Shareholders: All You Need to Know About Them

Who is a shareholder?

A shareholder can be an individual or an institution that holds at least one stock in a publicly listed company. Each share allows them to own a small part of the company, enabling them to benefit from the performance of that company.

A shareholder’s rewards can come in many forms such as increased stock valuation, dividend payments, or financial profits. However, the vice versa is also true and shareholders have to bear the brunt when a company performs poorly and the share value drops.

Depending upon the type of shares owned, shareholders also get repaid if a company goes bankrupt and liquidates all its assets. Here an advantage is that shareholders do not have to shoulder the burden of debt or other financial obligations of the company.

Ordinary shareholders get voting rights in the company whose shares they own. For example, if a company decides to change its board of directors, shareholders get a say in the decision-making process. The greater the number of shares owned, the greater the voting power vested with the shareholder.

Roles of a shareholder

Here are the roles and responsibilities of a shareholder as listed by the BSE itself. A shareholder:

• Must obtain all the material information regarding corporate developments and analyse company-specific information before making an investment decision(s).
• Must be well aware of the statutory norms & provisions and make sure he complies with them.
• Must always trade in securities through an exchange-registered stockbroker only.
• Must not publish any information that can manipulate the price of a stock & should refrain from engaging in unfair trading activities.
• Must also actively take part in the shareholders’ meetings and Annual General Meetings (AGMs).
• Should go through all company communication sent out to him/her, preferably electronic, such that the company may follow green practices.
• Must have a nominee registered with their demat accounts, such that (s)he may get possession of the securities therein in the event of a misfortune.
• Must effectively exercise their voting rights through either e-voting systems or by attending the AGMs as scheduled. Any approvals sought by the company require judicious use of shareholders’ voting rights.

Types of shareholders

There are generally two types of shareholders – common shareholders and preferred shareholders.

• Common shares are the ones that are traded in the stock market and thus common shareholders are more prevalent. Common shareholders get certain privileges over and above getting a commensurate ownership stake in the company. They not only get voting rights that allow them a say in crucial company decisions, but they also receive dividend payments when the company declares it. However, common shareholders are the last claimants in line if a company liquidates its assets in the event of bankruptcy.
• Preference shares come with certain preferential treatment over ordinary shares. Preference shareholders receive fixed dividend payments. Depending upon their types, preference shares also come with the option of converting into common shares at a predetermined time as decided by the company at the time of issuing these shares.

In contrast to the owners of common shares, these shareholders get preference in dividend payments but have no voting rights vested with them. They also get repaid before common shareholders if the company sells off its assets when it goes bankrupt.

Moreover, preferred shareholders lose their fixed dividend privileges and preferential treatment when their shares get converted into common shares. When this happens they get their voting rights in proportion to the number of shares held & get a say in the way the company is managed.

Can a shareholder be a director?

Yes, shareholders can be directors themselves and this is very common in start-ups. In the case of a start-up, the founder holds an equity stake and also fulfils his corporate responsibility in a senior management position. Such people are sometimes Directors, CXOs, and executors at the same time.

Being a director while having a large stake in a company can be a very powerful combination as the person not only has voting rights to influence management decisions but is also a part of the management team. A majority stakeholder can even overrule the decision to oust him simply because of majority voting rights.

This is the reason why companies appoint independent directors with a remuneration but not a significant stake in the company. Moreover, as the company grows, equity dilution is done externally to other investors and not within the existing shareholders of the company. This practice ensures that governance is fair and not influenced by a person in a position of power. The arrangement also instils faith in its other shareholders, who become confident that the company will not be steered singlehandedly in any particular direction.

Takeaway

Shareholding is not just a means to make long-term profits through investing but also involves taking part in the decision-making process and being involved in the governance of the company. As a shareholder, one must keep away from malicious practices that can damage the company name and bear all responsibilities diligently.

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