an interim
dividend by the board does not create a liability and can be cancelled at any time before the interim dividend is actually
paid out. Even if a portion of the interim dividend has been deposited into a separate bank account, the cancellation can
still be performed. The board has the authority to declare an additional interim dividend, and the interim dividend is not
subject to the approval of the members at the general meeting.
According to clause 81 of Table F of the Companies Act of 2013, the board may, subject to Section 123, pay interim
dividends to members as it deems appropriate in light of the company’s profit.
However, the Department of Company Affairs issued a position regarding interim dividends, stating that the general
meeting has the authority to approve dividends, and the board can pay interim dividends if authorised by the articles of
association, subject to the company regularising interim dividends at the general meeting. However, these are not legally
binding.
Declaration of dividend
No specific power has been granted to the companies registered under the act to declare and pay any dividend. The
power to pay dividends is a permanent existing characteristic in a company that is neither derived from the Companies
Act, 2013 nor from the Memorandum of Association or Articles of Association. However, the manner in which the
dividends are to be declared is regulated by the Articles of Association.
Clause 1 of Section 123 provides sources through which dividends can be declared or paid by a company. (Discussed in
detail below).
Clause 2 of Section 123 provides that in accordance to Schedule II, depreciation shall be disbursed.
Clause 3 of Section 123 provides that the Board of Directors of a company may declare an interim dividend from the
surplus in the profit and loss account or from profits generated in the current financial year, provided that it does not
exceed the average dividend declared by the company during the preceding three financial years.
Clause 4 of Section 123 provides that the amount of the dividend must be deposited into a separate bank account within
five days from its declaration.
Clause 5 of Section 123 provides that it must be paid out to the registered shareholder, and should be given in cash. A
bonus issue may be issued if approved, but cash dividends can also be paid by cheque, or electronic means.
Clause 6 of Section 123 provides that if any provisions of Section 73 and 74 are not met, then no equity dividend can be
declared until full compliance is resumed.
Dividend on preference share
Subject to the availability of distributable profits, a preference share carries a preferential dividend right in accordance
with the term of issue and the articles of association. The preferential right to a dividend could be granted for a
predetermined sum or a predetermined rate. It could or could not have a cumulative effect.
Prior to any dividend being paid on equity shares, preference shares may carry a fixed dividend. Shareholders of the
class with priority are entitled to their preferential dividend prior to any dividend paid to shareholders of the other class
if there are two or more classes of preference shares.
However, there are three conditions attached to these dividend rights.
a) First, because preference shares are a part of the company’s share capital, preference dividends can only be paid
if the company has made enough money.
b) Second, a dividend can only be declared in accordance with the act and the company’s articles before it is
distributed to shareholders.
c) Thirdly, a formal declaration ought to have been made.
The preference dividend cannot be treated as a debt by preference shareholders and they cannot first sue for its
payment. However, even if the preference dividend has not been declared, the preference shareholder can sue for it if
the articles stipulate that the company’s profit will be used to pay the preference dividend.
Dividend on equity share
The rights of the various classes of equity shares must be taken into consideration when paying dividends on equity
shares. After all dividends on preference shares have been paid, equity shareholders cannot receive dividends on their
shares.
The preference dividend is fixed and cannot be increased, regardless of how large the company’s profits may be, unless
the preference shares carry the right to participate in surplus profits. Even though the equity shareholder ranks second
in preference to the preference shareholders, he enjoys the privilege of a higher dividend.
Therefore, with the exception of the circumstances described above, the equity shareholders may receive a dividend for
the entirety of the company’s remaining profits following the payment of the preference dividend either immediately or
in subsequent years.
Sources of dividend
There are three sources of dividend as per Section 123(1):
1. Out of the profits of the company of the present year, after providing for depreciation.
2. Out of the profits of the company for any previous financial year, after providing for depreciation.
3. Any received for the payment of dividend from the Central Government or State Government.
Who is eligible to receive a dividend
A dividend on a share must be paid to the registered shareholder or his bankers. When a dividend is payable, it must be
distributed within 30 days of the declaration under Section 127 of the Companies Act of 2013.
In accordance with Section 127 provision, dividends are not required to be paid within 30 days in the following
circumstances:
a) when a shareholder has given the company instructions regarding the dividend payment but these instructions
cannot be followed;
b) in cases where the right to receive dividends is in dispute;
c) in cases where the dividend has been lawfully adjusted by the company to offset any shareholder-due amount.
Revocation of dividend
Once declared, a dividend, including an interim dividend, becomes a debt and cannot be revoked without shareholder
approval. A dividend that is declared and distributed to shareholders cannot be altered by a subsequent resolution.
However, if a dividend was declared fraudulently, the directors would be justified in withholding the dividend. The
directors are personally liable and accountable to the company if a dividend declared fraudulently is paid.
Directors, shareholders, and auditors are all responsible for improper dividend payments. In the event that an improper
dividend payment results in a loss for the business, the directors are generally responsible for paying it back. They must
compensate the business for the loss, for example, if they paid dividends out of capital.
On the other hand, if a shareholder knows that a dividend is paid out of capital, he or she is responsible for covering the
company’s loss, and the directors can get back the dividends. The directors can be prevented from paying an improper
and illegal dividend at the request of any shareholder (Hoole v. Great Western Railway Co. (1867) 3 Ch.) App. 262)
Transfer and Transmission of Shares
The act of movement of an asset is termed as a transfer. The movement can be physical movement or the ownership of
the title of the asset or both. For securities, this movement can be voluntary or operational by law. The transfer
of shares is a voluntary act by the holder of shares and takes place by way of contract. Whereas, the transmission of
shares takes place due to the operation of law that is on the death of the holder of shares or in an event where the
holder becomes insolvent/lunatic.
Meaning of Transfer of Shares
Transfer of shares refers to the intentional transfer of title of the shares between the transferor (one who transfers) and
the transferee (one who receives). The shares of a public company are freely transferable unless the company has a valid
reason to disallow the same. The shares of a private limited company are not transferable subject to certain exceptions.
A transfer deed is executed for the transfer of shares.
Meaning of Transmission of Shares
Transmission of shares takes place due to the operation of law that is when the holder is no more or has become lunatic
or insolvent. It can also take place when the holder of shares is a company, and it has wound up. There is no transfer
deed executed, and the transferee will be given the rights to the shares, and the transmission is recorded only when the
transferee gives proof of entitlement to the shares. In case of the death of the holder the shares, it will be transferred to
the legal representative and in case of insolvency to the official assignee. The following table illustrates the differences
between the transfer of shares and transmission of shares:

Details Transfer of Shares Transmission of Shares

What is it? Voluntary Act Operational by law

Who can initiate? Transferor or Transferee Legal heir or receiver

How is it affected? A deliberate act of parties Insolency, lunacy, death, or inheritance

Is there a consideration? Yes No

Is a transfer deed compulsory? Yes No

Yes. Payable on the market value of

Liability of transferor ceases to exist post Original liability of shares continues to

Provisions Under Companies Act, 2013 and Companies (Share Capital & Debenture) Rules, 2014
As per Section 56 of the Companies Act, 2013 read with Rule 11 of Companies (Share Capital & Debenture) Rules, 2014
Transfer of shares
It will be affected only if a proper instrument of transfer, in Form SH -4, as given in sub-rule 1 of Rule 11 of Companies
(Share Capital & Debenture) Rules 2014 duly stamped, dated, and is executed by or on behalf of the transferor and the
transferee and specifies all the details like name, address, occupation if any of the transferee. It has to be delivered to
the company by either parties within 60 days from the date of execution along with a certificate of securities or letter of
allotment of securities as available. If the transferor makes an application for the transfer of partly paid shares, then the
company gives notice of the application Form SH-5 as given in sub-rule 3 of Rule 11 of Companies (Share Capital &
Debentures) Rules 2014, to the transferee and the transferee must give no objection to the transfer within 2 weeks from
the receipt of the notice.
Transmission of shares
It will be affected when the application of transmission of shares along with relevant documents is valid. Execution of
transfer deed is not required. The following are the relevant documents for the transmission of shares
 Certified Copy of Death Certificate
 Self Attested Copy of PAN
 Succession certificate/ Probate of Will/Will/ Letter of Administration/ Court Decree
 Specimen signature of successor
Time limit for delivery of a certificate in both cases
Every company must deliver the certificates of all securities transferred or transmitted within 1 month from the date of
receipt of the instrument of transfer in case of transfer or intimation of transmission as applicable unless prohibited by
any provision of law or any order of Court, Tribunal, or other authority.
Penalty in case of non-compliance
Where any default is made in complying with the above, the company shall be punishable with a fine not be less than Rs.
25,000 but which may extend to Rs. 5,00,000, and every officer of the company who is in default shall be punishable
with a fine not be less than Rs.10,000 but which may extend to Rs.1,00,000. While the transfer of shares and
transmission of shares intend a change in ownership of the title of the shares, the distinction lies in the fact that the
transfer of shares is voluntary and initiated by the transferee or transferor while transmission of shares is operational by
law and is initiated by the legal representative or receiver.
Annual General Meetings
Annual General Meeting (AGM) is a yearly meeting of stockholders or shareholders, members of company, firm and
organizations. Annual General Meeting is held every financial year and it is mandatory for everyone. In AGM functions
like reviewing company account, approving audited accounts, elections, fiscal records of the past year are discussed. Let
us discuss requirements and issues discussed under Annual General Meeting in greater detail.
As per Companies Act, an annual general meeting must be held by every company once a year without fail. There cannot
be a gap of more than 15 months between two AGMs.
However, the first AGM of a company can be held at any date, within a period of 18 months, since the date of
incorporation of the company. Annual general meetings help members understand the company’s rate of growth and
potential for improvement.
An AGM gives insights into what steps made the company more successful and which steps caused loss. it helps the
members and the board to decide the future course of action. An AGM must be held on a working day.
If the Government declares a public holiday on the day of the meeting, it will be considered a working day by the
members attending the meeting. The annual general meeting can be held at the registered office of the company.
Legal Requirements for holding an Annual General Meeting
Legally, a notice period of 21 days must be given to all the members before the meeting. However, there is an exception
to this rule. If all the voting members consent, the meeting may be held at an earlier date. Further, the following
documents are also to be sent with the notice. Articles of Association, company bylaws, and jurisdiction specifies the
rules that govern annual general meeting.
 Copy of annual accounts of the company
 Director’s report on the company’s position for the given year
 Report by the Auditor of the annual accounts.
Members are allowed to use proxies in their absence. The proxy does not need to be a member of the company.
However, the proxy forms have to be submitted to the company at least 48 hours before the meeting.
Quorum for Annual General Meeting
Unless the articles of the company state otherwise, the quorum for an Annual General Meeting is as follows
1. Public companies – At least 5 members must be present.
2. Other companies – At least 2 members must be present within half an hour of the commencement of the
meeting.
Issues Undertaken at Annual General Meeting
The functions of business undertaken at a typical annual general meeting are listed as follows:
 1. The declaration of dividend among shareholders
2. Consideration of annual accounts
3. Discussion of the director’s report and the auditor’s report
4. Appointment and fixing of the remuneration of the statutory auditors
5. Appointing replacement directors in place of existing directors retiring
To address any issue other than the five mentioned above, a special notice regarding the issue is to be served to
members before the meeting. This is sent with the notice for calling the meeting.
Rights of small Shareholders
The Companies Act 2013 does not define the concepts “majority shareholders” and “minority shareholders”. However,
the terms “majority and minority shareholders” are conceptualised based on the percentage of shares they hold.
Majority shareholders are those who hold more than 50% of the total voting power in a company, thus having significant
influence over major decisions and the growth of the company.
Section 94 of the Act gives minority shareholders the right to inspect certain company records, such as the
Memorandum of Association (MOA), Articles of Association (AOA), financial statements, and annual returns, during
business hours.
Some more provisions as to the rights of minority shareholders as per the Companies Act 2013 are:
1. Section 56 of the Act provides for the free transfer of shares and gives every shareholder the right to transfer
ownership of the share they own as per their will.
2. Section 100 of the act gives minority shareholders the right to call for extraordinary general meetings if they are
holding at least 1/10th of the total voting power or a lower percentage as specified in the company’s articles.
3. Section 108 of the Companies Act provides for modern technology of voting through electronic means for certain
classes of companies. Exercising voting power through the use of electronic mode was a right that was absent in the
Companies Act of 1956. This facility of exercising voting power through electronic mode has proved to be a boon to
the shareholders who are not able to attend the meetings or are at a remote location.
4. As per Section 101 of the Act, the notice of the meeting must be served to all the members within prescribed time,
either in writing or through electronic means. According to this section, every single member or shareholder has the
right to receive notice of the meeting.
5. Section 109 of the Act gives minority shareholders the right to demand a poll if they are not satisfied with the
passing of the resolution by show of hand. This section ensures a fair voting procedure and transparency in the
process of company administration.
6. According to Section 123 of the Act, it is the right of every registered shareholder to receive a dividend out of the
profit of the company for that year as per the declaration made by the company.
7. Section 151 of the Act gives minority shareholders the right to elect one director as per the prescribed manner. This
section is one of the most essential provisions pertaining to the rights of minority shareholders, as it provides for the
scope of keeping a check on the absolute power of the majority and valuing the opinions of minority shareholders.
8. Section 241 of the Act acknowledges the rights of a member of a company to seek justice from a tribunal in cases of
oppression and mismanagement of the company in the hands of the majority, causing harm to the interests of such
member or any other member/members or against the public interest.
9. In connection with Section 241, Section 242 talks about power of the Tribunal to address such application/appeal
and inquire into the matter. Section 242 also provides vast powers to the Tribunal, including removal of directors
and th, termination of any agreement or business transaction with the company.
10. Section 245 of the Act enshrines the right to carry out “class action” by members if the majority is acting against the
overall interest of the growth of the company. “Class action” is the action taken by a group of members having
similar interests that is overlooked by the management of the company while taking key decisions.
Every minority shareholder must be treated as a key stakeholder in the affairs of the company administration. His rights
must be respected as per the values vested in the principle of natural justice. He must be notified of all key
developments and heard by company administration. In short, the company, as a family, must value the opinions and
interests of every member.