Saturday, September 1, 2012

Rights of Shareholders

We all know what an equity share is. The owner of such a share is called a Shareholder. Let us say I buy 100 shares of ICICI Bank, I am a shareholder in ICICI Bank and own a part of the company. If we consider the overall number of shares that ICICI Bank has in the market right now, the 100 may seem like an insignificant number. But, nonetheless a share is a share. Someone who owns just 1 share of a company too is considered a shareholder in the company. So, as shareholders we have certain rights. The purpose of this article is to take a look at those rights that we possess…

The Rights that we have as Shareholders are:
1. Right to Profit
2. Right to Vote
3. Right to Information
4. Right to Benefits
Let us take a detailed look at each of these, one by one.

Right to Profit

Every individual who owns the shares of a public limited company, owns a part of the company, even if he owns just one or two shares. His first and foremost right is his entitlement to the profits made by the company. Go back to the example at the beginning of this article, me buying 100 shares of ICICI Bank, I cant just barge into the ICICI Head Office and demand a share in their yearly profit. So, the question that arises now is, how will I get my share of the profit?

Every year, most large and profitable firms declare something called a “Dividend”. This is a cash payment that is made on a “Per-Share-Owned” basis to every shareholder. For ex: If ICICI Declares a Rs. 10/- dividend per share this year, then as owner of 100 shares of ICICI Bank, I will get Rs. 1000/-. This is my share in the profits made by ICICI.

In years when a company does not declare dividends, then we cannot ask or demand any. But, usually well performing company’s declare dividends regularly. If a company declares a dividend today, then the money should reach all shareholders within a reasonable amount of time (Around 2 to 3 weeks) failing which you can contact the company to find out why you haven’t received it yet.

Right to Vote

Every shareholder has the right to vote in a company’s general body meeting that happens once or twice a year. No company can prevent them from doing so. The votes entitled to a shareholder corresponds to his/her owned number of shares in proportion to the overall shares of the company. However, an important point to note is that, the overall voting mechanism goes by majority. So, if 60% of the shareholders are ok with something the company has decided, the remaining 40% cannot force the company to change their decision.

Usually preference shareholders do not have any voting rights. Only the owners of common-shares have voting rights.

Many of the retail investors like you and me own a few hundred and at most a few thousand shares which will not even be worth 0.1% of the overall shares the company has. So, practically speaking the value of our vote is negligible. Nonetheless, we have the right to vote

Right to Information

As per the laws in India, every shareholder of a company has the right to receive the company’s annual report which contains details of the company finances. The Management of the company is supposed to act on behalf of the shareholders and in turn obliged to provide all the necessary information about the company to their shareholders.

Even if you own only a few shares of the company, you will receive their annual report.
Right to Benefits
The term benefits here is misleading. Per say, there are no direct benefits of owning shares of a particular company. However, you have the following rights:
a. Right to participate in any exercise by which the company raises capital – for ex: a Rights Issue
b. Right to Bonus Shares when declared
c. Right to participate in Share Buy-Back when the company opens up a buy-back offer.
d. Right to defend their rights – i.e., if the company tries to alter the rights of its shareholders, they have the right to challenge the decision.

You may be wondering by now that all these rights seem insignificant considering the size of majority of the company’s that offer shares in the stock market. But, at the end of the day, a right is a right. Even if it is only Rs. 10/- worth of dividend, it is your right and you must get it. So, know your rights and make sure that you get a fair share in the pie.

Happy Investing!!!

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