Is it true that if you have purchased Disney shares as a part-owner, you and your family would be able to visit Disneyland for free this summer? Or investing in Kingfisher entails you to a free supply of beer?
These hypothetical benefits are exceedingly implausible, but they do raise the topic of shareholders’ rights and privileges. Many people believe that investing in businesses is a good way to plan for the future, but they are unaware of the rights that come with their investment.
Levels of Ownership
You have invested in a company, but it is important to understand your position to grasp the influence of your actions on the company and the company’s actions on you. For the three basic forms of securities that firms issue: bonds, preferred stock, and common stock, each company has a hierarchical system of rights.
The easiest way to understand the importance of each type of rights is to consider what occurs when a firm goes bankrupt. You could believe that as a common shareholder with an interest in the firm, you would be first in line to get a share of its assets if it went bankrupt. But in reality, when a firm liquidates, common shareholders are at the bottom of the corporate food chain. During insolvency procedures, creditors are paid first from the company’s assets to settle outstanding debts.
Bondholders are next in line, followed by preferred shareholders, and then regular shareholders.
Who Can Become a Shareholder?
Members of a firm are also known as shareholders. Any person can become a shareholder under the Companies Act of 2013, and a person can be an individual, a body corporate, an association, or a company, regardless of its formation. Anyone who is able to enter into a legitimate contract (as defined by the Contract Act of 1872) appears to be eligible to join a corporation. A contract exists between the corporation and the shareholder when they subscribe for shares. The judiciary has established specific standards for obtaining membership in a firm for certain special categories of people. These are as follows:
Minor
A minor lacks the legal capacity to enter into a contract, hence his or her contract is void. A minor is unable to enter into a bond or authorise another person to act on his behalf. Under Hindu law, however, the accepted guardian is entitled to engage into a bond on behalf of the minor, and such a contract would be binding. It can be used for both the selling and acquisition of a home. As a result, a guardian can enter into a share purchase agreement on behalf of a minor, and the agreement will be lawful.
Company
A company can become a shareholder in another company with the Board of Directors’ consent and the passage of a resolution.
Partnership Firm
A firm, it has been maintained, is not a separate person or legal entity from the partners who make up the partnership, but rather a collective designation for the individuals who make up the partnership. As a result, a partnership firm is neither a legal entity nor an individual. A partnership firm’s partners can become joint shareholders of a business, and their names can be recorded into the shareholder register. If the partnership firm is registered, it can also become a shareholder of the company.
LLP
An LLP is a legal entity that owns and manages assets and properties. It can become a shareholder of a corporation by agreeing to the firm’s Memorandum of Association or by purchasing shares in the company later.
Government
The President of India or the Governor of a state can become a shareholder of a corporation on behalf of any of the state governments or the central government. According to the Act, either the President of India or the Governor of a state may designate anyone to attend any meeting of the company. The person so nominated could be deemed a shareholder of a firm, with the same rights and powers as the President of India or the Governor of the State.
NRI
Foreign nationals, foreign companies, and non-resident Indians are all permitted to become shareholders in Indian companies, subject to FDI legislation and FEMA standards.
Trust
Because a trust that has not been incorporated cannot be considered as a person, the trust’s shares cannot be registered in its name. It could, however, be registered in one or more trustees’ names. If a trust or co-operative society is registered, shares can be registered in its name. As a result, a registered trust or co-operative organisation can become a corporate shareholder.
HUF
For all intents and purposes, a HUF is treated as an individual rather than a legal entity. A company’s shares can be registered in Karta’s name. As a result, a HUF can become a shareholder in a corporation.
Know Your Rights
When you invest in a company, you become its shareholder. The shareholders of a corporation are the ultimate owners of the firm and so have the right to decide how it is run. While a shareholder is the company’s owner, the directors are in charge of the company’s general management and day-to-day operations.
As a shareholder, you have the right to attend annual general meetings (AGMs) and any special general meetings called by the company. You can vote on ordinary and special resolutions, offer your own resolutions, vote on director appointments, and vote on the company’s remuneration policy. You are also entitled to a part of the company’s profits, assets (if the company is liquidated), and a copy of the yearly accounts.
Shareholders keep an eye on management’s performance, vote on crucial resolutions in general meetings, and have access to company documents. They also have the authority to summon an EGM to address exceptional or routine resolutions. All shareholders, including minority and foreign shareholders, should be treated equally by the corporation. They should have a process in place to seek redress if their rights are violated.
source: cfainstitute
Contacting the Company
Whether you are a shareholder of a company, or you are planning to invest in the business, it is important to take an informed decision. There is a lot of publicly available information about the company that would enable you to take the right call. Here are few ways to gain an informational advantage and invest in the right manner:
Annual Report
The annual report of a public company is widely available to the public. Before investing in a company, it is vital to go through the report and financials of the company. The annual report provides a great deal of significant information not just about the past workings of the company, but also the potential future outlook of the organisation.
If an investor discovers that material is missing from the annual report, she should contact the company’s investor relations department.
The company secretary is usually in charge of investor relations for the majority of corporations. The concerned person-in-email charge’s and phone number will, however, be listed on the company’s website.
An investor can receive no response from the company after sending their initial email. Despite the fact that most companies respond after one follow-up (email or phone call). As a result, if the investor does not receive a timely answer from the company, following up may be useful.
Conference Calls and Investor Presentations
Conference calls and investor presentations are essential to understanding the current status of business/ongoing projects.They’re also useful for deciphering short-term changes to the general company plan, such as what the corporation might do to address sporadic issues.
Attending the AGM
According to the Companies Act, every company must convene an annual general meeting within six months after the financial year’s end. A 21-day notice must be provided to all members. The company’s board of directors discusses the company’s financial performance at every AGM.
These meetings are also the only opportunity for smaller shareholders to hear from the executives of the corporations in which they own stock. AGMs are the only way for investors to connect directly with the company’s promoters.
source: cfainstitute
As an investor, when can you attend an AGM and why should you do it?
Just one share is sufficient to attend the AGM. If you have a demat account and you have registered your email id with the listed entity then you will get the intimation from the company secretary about the AGM. Following that, you will get the entry to the place after giving the relevant details of your holding share.
If you’re already a shareholder in a corporation, you can just show up in person with your ID card.
But what is the point of attending an annual general meeting when the financial statements are available publicly?
Allows you to keep yourself up to date
Reporting to shareholders is a fixture of all annual meetings. A report on audited financial accounts, a report from the president/chair, and a report from the manager/CEO are usually included. These reports provide shareholders with information about the cooperative’s performance, direction, and stability.
Meeting Like Minded People
You can get new viewpoints on why other investors invested in the same firm as you by talking to other investors. As an investor, you might learn new distinctions that will help you enhance your research and analytical skills.
Gain Informational Advantage
Shareholders ask the board questions in front of other shareholders during the meeting. The responses are usually more politically correct. Shareholders should ask more delicate issues after the meeting, and most management, in my experience, is willing to give you more open answers. In fact, when it’s not appropriate to reveal sensitive information about their company publicly, directors prefer to share it one-on-one and face-to-face.
Other Perks
Berkshire Hathaway, the famed investor Warren Buffett’s company, sets the bar for shareholder meetings that all others are measured against. Comedy skits, disco lights, music, celebrities like Bill Gates, and even dancing figures from the portfolio, including the GEICO gecko, are all part of the daylong carnival-like ambiance. For those who are interested in the event but unable to attend, live online coverage of the proceedings gives real-time updates.
Carnival Cruises offers room discounts to shareholders who own at least 100 shares of the company. Shareholders of Royal Caribbean Cruises feel the same way. Intercontinental Hotels Group investors can save even more money by reserving reduced hotel stays. Meanwhile, Ford stockholders who have held their shares for at least six months are eligible for a discount on a new vehicle.
Conclusion
If you hold stock in a firm, you have the right to attend its annual general meeting (AGM), where you can question directors about matters such as performance and compensation. Despite this possibility, the number of shareholders attending annual general meetings has decreased considerably in recent years.
Apathy toward annual general meetings has resulted from a widespread lack of information about corporate governance among individual investors (AGMs).
Purchasing a stock, which indicates a claim to ownership in a corporation, confers several benefits. While common shareholders may be the last to be paid in the event of a liquidation, this is offset by other benefits such as increased share value.
Being an informed investor requires you to understand your rights. Regulatory organisations try to enforce shareholder rights to some extent, but well-informed investors who fully understand their rights are less vulnerable to dangers.