Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.

Chapter 8

Corporate Ethics:
Investors Rights, Privileges,
Problems and Protection

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Theoretical Basis – Agency Costs

Shareholders are the owners of joint-stock, limited

liability company and are its principals. By virtue of
their ownership, the principals define the objectives of
the company. The management, directly or indirectly
selected by shareholders to pursue such objectives,
are the agents. While the principals might assume that
the agents will invariably do their bidding, it is often
not so.

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Two broad instruments that
reduce agency costs and hence, improve
ethical corporate governance

• Financial and non-financial disclosures, and

• Independent oversight of management, which
consists of two aspects—the first relates to the role of
the independent, statutory auditors and the second to
the board of directors of a company.

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of Shareholders

A shareholder of a company

1. has a right to obtain copies of the Memorandum of

Association, Articles of Association and certain resolutions
and agreements on request on payment of prescribed
fees (Section 39);
2. has a right to have the certificate of shares held by him
within 3 months of the allotment;

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of Shareholders (contd.)

3. has a right to transfer his shares or other interests in the

company subject to the manner provided by the Articles of
the Company;
4. has a right to appeal to the Company Law Board if the
company refuses or fails to register the transfer of shares;
5. has the preferential right to purchase shares on a pro-rata
basis in case of a further issue of shares by the Company.
Moreover, he/she also has the right of renouncing all or
any of the shares in favour of any other person;

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of Shareholders (contd.)

6. has a right to apply to the Company Law Board for the

rectification of the register of members;
7. has the right to apply to the Court to have any variation
or abrogation to his/her rights set aside by the Court;
8. has the right to inspect the register and the index of
members, annual returns, register of charges, and
register of investments not held by the Company in its
own name without any charge. He/she can also take
extracts from any of them;

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of Shareholders (contd.)

9. is entitled to receive notices of general meetings and to

attend such meetings and vote thereat either in person
or by proxy;
10. is entitled to receive a copy of the statutory report;
11. is entitled to receive copies of the annual report of the
directors, annual accounts and auditors’ report;

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of Shareholders (contd.)

12. has the right to participate in appointment of auditors

and the election of directors at the annual general
meeting of the company;
13. has a right to make an application to the Company Law
Board for calling annual general meeting if the company
fails to call such a meeting within the prescribed time
limits;
14. can require the directors to convene an extraordinary
general meeting by presenting a proper requisition as per
the provisions of the Act and hold such a meeting on
refusal;

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of Shareholders (contd.)

15. can make an application to the Company Law Board for

convening an extraordinary general meeting of the
company where it is impracticable to call such a meeting
either by the directors or by the members themselves;
16. is entitled to inspect and obtain copies of minutes of
proceedings of general meetings;
17. has a right to participate in declaration of dividends and
receive his/her dividends duly;

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of Shareholders (contd.)

18. has a right to demand poll;

19. has a right to apply to the Company Law Board for
investigation of the affairs of the Company.
20. has the right to remove a director before the expiry of
the term of his/her office;

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of Shareholders (contd.)

21. has a right to make an application to the Company Law

Board for relief in case of oppression and
mismanagement;
22. can make a petition to the High Court for the winding up
of the Company under certain circumstances;
23. has a right to participate in passing of a special
resolution that the company be wound up by the Court
or voluntarily; and
24. has a right to participate in the surplus assets of the
company, if any, on its winding up.

Business Ethics and Corporate Governance, 2e A. C. Fernando

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Views of Various Committees on
Shareholders’ Rights

• Working Group on the Companies Act

• CII’s Committee on Corporate Governance
• Kumar Mangalam Birla Committee

 Recommendations Relating to Shareholders

 Responsibilities of Shareholders
 Shareholders’ Rights

• The Naresh Chandra Committee

• The Narayana Murthy Committee
• Dr. J.J. Irani Committee Report on Company Law, 2005

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Guide For Investors/Shareholders

SEBI in its guidelines to investors/shareholders, titled “A

Quick Reference Guide for Investors”, published recently,
makes it known that a shareholder of a company enjoys the
following rights:

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of a Shareholder, as an Individual

• To receive the share certificates on allotment or transfer

as the case may be in due time.
• To receive copies of the abridged Annual Report, the
Balance Sheet, the Profit & Loss A/c and the Auditors’
Report.
• To participate and vote in General Meetings either
personally or through proxies.
• To receive dividends in due time once approved in
general meetings
• To receive corporate benefits such as rights, bonus etc.,
once approved.

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of a Shareholder, as an Individual
(contd.)

• To apply to Company Law Board (CLB) to call or direct

the Annual General Meeting.
• To inspect the minute books of the General Meetings
and to receive copies thereof.
• To proceed against the company by way of civil or
criminal proceedings.
• To apply for the winding-up of the Company.
• To receive the residual proceeds.

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of a Shareholder, as an Individual
(contd.)

Besides the above rights one enjoys as an individual

shareholder, one also enjoys the following rights as a group
of shareholders:
•To requisition an extra-ordinary General Meeting.
•To demand a poll on any resolution.
•To apply to CLB to investigate the affairs of the company.
•To apply to CLB for relief in cases of oppression and/or
mismanagement.

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Rights of a Shareholder, as an Individual
(contd.)

As a debenture-holder, one has the right

•To receive interest/redemption in due time.
•To receive a copy of the trust deed on request.
•To apply for winding up of the company if the company fails
to pay its debt.
•To approach trustee with his/her grievance.

Business Ethics and Corporate Governance, 2e A. C. Fernando

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Shareholders’ Responsibilities

Shareholders are responsible

• To remain informed
• To be vigilant
• To participate and vote in general meetings
• To exercise one’s rights on one’s own, or as a group

Business Ethics and Corporate Governance, 2e A. C. Fernando

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Investor Protection

Definition: Investor protection can be defined by both

(i) the extent of the laws that protect investors’ rights, and
(ii)the strength of the legal institutions that facilitate law
enforcement.
• Relationship between investor protection and corporate
governance
• How do insiders steal investors’ funds?
• Rights to information and other rights

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Investor Protection (Contd.)

• Corporate governance through legal protection of

investors
• Impact of investor protection on ownership and control of
firms
• The impact of investor protection on the development of
financial markets
• Banks and corporate governance

Business Ethics and Corporate Governance, 2e A. C. Fernando

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N.K. Mitra Committee on
Investors Protection

This committee gave the following recommendations:

1. There is need for a specific Act to protect investor
interest. The Act should codify, amend and consolidate
laws and practices for the purpose of protecting investors
interest in corporate investment;
2. Establishment of a judicial forum and award of
compensation for aggrieved investors;

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
N.K. Mitra Committee on
Investors Protection (Contd.)

3. Investor Education and Protection Fund, which is under

the Companies Act, should be shifted to the SEBI Act and
be administered by SEBI;
4. SEBI should be the only capital market regulator, clothed
with the powers of investigation;
5. The regulator, SEBI, should require all IPO’s to be
insured under third party insurance with differential
premium based on the risk study by the insurance
company.

Business Ethics and Corporate Governance, 2e A. C. Fernando

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N.K. Mitra Committee on
Investors Protection (Contd.)

6. SEBI Act 1992, to be amended to provide for statutory

standing committees on investors protection, market
operation and standard setting; and
7. The Securities Contracts (Regulation) Act, 1956, to be
amended to provide for corporatization and good
governance of stock exchanges.

Business Ethics and Corporate Governance, 2e A. C. Fernando

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Problems of Investors
in India

Most of the investor complaints can be divided into three

broad categories:
 
1. Against Member-Brokers of Stock Exchanges
2. Against Companies Listed for Trading on Stock Exchanges
3.Complaints against Financial Intermediaries

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Law Enforcement for
Investor Protection

Investor protection is a multi-dimensional function, requiring

checks at various levels, as shown below:
•Company Level: Disclosure and corporate governance
norms.
•Stock Brokers Level: Self-regulating organization of
brokers.

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Law Enforcement for
Investor Protection (contd.)

• Stock Exchanges: Grievance redressal mechanism

and investor protection find.
• Regulatory Agencies:
 Investors’ Grievances and Guidance Division of
SEBI
 Department of Company Affairs
 Department of Economic Affairs
 Reserve Bank of India
 Consumer Courts and Courts of Law

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Grievance Redressal Mechanisms

Apart from SEBI and DCA two other avenues available to the
investor to seek redressal of his complaints are :

1.Complaints with consumers disputes redressal forums

2.Suits in the court of law.

Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
SEBI’s Poor Performance and
Suggestions for Improvement

SEBI failures:
• Poor tackling of price manipulation and insider trading
issues
• Poor conviction rate
• Need to enhance its manpower skills
• It should simplify and trim regulations
• It should tone up quality of disclosures
• It should solve issues of IPOs and mutual funds

Business Ethics and Corporate Governance, 2e A. C. Fernando