Investors’ protection

Anonymous , National Law University Jodhpur

Editor’s Note: Investors are often known as shareholders or members of the company. They contribute to the equity capital, have the voting rights in every matter and are entitled to get dividend. Protection of investors means safeguard and enforcement of the rights and claims of a person in his role as an investor. The same being of utmost importance, has been analysed in detail by the author in the following paper.

Introduction

An investor is a person who allocates capital with the expectation of a financial return. There are different kinds of investors, such as sweat equity investors, angel investors, venture capital etc.

Sweat equity has been used to describe a party’s contribution to a project in the form of effort, as opposed to financial equity which is a contribution in the form of capital. The party contributing his effort is known as Sweat Equity Investors. In a partnership, some partners may contribute to the firm only capital and others only sweat equity.

An angel investor or angel (also known as a business angel or informal investor) is an individual with significant financial resources who provides capital for a business start-up. Usually such investor provides capital in exchange of a percentage of return on his investment or for partial ownership in the company and a say in management decisions. Angels typically invest their own funds, unlike venture capitalists who manage the pooled money of others in a professionally-managed fund.

Venture capitalists are able to provide larger amounts of capital, so this will only be done at a later stage of development, or in exceptional cases, if the initial stage of the business is presented as highly successful with great development opportunities.[i] Money is provided by investors to early-stage, high-potential, start-up companies, and in exchange owning equity in the companies it invests in. This is a very important source of funding for start ups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.[ii]

Various provisions have been enumerated under the Companies Act, 2013 for the protection of the Investors. Since the Companies Bill, 2012 received assent of the President of India on the 29th August, 2013, and published in the Gazette on 30th August, 2013, the Companies Act, 2013 came into force from 30th August, 2013. Thus the Companies Act, 1956 is overridden by the Companies Act, 2013 and thus the provisions under the Companies Act, 2013 shall be applicable to all the Companies.

Investors’ protection

Protection of investors means safeguard and enforcement of the rights and claims of a person in his role as an investor. The capital of a company may be divided into Equity capital and Debt capital. The persons who contribute to the equity capital of a company are called investors. Investors have the voting rights in every matter of the company and are entitled to get dividend. It is different from the creditors who contribute to the debt capital of the company, who in turn get fixed rate of interest on the money so lent. Moreover, creditors have limited voting rights only with respect to those matters which directly affect their interest such as reduction of capital, winding up of company etc.

Investors are the insiders of the company. They are known as shareholders or members of the company. It is to be noted that all members may not be shareholders, but all shareholders are the members of the company. Section 41 of the Companies Act, 1956 provides that “member” includes the subscribers of the memorandum of a company, every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, and every person holding equity share capital of company and whose name is entered as beneficial owner in the records of the depository. Section 2(55) of the Companies Act, 2013 provides for the definition of „member‟ which is same as that given under S. 41 of the Companies Act, 1956.

Various provisions incorporated for the protection of investors under Companies Act, 1956 and the Companies Act, 2013 are-

(1) Civil Liability for Misstatement in Prospectus.

Section 62 of the Companies Act, 1956 lays down civil liability for misstatement in prospectus. Where a prospectus invites persons to subscribe for shares in or debentures of a company, the director, promoter (i.e. party to the preparation of prospectus) and person who has authorised the issue of the prospectus, shall be liable to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement included therein.

Any person who has subscribed for shares against public issue and sustained loss or damage due to such misstatement is entitled to relief under this section.

Section 35 of the Companies Act, 2013 provides for the civil liability for misstatement in prospectus. Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and the following persons given below shall be liable to pay compensation to every person who has sustained such loss or damage. The persons liable, along with the Company are-

(a) Director of the company at the time of the issue of the prospectus;

(b) Has authorized himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time;

(c) Promoter of the company;

(d) Has authorised the issue of the prospectus; and

(e) An expert who is not, and has not been, engaged or interested in the formation or promotion or management, of the company and has given his written consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for registration and a statement to that effect shall be included in the prospectus.

The measure of damages for the loss suffered by reason of the untrue statement, omission etc. is the difference between the value which the shares would have had but for such statement or omission and the true value of the shares at the time of allotment.[iii] In applying the correct measure of damages to be awarded to compensate a person who has been fraudulently induced to purchase shares, the crucial criterion is the difference between the purchase price and their actual value. It may be appropriate to use the subsequent market price of the shares after the fraud has come to light and the market has settled.[iv]The period prescribed for a suit for damage by shareholder is 3 years as per Article 113 of the Limitation Act, 1963.

In R. v. Lord Kylsant[v], a table was set out in the prospectus showing that the company had paid dividends varying from 8 to 10 percent in the preceding years, except for two years where no dividend was paid. The statement showed that the company was in a sound financial position but the truth was that the company had substantial trading loss during the seven years preceding the date of prospectus and the dividends had been paid, not out of the current earnings, but out of the funds which had been earned during the abnormal period of war. The prospectus was held to be untrue due to the omission of the fact which was necessary to appreciate the statements made in the prospectus.

(2) Criminal Liability for Misrepresentation in Prospectus

Section 63 of the Companies Act, 1956 lays down criminal liability for misrepresentation in prospectus. Every person who has authorised the issue of the prospectus containing any untrue statement shall be punishable with the imprisonment which may extend to two years, or with fine which may extend to Rs. 50,000 or both.

Section 34 of the Companies Act, 2013 provides that where a prospectus contains any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, then every person who authorizes the issue of such prospectus shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.[vi]

Thus, the imposition of liability on the persons involved in the preparation of a prospectus is a measure to regulate the Initial Public Offering. This regulation is necessary to ensure accuracy, adequacy and timeliness of the material information in relation to both the prospectus and the concerned issuing company.

(3) Advertisement of prospectus.

Section 58A of the companies Act, 1956, as inserted by Companies Amendment Act, 1974, states that deposits should not be invited without issuing an advertisement. There should be an advertisement, including therein a statement showing the financial position of the company and that the company is not in default in the repayment of any deposit or the interest charged with respect to such deposit.

Section 30 of the Companies Act, 2013 lays down the provision for advertisement of prospectus. Where an advertisement of any prospectus of a company is published in any manner, it shall be necessary to specify therein the contents of its memorandum as regards the objects, the liability of members and the amount of share capital of the company, and the names of the signatories to the memorandum and the number of shares subscribed for by them, and its capital structure.

(4) Investor Education and Protection Fund

Section 205C of the companies Act, 1956 provides for the establishment of Investor Education and Protection Fund by the Central Government. It is a mandatory duty on the Government.[vii] The amounts that shall be credited to the Fund are –

(a) Amounts in the unpaid dividend accounts of companies;

(b) The application moneys received by companies for allotment of any securities and due for refund;

(c) Matured deposits with companies;

(d) Matured debentures with companies;

(e) The interest accrued on the amounts referred to in clauses (a) to (d);

(f) Grants and donations given to the Fund by the Central Government, State Governments, companies or any other institutions for the purposes of the Fund ; and

(g) The interest or other income received out of the investments made from the Fund.

Provided that no such amounts referred to in clauses (a) to (d) shall form part of the Fund unless such amounts have remained unclaimed and unpaid for a period of 7 years from the date they became due for payment.

Section 205C(3) of the Companies Act, 1956 provides that the Fund shall be utilised for promotion of investors’ awareness and protection of the interests of investors in accordance with such rules as may be prescribed.

Section 125 of the Companies Act, 2013 provides that Investor Education and Protection Fund (“Fund”) shall be established by the Central Government. The following amounts shall be credited to the Fund-

(a) The amount given by the Central Government by way of grants after due appropriation made by Parliament by law in this behalf for being utilised for the purposes of the Fund.

(b) Donations given to the Fund by the Central Government, State Governments, companies or any other institution for the purposes of the Fund.

(c) The amount in the Unpaid Dividend Account of companies transferred to the Fund under sub-section (5) of section 124. Section 124 provides for the Unpaid Dividend Account. Section 124(1) states that where a dividend has been declared by a company but has not been paid or claimed within 30 days from the date of the declaration to any shareholder entitled to the payment of the dividend, the company shall, within 7 days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account.

Section 124(5) provides that where any money so transferred to the Unpaid Dividend Account of a company which remains unpaid or unclaimed for a period of 7 years from the date of such transfer shall be transferred by the company along with interest accrued, if any, to the Investor Education and Protection Fund established under section 125 (1).

(d) The amount in the general revenue account of the Central Government which had been transferred to that account under sub-section (5) of section 205A of the Companies Act, 1956, as it stood immediately before the commencement of the Companies (Amendment) Act, 1999, and remaining unpaid or unclaimed on the commencement of this Act.

Section 205A (5) of the Companies Act, 1956 prior to the abovementioned Amendment provided that- Any money transferred to the unpaid dividend account of a company which remained unpaid or unclaimed for a period of 3 years from the date of such transfer, shall be transferred by the company to the general revenue account of the Central Government.

(e) The amount lying in the Investor Education and Protection Fund under section 205C of the Companies Act, 1956.

(f) The interest or other income received out of investments made from the Fund.

(g) The amount received under sub-section (4) of section 38. Section 38 of the Companies Act, 2013 provides that any person who makes or abets- (a) making of an application in a fictitious name to a company for acquiring or subscribing for its securities, or (b) makes or abets making of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities or (c) otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name shall be liable under Section 447 i.e. shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

Where a person has been convicted under this section, the Court may also order disgorgement of gain, if any, made by, and seizure and disposal of the securities in possession of, such person.[viii] The amount so received through disgorgement or disposal of securities shall be credited to the Investor Education and Protection Fund.[ix]

(h) The application money received by companies for allotment of any securities and due for refund

(i) Matured deposits with companies other than banking companies

(j) Matured debentures with companies

(k) Interest accrued on the amounts referred to in clauses (h) to (j)

(l) Sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for seven or more years

(m) Redemption amount of preference shares remaining unpaid or unclaimed for seven or more years; and

(n) Such other amount as may be prescribed

The proviso to this section provides that the amount referred to in clauses (h) to (j) shall not form part of the Fund unless such amount has remained unclaimed and unpaid for a period of 7 years from the date it became due for payment.

Individual Shareholder Right

There are two kinds of rights for a member of the Company, namely Individual membership rights and corporate membership rights. An individual membership right is a right to maintain himself in full membership with all the rights and privileges appertaining to that status.[x]

The individual membership right insists on strict observance of legal rules, statutory provisions and provisions under MOA and AOA. Where corporate membership rights are concerned, a shareholder can assert those rights only in conformity with the decision of the majority of the shareholders.[xi]

The Supreme Court in landmark case, Life Insurance Cooperation of India V. Escorts Ltd. & others[xii] observe certain fundamental rights of shareholders which are as follows:

  • 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.

As Hohfeld[xiii]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, here 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 heads.

 (i) Contractual Rights: These are those rights to which a member is entitled by virtue of Memorandum of Association (MOA) and Articles of Association (AOA). Since the AOA articles constitute a contract between the company and its member, the provision mentioned in the AOA is mandatory. Such rights includes- right to have his 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 on reduction of share capital of the company etc.[xiv]

Since MOA provides the Object Clause of the Company, the member has a right to bring action to restrain the company from doing an ultra-vires act.[xv]

(ii) Statutory Right: Rights entrusted under the Companies Act, 2013 are known as Statutory Right. There are various rights provided to a member under the Act are-

(a) Right to have his name entered in the Company’s register of members

Section 88(1)(a) of the Companies Act, 2013 provides that every company shall keep and maintain a register of members indicating separately for each class of equity and preference shares held by each member residing in or outside India.

Section 88 (5) provides punishment for default in maintaining such Register. If a company does not maintain a register of members, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 3 lakh and where the failure is a continuing one, with a further fine which may extend to Rs. 1,000 for every day, after the first during which the failure continues.

The corresponding section of the Companies Act, 1956 is Section 150. In case of default in maintaining the register of its members, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 500 for every day during which the default continues.

Thus the liability for such default is increased under the Companies Act, 2013.

Register of members is the prima facie evidence of its contents including membership.[xvi] It is, however, not the conclusive proof of membership of a member.

(b) Delivery of share certificate

Section 56(4) of the Companies Act, 2013 provides that every company shall deliver the certificates of all securities within a period of 2 months from the date of incorporation in the case of subscribers to the memorandum; within a period of 2 months from the date of allotment, in the case of any allotment of any of its shares; and within a period of 1 month from the date of receipt by the company of the instrument of transfer or intimation of transmission, in the case of a transfer or transmission of securities.

Section 56(6) provides that in case of default, the company shall be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 lakh and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1 lakh.

The corresponding section of the Companies Act, 1956 is Section 113. Within 3 months after the allotment of shares and within 2 months after the application for the registration of the transfer of any such share, the allottee or the transferor is entitled for delivery of such shares certificate. In case of default, the company, and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 5000 for every day during which the default continues.[xvii]

In H.V. Jayaram v. Industrial Credit and Investment Corporation of India Ltd. (ICICI)[xviii], where the share certificates were sent to the purchaser of shares by post as requested by him, the Supreme Court has ruled that where an offence punishable under Section 113 (2) of the Companies Act, 1956 has been committed, the cause of action arises where the head office of the company is situated and not where the purchaser resides. Therefore, a complaint can be filed only where the registered office of company is situated.

The Court held that since the company had dispatched the share certificates to the purchaser by post, there was no default on its part as regards compliance of the provisions of Section 113(1) and therefore, there was no merit in appeal and as such the same was dismissed.

(c) Right to receive dividend

Section 127 of the Companies Act, 2013 provides punishment for failure to distribute dividends. Where a dividend has been declared by a company but has not been paid within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default,[xix] be punishable with imprisonment which may extend to 2 years and with fine which shall not be less than Rs. 1000 for every day during which such default continues and the company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.

If a company declares dividend then only it becomes liable to pay.[xx]

A company may, if so authorised by its articles, pay dividends in proportion to the amount paid-up on each share.[xxi] No dividend shall be declared or paid by a company for any financial year except- (i) out of the profits of the company for that year arrived at after providing for depreciation, or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation; or (ii) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government.[xxii]

The corresponding section of Companies Act, 1956 is Section 207 which provides penalty for failure to distribute dividends within 30 days from the date of declaration to any shareholder entitled to such payment. Every director of the company shall, if he is knowingly a party to the default, be punishable with simple imprisonment for a term which may extend to 3 years and shall also be liable to a fine of Rs. 1000 for every day during which such default continues and the company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.

Thus the Companies Act, 2013 has reduced the limit of the punishment of imprisonment from 3 years to 2 years only and has increased the fine by fixing a minimum amount of Rs. 1000, as the 1956 Act provided the maximum amount of fine as Rs. 1000.

(d) Rights issue (on further issue of shares)

Section 62(1) (a) of the companies Act, 2013 provides that where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to persons who, at the date of the offer, are holders of equity shares of the company in proportion to the paid-up share capital on those shares.

Section 81 is the corresponding section of the Companies Act, 1956 which provides that the existing members has a pre-emptive right on further issue of shares in proportion to the shares already held by them.

(e) Voting rights

Section 47(1) of the Companies Act, 2013 provides that every member of a company limited by shares and holding equity share capital therein, shall have a right to vote on every resolution placed before the company; and his voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company.

A condition is imposed on this right under section 50 which provides that a member of the company limited by shares shall not be entitled to any voting rights in respect of the amount paid by him on shares held by him, until that amount has been called up.[xxiii]

Section 87 is the corresponding section under the Companies Act, 1956 which provides that member holding equity share capital has a right to vote on every resolution placed before the Company. Such voting rights shall be in proportion to the member’s share in the paid-up equity capital of the Company.

(f) Right to transfer shares

Section 44 of the Companies Act, 2013 provides the nature of shares. It states that the shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.

Section 82 of the Companies Act, 1956 provides that shareholders are owner of their share and can transfer it subject to the restrictions imposed by AOA.

(g) Right to inspect register of members or debenture holders, annual returns

Section 94(2) of the Companies Act, 2013 provides that the registers and their indices, except when they are closed under the provisions of this Act, and the copies of all the returns shall be open for inspection by any member, debenture-holder, other security holder or beneficial owner, during business hours without payment of any fees and by any other person on payment of such fees as may be prescribed.

The corresponding section under Companies Act, 1956 is Section 163.

(h) Right to petition for compulsory winding up of the Company

Section 272(1) (c) of the Companies Act, 2013 provides that contributory can apply for winding up on any grounds given under section 271(1). A “contributory” is a person liable to contribute to the assets of a company in the event of its being wound up. The concept of contributory arises only at the time of winding up of a company. A member does not become a contributory until the winding up.

The corresponding section of Companies Act, 1956 is Section 439.

(i) Right to attend and vote at a meeting of the company and to appoint proxy

Section 105(1) of the Companies Act, 2013 provides that any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person as a proxy to attend and vote at the meeting on his behalf.

The corresponding section of Companies Act, 1956 is Section 176.

(j) Right to receive notice

Section 111(1) (a) of the Companies Act, 2013 provides that a company shall give notice to members of any resolution which may properly be moved and is intended to be moved at a meeting, if it is required by the member in writing.

The corresponding section of the Companies Act, 1956 is Section 188 which provides that the Company shall give notice to the members of the next annual general meeting, notice of any resolution which may properly be moved and is intended to be moved at that meeting, if required by the member and at his expense.

(k) Right to apply to the Tribunal for calling Annual General Meeting

Section 97 of the Companies Act, 2013 states that if any default is made in holding the annual general meeting of a company, any member of the company may apply to the Tribunal to call, or direct the calling of, an annual general meeting of the company.

The corresponding section of the Companies act, 1956 is S. 167 which gives right to the member to apply to the Central Government for calling an Annual General Meeting in case of default by the Company.

Thus the Companies Act, 2013 gives the power to call annual general meeting to the Tribunal, unlike the Central Government under the Companies Act, 1956.

(l) Right to receive a share in the surplus assets of the Co. at the time of winding up

Section 297 of the Companies Act, 2013 provides that the Tribunal shall adjust the rights of the contributories among themselves and distribute any surplus among the persons entitled thereto.

Section 475 of the Companies Act is the corresponding section related to this right.

Rights of the Minority shareholders

Democratic decisions are made in accordance with the majority decision and are deemed to be fair and justified while overshadowing the minority concerns. The corporate world has adopted this majority rule in decision making process and management of the companies. Statutory provisions in this regard have been provided under the Companies Act, 1956 (“CA 1956”), which is being replaced by the Companies Act, 2013 (“CA 2013”).[xxiv]

Despite the fact provisions have been in place under the CA 1956 to protect the interest of the minority shareholders, the minority has been incapable or unwilling due to lack of time, recourse or capability- financial or otherwise. This has resulted in the minority to either let the majority dominate and suppress them or squeeze them out of the decision making process of the company and eventually the company. CA 2013 has sought to invariably provide for protection of minority shareholders rights and can be regarded as a game changer in the tussle between the majority and minority shareholders. Various provisions have been introduced in CA 2013 to essentially bridge the gap towards protection and welfare of the minority shareholders under CA 1956.

This provision came after the incident in 2011 when Mahindra Satyam agreed to pay $125 million (Rs 580 crore) in an out-of-court settlement to end a bunch of class action suits -a combined petition by a large group of investors – filed in the US. The suits were filed after Satyam Computer investors lost substantial money. This followed former chairman Ramalinga Raju admitting to “cooking” the company’s books. Eventually, the company was acquired by Tech Mahindra.[xxv]

The new Companies Act has been implemented to rectify this. Now, the individual or minority shareholders will find it easier to effect a change in decisions taken by a company’s management, but only if they can organise themselves into groups.

Presently, ‘minority shareholders’ are not defined under any law, however, by virtue of Section 395 (Power to acquire shares of dissenting shareholders) and Section 399 (Right to apply for Oppression and Mismanagement) of CA 1956, minority shareholders have been set out as ten percent (10%) of shares or minimum hundred (100) shareholders, whichever is less, in companies with share capital; and one-fifth (1/5) of the total number of its members, in case of companies without share capital. In general terms, minority shareholding can be understood to mean holding such amount of shares which does not confer control over the company or render the shareholder with having a non-controlling interest in a company. CA 1956 provides for various provisions dealing with situations wherein rights of minority shareholders are affected and the same can be divided into two major heads, i.e., (a) oppression and mismanagement of the company; and (b) reconstruction and amalgamation of companies.

Oppression and Mismanagement

CA 1956 provides for protection of the minority shareholders from oppression and mismanagement by the majority under Section 397 (Application to Company Law Board for relief in cases of oppression) and 398 (Application to Company Law Board for relief in cases of mismanagement). Oppression as per Section 397(1) of CA 1956 has been defined as ‘when affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members’ while the term mismanagement has been defined under Section 398 (1) as ‘conducting the affairs of the company in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company or there has been a material change in the management and control of the company, and by reason of such change it is likely that affairs of the company will be conducted in a manner prejudicial to public interest or interest of the company’. Right to apply to the Company Law Board in case of oppression and/or mismanagement is provided under Section 399 to the minority shareholders meeting the ten percent shareholding or hundred members or one-fifth members limit, as the case may be. However, the Central Government is also provided with the discretionary power to allow any number of shareholders and/or members to apply for relief under Section 397 and 398 in case the limit provided under Section 399 is not met.

On the other hand, CA 2013 provides for provisions relating to oppression and mismanagement under Sections 241-246. Section 241 provides that an application for relief can be made to the Tribunal in case of oppression and mismanagement. Section 244(1) provides for the right to apply to Tribunal under Section 241, wherein the minority limit is same as that mentioned in CA 1956. Under CA 2013, the Tribunal may also waive any or all of the requirements of Section 244(1) and allow any number of shareholders and/or members to apply for relief. This is a huge departure from the provisions of CA 1956 as the discretion which was provided to the Central Government to allow any number of shareholders to be considered as minority is, under the new CA 2013 been given to the Tribunal and therefore is more likely to be exercised.[xxvi]

To further briefly examine a few provisions of CA 1956 vis-à-vis the provisions of CA 2013:

  • Provision of Section 397 and 398 of CA 1956 are combined in Section 241 of CA 2013 and accordingly applications for relief in cases of oppression, mismanagement etc. will have to be directed to the Tribunal.
  • While the powers of the Tribunal under CA 1956 on application under Section 397 or 398 and Section 404 were limited, CA 2013 granted additional powers to the Tribunal including to:

(a)        restrictions on the transfer or allotment of the shares of the company;

(b)        removal of the managing director, manager or any of the directors of the company;

(c)        recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;

(d)       the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company;

(e)        appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct; and

(f)        imposition of costs as may be deemed fit by the Tribunal.

  • The requirement of establishing existence of ‘just and equitable’ circumstances to waive any and all requirements of the section pertaining to the meeting the minimum minority limits and providing ‘security’ while allowing such an application are excluded from the Companies Act, 2013.

Further, by way of Section 245, CA 2013 has introduced the concept of class action which was non-existent in CA 1956.

Class Action

Section 245 of CA 2013 provides for class action to be instituted against the company as well as the auditors of the company. The Draft Companies Rules allow for this class action to be filed by the minority shareholders under Clause 16.1 of Chapter-XVI (Number of members who can file an application for class action). On close reading of Section 245 of the Companies Act, 2013, it can be seen that the intent of the section is not only to empower the minority shareholder and/or members of the company but also the depositors. Unlike Section 399 of CA 1956 which provides for protection to only shareholder/members of the company, Section 245 of CA 2013 also extends this protection to the class of depositors as well. However, in the current scenario, the provision of representation of a class of members or depositors by a particular member or depositor lacks clarity.

Sub-section (1) of Section 245 provides, “such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders …”. Besides, there being a typographical error in this sub- section (1) with respect to indicating sub-section (2) instead of sub-section (3) which provides for the minimum number of members who can apply for class action there is also some confusion as to the class on whose behalf such class action can be instituted. While ‘member has been defined in the CA 2013 as including the subscriber to the memorandum of the company, shareholders and person whose name is entered in the register of members; definition for depositor is not provided under CA 2013.

Further, section 245 does not empower the Tribunal with discretionary power to admit/allow any class suit wherein class of members or depositors are unable to comply with the minimum number of members/depositors requirement to be laid down in the Companies Rules. Also, on a close reading of Section 241 and Section 245 of the Companies Act, 2013, we can find duplication in protection provided to the members in case affairs of the company are conducted in a manner prejudicial to the interest of the company/members.

Reconstruction and Amalgamation

With respect to minority shareholder rights at the time of reconstruction and amalgamation of companies, CA 1956 under Section 395 states that transfer of shares or any class of shares of a company (transferor company) to another company (transferee company), has to be approved by holders of atleast nine-tenths (9/10) in value of the shares whose transfer is involved within four months after the offer has been made by the transferee company. Herein it is important to note that consent of 90% (ninety percent) shareholders is required, which is referred to as majority. The section further provides that within two months after the lapse of the aforementioned four months, the transferee company shall give a notice to any dissenting shareholders expressing its desire to acquire their shares. Herein, the term ‘dissenting shareholder’ is defined under Section 395(5)(a) as including shareholder who has not assented to the scheme or contract and any shareholder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract. As the ninety percent (90%) shareholders in this section are referred to as majority, the remaining ten percent (10%) dissenting shareholders can be referred to as minority. The section further goes on to provide that once the notice is provided to the dissenting shareholders, unless the dissenting shareholders make an application to the Tribunal within a month of such notice, transferee company shall be entitled to the shares of the dissenting shareholders and such shares shall be transferred to the transferee company. If the transferee already owns ten percent (10%) or more of such shares then the scheme needs to be approved by shareholders holding ninth- tenth (9/10) in value and being three-fourth (3/4) in number of the shareholders holding such shares. In such a case, the dissenting shareholder ought to be offered the same price as the other shareholders. However, this section has seldom been used and instead recourse has been to Section 100 of CA 1956 to eliminate the minority. Section 100 provides that the capital of the company may be reduced in any manner whatsoever by way of a special resolution i.e. assent of seventy-five (75%) shareholders present and voting subject to approval of the courts. This section ignores minority shareholding to the extent that special resolution does not reflect the intention of the minority shareholders.

To counter these shortcomings, CA 2013 has provided for Section 235 (Power to acquire shares of shareholders dissenting from scheme or contract approved by majority) and 236 (Purchase of Minority Shareholding). Section 235 is corresponding to Section 395 of CA 1956 and provides that transfer of shares or any class of shares in the transferor company to transferee company requires approval by the holders of not less than nine-tenths (9/10) in value of the shares whose transfer is involved and further the transferee company may, give notice to any dissenting shareholder that it desires to acquire his shares. Section 235 makes it mandatory for the majority shareholders to notify the company of their intention to buy the remaining equity shares the moment acquirer, or a person acting in concert with such acquirer, or group of persons becomes the registered holder of ninety per cent (90%) or more of the issued equity share capital of a company. It further provides that such shares are to be acquired at a price determined on the basis of valuation by a registered valuer in accordance with such rules as may be prescribed.

CA 2013, in addition to minor improvements to certain provisions of CA 1956 has also introduced new provisions affecting the reconstruction and amalgamation procedures. These, inter alia, include:

  • CA 2013 vide Section 235(4) in respect of ‘Dissenting Shareholders’ provides that the sum received by the transferor company must be paid into separate bank account within the specified period of time as against the provision mentioned in Section 395(4)of CA 1956 which lacked clarity on this aspect;
  • As per CA 2013, Section 236 (1) and (2), the Acquirer on becoming registered holder of niney percent (90%) or more of issued equity share capital shall offer minority shareholder for buying equity shares at the determined value;
  • Section 236 (3) of CA 2013 has provided the minority with an option to make an offer to the majority shareholders to buy its shares; and
  • Section 236 (5) of CA 2013 requires the transferor company to act as a transfer agent for making payments to minority shareholders.

Minority Upgraded

Besides the above, CA 2013 has sought to empower the minority shareholders in corporate decision making also. Section 151 of the CA 2013 requires listed companies to appoint directors elected by small shareholders, i.e. shareholders holding shares of nominal value of not more than twenty thousand rupees (INR 20,000/-). The Draft Companies Rules elaborates the provision in this regard under Clause 11.5 of Chapter XI and provides that a listed company may either suo-moto or upon the notice of not less than five hundred (500) or one-tenth (1/10) of the total number of small shareholders, whichever is less, elect a small shareholders’ director from amongst the small shareholders. Here, it is important to note that small shareholders are different from the minority shareholders as small shareholders are ascertained according to their individual shareholding which should be less than twenty thousand rupees (INR 20,000/-); whereas minority shareholders/shareholding is collectively ascertained and regarded as having non-controlling stake in the company. However, small shareholders can be included in and/or regarded as minority shareholders by virtue of their small shareholding amounting to non-controlling stake in the company.

The Draft Companies Rules further provides for the procedure for nomination of a small shareholder director and the information and declaration to be provided in this regard. To safeguard the interest of the small shareholder and to maintain the independent decision making by such directors, the Draft Companies Rules provides that such director shall not be liable to retire by rotation and shall have tenure of three years. However, the small shareholder director will not be eligible for reappointment.

Sub-Clause (4) of Clause 11.5 of the Draft Companies Rules provides that “such director shall be considered as an independent director subject to his giving a declaration of his independence in accordance with sub-section (7) of Section 149 of the Act.” Meaning thereby, that small shareholder director may or may not be an independent director. However, the Draft Companies Rules provides under Sub-Clause (5) of Clause 11.5 that such office shall be vacated if the director inter alia ceases to be an independent director. Now, while Sub-Clause (4) of Clause 11.5 makes it optional for the small shareholder director to be an independent director; Sub-Clause (5) of Clause 11.5 makes it mandatory for the small shareholder director to be an independent director and to maintain its independence throughout its term thereby creating confusion. It is expected that this inconsistency may be addressed while finalizing the Draft Company Rules.

While empowering the minority/small shareholders in the decision making process, the CA 2013 endeavours to further its present provisions to safeguard the interest of minority shareholders through appointment of independent directors. The ‘Code of Independent Directors’ provided pursuant to Section 149(8) in Schedule IV of the CA 2013, provides that independent directors shall inter alia work towards promoting the confidence of minority shareholders.

Upon careful examination of the provisions of the CA 2013 it can be ascertained that legislative intent in CA 2013 is to safeguard the minority interest in a more comprehensive manner. However, the provisions of CA 2013 not only requires proper implementation upon addressing the present lacunas but also requires instilling confidence in the minority shareholders with respect to the institutional and regulatory mechanism which ensures that interest of minority shareholders shall be given due consideration. This dual approach towards enforcement of minority rights shall only guarantee proper administration of the corporate activities. Nevertheless, Ministry of Corporate Affairs’ effort in preparation of a framework, which endeavors to empower minority shareholders, is commendable.

Rights of majority shareholder (Corporate membership rights)

Certain rights can be exercised only by the majority and not by single shareholder. Such rights are known as corporate membership right. Some of the instances of such rights under the Companies Act, 2013 are-

(i) Section 149(10) provides that an independent director shall be eligible for reappointment only on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.

(ii) Section 139 provides that company shall place the matter relating to the appointment of auditors for ratification by members at every annual general meeting.

(iii) Section 169 (1) may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242 in order to prevent mismanagement or oppression, before the expiry of the period of his office after giving him a reasonable opportunity of being heard.

(iv) Section 180 provides for restriction on the power of Board. The Board of Directors of a company shall exercise the certain powers only with the consent of the company by a special resolution. They are- (a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company; (b) invest, otherwise than in trust securities, the amount of compensation received by the company as a result of any merger or amalgamation; (c) borrow money which exceeds the aggregate of the paid-up capital of the company and its free reserves; (d) to remit, or give time for the repayment of, any debt due from a director.

Principle of Majority Rule

Unlike individual right, under corporate membership rights a shareholder is not entitled to bring an action in his own name. Majority shareholders in a general meeting control the management of the company. If the directors are supported by majority in what they do, the minority can do nothing.

The principle of majority rule was first established in the case Foss v. Harbottle[xxvii]. In this case, the directors of the company Victoria Park Company were alleged of fraudulent acts such as the property of the company being misapplied and certain mortgages over the property being given. Majority shareholders at the general meeting resolved that no action should be taken against the directors. Two of the minority shareholders brought an action against the directors to compel them to make good the losses to the Company. The Court dismissed the action on the ground that the wrong done to the Company was capable of being ratified or confirmed by the majority of the shareholders and therefore the Court should not interfere. It was left to the majority to decide what was for the benefit of the company and whether the proceedings against the directors should be commenced or not. Thus, minority shareholders were not entitled to sue the directors for the wrongs done to the company.

Exceptions to the Majority Rule

In certain conditions this principle is not applicable. These conditions may be treated as the restrictions on the power of the majority. These conditions are-

(i) Ultra vires acts- Ultra vires means beyond power. The doctrine of ultra vires has been developed to protect the investors and creditors of the Company. It prevents a Company to employ the money of the investors for the purpose other than those stated in the object clause of the memorandum.

If an act is ultra vires the company, no majority can sanction or confirm such an act and every shareholder is entitled to bring an action against the company and its officers in respect of it.[xxviii]

In Bharat Insurance Co. v. Kanhaiya Lal[xxix], one of the objects of the company was to “advance money at interest on security of land, houses, machinery and other property situated in India”. One shareholder brought an action on the ground that several investments had been made by the company without adequate security and contrary to the provisions of the memorandum. The Court held that he could sue because as regards the ultra vires act, the majority rule does not come into operation.

(ii) Fraud on the Minority

If the conduct of the majority shareholders constitutes fraud on the minority shareholders, any shareholder in exercise of his individual right may apply to the Tribunal to interfere and restrain the company from going ahead with that transaction.[xxx]

In Brown v. British Abrasive Wheel Co.,[xxxi] the articles were altered so as to enable the nine-tenths of the shareholders to compel any shareholder to sell his shares to them at a fair value. The resolution of altering the articles was not upheld because it was only in the interest of majority and not in the interest of the company as a whole. The object of such resolution was merely to enable the majority to acquire the shares of minority.

(iii) Company is in control of the wrongdoers

When the persons against whom the relief is sought themselves hold and control the majority of shares in the company and will not permit an action to be brought in the name of the company, then shareholders may sue in their own name.

In Glass v. Atkin,[xxxii] a company was controlled equally by two defendants and two plaintiffs. The two plaintiffs brought an action against the two defendants alleging that they had fraudulently converted the assets of the company for their own benefit. The court allowed the action and observed that normally it is for the company itself to bring an action where its interest is adversely affected, but in the instant case the two plaintiffs were justified in bringing an action on behalf of the company since the two defendants being in equal control would easily prevent the company from suing.

(iv) Acts requiring a special resolution

Sometimes the Act or the articles of the company require certain acts to be done only by passing a special resolution at the general meeting of the company. If the majority shareholders purport to do any such act by passing an ordinary resolution, then anyone can bring an action to prevent the majority to do so.

Distinction between Individual Membership Rights and Corporate Membership Rights

Under Individual membership right, every shareholder has got the right to assert it in his own name. Such right arises when the member has special interest distinct from the general interest which other members have in the company.

But if the infringement of a corporate membership right is alleged, his remedy is a representative action on behalf of himself and other shareholders or in some instances an action in the name of the company. Such right is subject to the will of the majority.

Dematerialisation of Securities

Due to dematerialisation, there is no risk of the securities being stolen / lost and no fear of fake and forged securities. Bonus and right issues are credited directly to the investors account. The major advantage in case of dematerialized holdings is that the transmission formalities for all securities held in a demat account can be completed just by interaction with the DP alone. The various provisions that mandate for dematerialization of securities are-

Offer of securities to be dematerialised form

Section 29 (1) of the Companies Act, 2013 provides that (a) every company making public offer; and (b) such other class or classes of public companies as may be prescribed, shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 and the regulations made thereunder.

The corresponding section of the Companies Act, 1956 i.e. Section 68B as inserted by Companies (Amendment) Act, 2000 provides that Initial Public Offer by listed Company of any security for Rs. 10 Crores or more shall only be in dematerialised form so as to comply with the Depositories Act, 1996.

SEBI (Issue of Capital and Disclosure Requirement) Regulation, 2009

An option to receive securities in dematerialised form is given to the investors. Schedule VIII Part A (A) (13) (a) of the said regulation requires a statement to be incorporated in the “offer document” and in the application form[xxxiii], to the effect that the investors have an option to either receive securities in the form of physical certificates or hold them in the dematerialised form.

Issue of Certificates on Initial Public Offer (IPO)

SEBI has mandated all the shares allotted under new IPOs will be traded in Demat form only in all exchanges. Investors, however, have the right to obtain and hold physical share certificates, though these will need to be dematerialised before sale of securities. Again, there is a provision for re-materialisation at the instance of the investor.

Depository

A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities.

Depository Participant

A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services.

Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the RBI, state financial corporations- complying with the requirements prescribed by SEBI can be registered as DP.

Depositories Act, 1996

Section 2 (1) (a) provides that “beneficial owner” means a person whose name is recorded as such with a depository. Section 2 (1) (f) states that “issuer” means any person making an issue of securities. Section 2 (1) (j) provides that “registered owner” means a depository whose name is entered as such in the register of the issuer

To avail the services of a depository, an investor is required to open a Beneficial Owner (BO) account with a Depository Participant (DP) of any depository.

  1. 6 lays down a provision for surrender of certificate of security. The issuer, on receipt of certificate of security from any person who has entered into an agreement with the depository for availing services, shall cancel the „certificate of security‟ and substitute in its records the name of the depository as a registered owner in respect of that security and inform the depository accordingly.
  2. 7 provides for registration of transfer of securities with depository. Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of the transferee.
  3. 8 give options to receive security certificate or hold securities with depository to the investors. Where a person opts to hold a security with a depository, the issuer shall intimate such depository the details of allotment of the security, and on receipt of such information the depository shall enter in its records the name of the allottee as the beneficial owner of that security.
  4. 9 mandates that all securities held by a depository shall be dematerialised form.
  5. 10 provides that a depository shall be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner. But the depository as a registered owner shall not have any voting rights or any other rights in respect of securities held by it.
  6. 11 mandates that Register of beneficial owner should be maintained in the manner provided under the Companies Act, 1956
  7. 19D provides for the penalty for delay in dematerialisation or issue of certificate of securities. If the issuer or his agent fails to dematerialise or issue the certificate of securities on opting out of a depository by the investors, such issuer or its agent or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or Rs. 1 crore, whichever is less.

Shareholder Derivative Suit

Shareholder derivative suit refers to a lawsuit brought by a shareholder on behalf of a corporation against a third party allegedly causing harm to the corporation. Here the third party is often the insider of the Company.

Under traditional corporate law, management is responsible for bringing and defending the corporation against suit. But when the defendant in the suit is someone close to the company, like a director or an executive officer, shareholders have the right to bring suit against them for protecting the interest of the Company.

If the suit is successful, the proceeds go to the corporation, not to the shareholder who brought the suit.

Shareholder derivative actions provide greater accountability for shareholders, inspire investor confidence in the financial markets, and protect companies and shareholders from further harm.

Section 245 of the Companies Act, 2013 provides for class action. A prescribed number of members and depositors can file application against the management or the Company “if its affairs are conducted prejudicial to their interest or the interest of the Company and may call for specified orders in such respect.” The Companies Act, 1956 did not provide for class action.

Transfer And Transmission Of Shares

Transfer of shares is a voluntary act of a member while transmission takes place by operation of law. Transmission of shares means shares transmitted to legal representatives or the Official Receiver in case of death or bankruptcy of the registered shareholder. In transfer of shares, there is always consideration involved but in transmission, no question of consideration arises.

Section 44 of the Companies Act, 2013 provides the nature of shares. It states that the shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company. A private company may impose reasonable restrictions on transferability of shares, but cannot impose absolute prohibition on transferability of shares.

Section 56(1) of the Companies Act, 2013 provides that a company shall not register a transfer of securities of the company, or the interest of a member in the company in the case of a company having no share capital, unless a proper instrument of transfer, duly stamped, dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of 60 days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities.

Exemption under Section 56(1) is given to the transfer between persons both of whose names are entered as holders of beneficial interest in the records of a depository.

Section 56(2) of the Companies Act, 2013 states that the company has power to register, on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted.

Where an application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered, unless the company gives the notice of the application to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of notice.[xxxiv]

Section 56(4) of the Companies Act, 2013 provides that every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted-

(a) Within a period of two months from the date of incorporation, in the case of subscribers to the memorandum;

(b) Within a period of two months from the date of allotment, in the case of any allotment of any of its shares;

(c) Within a period of one month from the date of receipt by the company of the instrument of transfer or of the intimation of transmission, in the case of a transfer or transmission of securities respectively;

(d) Within a period of six months from the date of allotment in the case of any allotment of debenture:

Provided that where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.

In case of default by the company in complying with the provisions under Section 56, it shall be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 lakh and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees.[xxxv]

Where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.[xxxvi]

In Bajaj Auto Ltd. v. Company Law Board,[xxxvii] the Supreme Court observed that even if the appellants have tried to purchase shares with a view to get a controlling interest in the Company, that itself cannot be a ground for refusing to transfer the shares unless and until it can be shown that the purchasers are undesirable persons and after gaining control of the Company, they will act against the Company and shareholder’s interest.

In Reliance Industries Ltd. v. Securities And Exchange Board of India,[xxxviii] Reliance Industries Limited (‘RIL’), had been holding more than 5 per cent shares in the target company, Larsen & Toubro Limited (‘L&T’) since 1988-89 and had been having two of its representatives functioning as Non-Executive Directors on the Board of Directors of L&T. Securities and Exchange Board of India (SEBI) notified the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 requiring disclosure of holdings above 5 per cent. RIL continued to purchase the shares of L&T in the securities market inasmuch as its shareholding reached as high as 10.98 per cent. The Court held that the appellant (RIL) was under an obligation under Regulation 7 to inform the target company about its shareholding having exceeded 5 per cent.

Transfer of shares under the Securities Contracts (Regulation) Act, 1956

Section 22A as inserted by the Securities Contracts (Regulation) Amendment Act, 1985 provides that the Board of Directors (BOD) do not have absolute right to refuse registration of transfer of listed shares.

Four grounds on which Company may refuse are-

(i) Where the transfer deed is defective or incomplete.

(ii) If such transfer is likely to affect the composition of BOD which would be prejudicial to the interest of the Company or the public.

(iii) Where the transfer of listed shares is in contravention of any law for the time being in force.

(iv) Transfer is prohibited by order of court or any competent authority.

Transfer of Securities under FEMA, 1999

Section 2(ze) provides that the term “transfer” includes sale, purchase, exchange, pledge, gift, loan or any other form of transfer of right, title, possession or lien.

Section 6(3) empowers RBI to prohibit, restrict or regulate, the following matters given below-

(a) Transfer or issue of any foreign security by a person resident in India

(b) Transfer or issue of any security by a person resident outside India

(c) Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India.

Free Transferability of Securities of Public Companies

Section 111A in the Companies Act, 1956 as amended by the Depositories Related Laws (Amendment) Act, 1997, provides as follows-

The shares and debentures of a public company, whether listed or not, shall be freely transferable. The BODs of the company or the concerned ‘depository’ does not have discretion to refuse or withhold transfer of any security.

The transfer has to be effected by the company immediately as soon as it receives instrument of transfer, if the securities are outside the depository mode. When securities are in the demat form, the transfer shall be effected by the depository automatically on the receipt of the intimation in appropriate form from the ‘participants’.

Under both the cases, namely, non-depository mode or depository mode, the transferee shall be entitled to all the rights including voting rights associated with the security as soon as intimation about the transaction is received by the company or depository.

Section 111 of the Companies Act, 1956 provides for Right of Appeal. If a private company refuses, on any ground not stated in the restrictions contained in its Articles of Association, to register the transfer/transmission of any shares, the transferor or transferee may prefer an appeal to the Tribunal against the refusal. The appeal must be filed within 2 months of the receipt of the notice of such refusal or, where no notice has been sent by the company, within 4 months from the date on which the instrument of transfer was delivered to the company. If the refusal does not seem justified, the Tribunal shall issue an order to the company to register the transfer, which must be given effect to, within 10 days of the receipt of the order.

If default is made in giving effect to the orders of the Tribunal, the Co. and every officer of the Co. who is in default shall be punishable with fine which may extend to Rs. 10,000, and with a further fine which may extend to Rs. 1000 for every day after the first day during which the default continues.

Conversion, Consolidation And Re-Organisation Of Shares

Section 61 of the Companies Act, 2013 provides for power of Limited Company to alter its share capital. A limited company having a share capital, may, if so authorised by its articles alter its memorandum in its general meeting to – consolidate and divide all or any of its share capital into shares of larger amount than its existing shares[xxxix], and convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination.[xl]

Consolidation of shares

It is a process of combining a specified number of shares into one new share, and that new share has to be of a nominal value equal to the aggregate of the shares so consolidated. Thus it is a process by which a company reduces the number of issued shares and increases the par value of each.

As a shareholder, the number of shares owned would be reduced, their face value would rise to compensate, and the market price of the shares should also rise .This power has to be exercised in the general meeting in the manner authorised by the articles.

Conversion of shares

Stock is the aggregate of fully paid up shares legally consolidated, portions of which aggregate may be transferred or split up into fractions of any amount, without regard to the original nominal amount of the shares.

Section 61(1) (c) of the Companies Act, 2013 enables a Company limited by share or a Company limited by guarantee with a share capital, if so authorised by the Articles, to convert the whole or any of its paid-up shares into stock or vice-versa.

Stock cannot validly be issued directly, even against payment of full nominal amount in cash. Shares must first be issued and paid-up in full and then converted into stock.

Share re-organisation

It includes certain transactions in which new shares are issued to the shareholders in a Company, or the rights attaching to shares are altered, or a company’s share capital is reduced.

The most common share re-organisation transactions are bonus issues and rights issues. In both cases, new shares are allotted to some or all of the existing shareholders in proportion to their shareholdings. Bonus share means when huge profits are accumulated and the Company with the intention to distribute these profits, instead of paying the dividends or bonus in cash, issues fully paid-up new shares to its members or applies the dividends belonging to the shareholders in payment of the unpaid value of shares already held by them.

Section 66 of the Companies Act, 2013 provides that subject to confirmation by the Tribunal, a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way, and thus may-

(a) Diminish the nominal amount of the shares so as to leave a less sum unpaid; or

(b) either with or without extinguishing or reducing liability on any of its shares- (i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or (ii) pay off any paid-up share capital which is in excess of the wants of the company.

Other key investor-friendly provisions

  • Prohibition on forward dealings in securities of company by a key managerial personnel
  • Prohibition on insider trading of securities
  • Voting through electronic means
  • No mid-night Annual general meeting – The time of calling of AGM has been specified to be in business hours, that is, between 9 a.m. and 6 p.m.
  • Quorum for meetings – fixed as per the membership base of the Company instead of specified number irrespective of size.
  • Minutes of proceedings of general meeting, meeting of Board of Directors and other meeting and resolutions passed by postal ballot
  • Maintenance and inspection of documents in electronic form

Conclusion

Though several provisions were provided under the Companies Act, 1956 for protection of the interests of the shareholders, it did not keep pace with the changing business environment. The new companies Act addresses several investor concerns and seeks to provide a more hospitable environment for minority shareholders especially in the wake of scams and scandals such as the one that hit the Satyam Computer Services in 2008.

Under the new Act, a prescribed number of members and depositors can file application against the management or the Company “if its affairs are conducted prejudicial to their interest or the interest of the Company and may call for specified orders in such respect.”

An application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the specified persons affected by any act or omission. Further, where the members seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall lie on the firm and of each partner who was so involved.

The companies Act also provides for protection for whistleblowers. The Act contains provisions to enable the directors and employees to report genuine concerns. Such a vigil mechanism will provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases.

Investors are also entitled to an exit option if a company changes its objects. “Specific provision has been formulated to provide exit opportunity by the promoters to the dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus,” Corporate Professionals said in a note describing the provisions on the new law.[xli]

Analyzing the various provisions of the Companies Act, 2013, it can be concluded that legislature has taken affirmative step to protect the interest of the investors. Since investor’s contribution is very essential in raising fund by the company, care must be taken to address their needs. However, the investors’ onus of proof of their reliance on the prospectus, and the loss or damage being caused by the untrue statement included in the prospectus, are impediments to the recovery of compensation for their investments in an IPO. But such provision is necessary in order to balance the interest of the Company and the investors.

Edited by Kanchi Kaushik

[i] R. Chakrabarti, Corporate Governance in India-Evolution and Challenges, available at www.ssrn.com

[ii] S. Ghosh, Do Board Characteristics Affect Corporate Governance? Firm Level Evidence For India, available at www.jstor.com

[iii]McConnel v Wright, (1903) 1 Ch 546

[iv]Smith New Court Securities Ltd. v Scrimgeour Vickers (Asset Management) Ltd., (1997) 1 BCLC 350 (HL)

[v] (1932) K.B. 442

[vi] Section 447 of the Companies Act, 2013

[vii] A.K. Thej, Class Actions Under The Indian Companies Act, available at www.kluwerlawonlne.com

[viii] Section 38(3) of the Companies Act, 2013

[ix] Section 38(4) of the Companies Act, 2013

[x]  R.R. Drury, The Relative Nature of Shareholders Right to  Enforce The Company Contract, Cambridge Law Journal,  Vol.45, No 2 (Jul. 1986)

[xi] Tony Tan, Corporate Governance in India: The Rise of Minority Shareholder, available at www.ssrn.com

[xii](1986)1 SCC 264

[xiii]Alan Dignam, Hicks & Goo’s Cases & Materials On Company Law, Oxford University Press, 7th Ed. (2011),

Pa.214

[xiv] A.K Majumder& Dr. G.K. Kapoor, Company Law and  Practice, Taxman’s , 16th Ed

[xv] Louis Groarke, Moral Reasoning Rediscovering The  Ethical Traditional Moral Reasoning: Rediscovering The  Ethical Tradition, Available at  books.google.co.in/books?isbn=1467209244

[xvi] Section 95 of the Companies Act, 2013

[xvii] Section 113(2) of the Companies Act, 1956

[xviii] AIR 2000 SC 579

[xix] M Sathya Kumar, Importance Of The General Meeting In  The Conduct Of Company Business, Available at http://www.primeacademy.com

[xx] A. Ramaiya, “Guide to the Companies Act”, Part 1, LexisNexis Butterworths Wadhwa, Nagpur, 17th edn., (2010).

[xxi] Section 51 of the Companies Act, 2013

[xxii] Section 123(1) of the companies Act, 2013

[xxiii] FAQs on Company Law, Available at  http://www.legalindia.in/

[xxiv]Sulalit, Akshat, Companies Act, 2013: Rise of the Minority Shareholder, Available at: http://www.indialawjournal.com/volume6/issue-2/article5.html

[xxv]Nayyar, Priya, Some muscle for small shareholders, April 7, 2014, available at: http://www.business-standard.com/article/pf/some-muscle-for-small-shareholders-114040700035_1.html

[xxvi] Desai, Nishith, India: Borrow, Lend Or Invest: Beware Of Companies Act 2013, May 23, 2014, Available at: http://www.mondaq.com/india/x/315938/Corporate+Commercial+Law/BORROW+LEND+OR+INVEST+BEWARE+OF+COMPANIES+ACT+2013

[xxvii] 67 E.R. 189

[xxviii]Burland v. Earle, (1902) A.C. 83

[xxix] AIR 1935 Lah. 792

[xxx] Alan Dignam, Hicks & Goo’s Cases & Materials On Company Law, Oxford University Press, 7th Ed. (2011), Pa.214

[xxxi] (1919) 1 Ch. 290

[xxxii] (1967) 65 DLR 501

[xxxiii] J. Pookatt, Liberalisation v Regulation: An Appraisal of SEBI and its Guidelines, available at www.heinonline.com

[xxxiv] Section 56(3) of the companies Act, 2013

[xxxv] Section 56(6) of the Companies Act, 2013

[xxxvi] Section 56(7) of the Companies Act, 2013

[xxxvii] AIR 1999 SC 345

[xxxviii] 2004 55 SCL 81 SAT

[xxxix] Section 61(1) (b) of the Companies Act, 2013

[xl]Section 61(1) (c) of the Companies Act, 2013

[xli]Subramanium, Sudaresh, Investor protection will get a big boost under new company law, Business Standard, dec 19, 2012, available at: http://www.business-standard.com/article/companies/investor-protection-will-get-a-big-boost-under-new-company-law-112121900046_1.html

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