Rights to Shareholders

As an owner of a company, an equity shareholder enjoys the following rights

Right on Income: Equity investors have a residual claim to the income of the firm. The profit [Profit After Tax – Dividends to be paid out on Preferential Shares] that arises from the business operations can either be distributed to the investors as dividend or reinvested to expand the business or can be kept aside as reserves; but promoters can’t take away the profit because it belongs to all shareholders [including promoters]. The decision of distributing dividends is taken by the Board of Directors of the company and shareholders can’t challenge the decision.

Right to Control: The management of the company is supposed to increase the value of the firm for shareholders. If this doesn’t happen, the shareholders can vote against the existing management to have it replaced. As owners, shareholders elect the Board of Directors who can act on their behalf. The right to vote is in proportion to number of shares held by an investor.

In most of the cases, retail investors don’t have enough shares to have an influence on the affairs of the company. Big investors like institutional investors, mutual funds and high net worth investors are in a better position to influence the management. But ultimately a company follows the course decided by the group of shareholders who control the Board of Directors and appoint the management team. Right to Reports: Shareholders are entitled to get reports on business operations which tell profitability and healthiness of the company. That means the company can’t hide the details about its performance. Companies publish quarterly and annual reports providing updates of the previous period and management’s outlook on future business. Management also gives other periodic communications as and when required.

Right in liquidation: Equity shareholders have a residual claim over the assets of the firm in the event of liquidation. Residual claim is on the amount left over after paying off all the senior claims of the creditors, preference shareholders etc.

Preemptive right: The existing share holders should be offered new shares proportionately in case of issuance of additional shares by the company. In the absence of this right with any additional issue of shares, the ownership of the existing shareholders would get diluted and the earnings of the company will get distributed over a larger base. However shareholders may or may not exercise this right.

November 22, 2008 | Filed Under Stocks

Comments

One Response to “Rights to Shareholders”

Vijayakumar.N on June 10th, 2010 9:57 pm

Dear Sir,
In ASHOKLEYLAND COMPANY, I booked a commercial vehicle. I have some problem [product based] in delivery. I brought it to the higher authority. They ignored it without sending any reply and steps to solve it. As a shareholder of the company, May I raise it in the SHAREOLDER meeting to know the reason.

Leave a Reply