A person or organisation that has equity or mutual fund shares in a company is referred to as a shareholder in that company. The rights and responsibilities that come with becoming a shareholder are two separate things. A shareholder has the right to vote on issues affecting the company or fund in which they have invested, and shares, in addition to the financial success that may result from their investment. A person or group that has or controls more than 50 percent of the outstanding shares of a company is considered to be a majority shareholder. People who possess less than 50 percent of a company’s total shares are considered to be minority shareholders.
The majority of founders of a company go on to become shareholders in that company. In older, more established businesses, the majority of shareholders are often linked in some way to the company’s founders. This is especially true of large corporations. When these shareholders possess more than half of the voting interest, they have the right to dismiss or nominate board members and C-suite executives, including chief executive officers (CEOs) and other senior professionals, just as they would if they owned all of the voting interest. It is common custom for companies to put minority shareholders at a remove from decision-making processes.
Shareholders of corporations are not held personally accountable for the debts and other financial obligations of the company, as opposed to the owners of sole proprietorships and partnerships. In the event that a company goes bankrupt, creditors will not be able to go for the shareholder’s personal belongings because of this.
In the event that a company liquidates its assets, any residual monies should be given to the company’s shareholders. It is possible that ordinary investors will get nothing after all other commitments, such as those owed to creditors, bondholders, and preferred proprietors.
When thinking about what it means to be a shareholder, it is very important to keep a few things in mind at all times. This includes the shareholder’s rights and responsibilities, in addition to any potential financial repercussions.
In general, a corporation’s charter and bylaws provide the following privileges to its shareholders:
- The availability of the company’s financial records for review by interested parties.
- Being ability to take legal action against a company because of wrongdoing committed by its officers or directors Participating in key corporate decisions, such as the election of board members or the approval of mergers, and having a voice in such choices.
- The opportunity to be compensated with dividends
- The opportunity to participate in yearly meetings either in person or via teleconferences
- Shareholders have the right to collect their proportional share of the profits in the event that the company is liquidated. This share is determined by the shareholder’s ownership percentage as well as the total number of shares that the shareholder owns.
Major Characteristics of a Public Company
- Separate Legal Entity: Separate legal entity means that the company is recognized as an artificial personality in the eyes of law. The company can be sued and can sue in its personal capacity and enter into contracts in its name. The members of the company are not liable for the acts of all other members altogether, if they are not a party to it.
- Common Seal: Common seal refers to the seal used by all the members of the company while entering contracts or any other deal relating to the business activity of the company. It is usually a sealed signature of the company, which authorizes the authenticity of the documents and such other business dealings.
- Perpetual Existence: Perpetual existence means that the members may come and go but the company shall go on forever. Until and unless the company falls into losses and eventually enters a winding up or liquidation process, the company shall go on for even centuries without the existence of its original members.
- Limited Liability: Limited liability means that at the time of winding up of the company, the creditors and all other borrowings will be paid off from the company cash reserves, then the company’s assets would be sold. The cash received from the sale of assets will then be used to pay the debts. Even if after that some liabilities are still left, then in a limited liability company the members will not have to use their personal belongings to pay the company’s debt.
- Recognized by Stock Exchange: Stock exchanges act as an intermediary between the public companies and the public. A public company mustenlist itself in a recognized stock exchange in order to be able to make initial public offerings and offerings after IPO. E.g., recognized stock exchanges are BSE, Calcutta stock exchange etc.
- Transferability of Shares: transferability of shares means that shares of a public company can be transferred freely in the market. Once the company has enlisted itself with a recognized stock exchange and has made its IPO, the subscribers of the paid-up capital can sell those shares without prior consent of the company. The new subscribers’ names and address shall be recorded in the company’s register.
- Paid-up Capital: Paid up capital means the capital which has been issued in public by the company out of its authorized capital. It is not necessary that the company issue all its authorized capital in the market for security investments.
- Minimum Subscription: in order to be a public company, there is a requirement for a minimum subscription which shall be fulfilled by the company. The minimum subscription for a public company is INR 5,00,000 whereas for a private company the minimum requirement is INR 1,00,000. The requirement may vary as prescribed by the statutory bodies.
- CSR: CSR refers to corporate social responsibility provided under section 135 of the company’s act 2013. Every corporate, its holding company, its subsidiary company having in the preceding financial year a Net worth more than 500 crore or turnover more than 1000 crore or net profit more than 5 crore shall comply with CSR.
- Members: In a public company minimum no. of members should be 7 and there is no limit for maximum no. Of members.
- Issue of Prospectus: A public company must issue prospectus to the public. A prospectus is a mandate which contains the company’s information such as its objective, address, name, registered office, authorized capital. If any person is interested in investing in the company, he shall purchase a prospectus.
- Directors: It is not necessary that all directors and members of the public company are the same. Minimum no. Of directors required for a public company is 3 and maximum no. of directors can be 12. The directors are elected in the company’s Annual General Meetings. They are responsible for taking all necessary actions for the company.
- Audits: it is a regulatory requirement for a public company to conduct audits. Internal and external audits are to be conducted by the company. The Sarbanes-Oxley Act of 2002, which mandates excessive control and internal management in businesses, places a few requirements on public firms, including the implementation of internal controls, audits, board meetings, quarterly reports, etc.
Public firms must do financial and accounting engineering in order to satisfy the quarterly earnings expectations set by Wall Street. Due to this, public corporations concentrate on short-term accomplishments and long-term objectives.
Merits of a Public Company
- IPO (Initial Public Offer): private companies cannot make public offers and have less resources and capital both, they could fall into losses and might not be able to cover their costs and borrowings. Turning into a public company at first means to register yourself in a stock exchange and release your securities in public, which is called initial public offering because that is the first time offer in public for purchasing and investing in the business. IPO enables a company to expand its business and reach a wider audience. The company will now be recognized among the venture capitalists.
- More resources: turning into a public company means there are chances of ample resources availability. The amount of capital, skills, knowledge eventually widens up and the company can increase its scale of production and the number of staff. With the help of increased numbers of staff and capital, the company can expand its operations and business. The company can now work as a large-scale company. The company can even introduce a new range of products and services, be able to buy the latest technology and compete in the global market.
- Liquidity: by making an IPO, the company could be flooded with cash. More cash would help the company to release its debtors and other borrowings. The company might use the money received from making the initial public offering to pay off its debt and if some cash is left, they could utilize it for business operations. If the company requires more cash, they could even make a second public offering. To keep a check on the company’s activities, it is regulated by SEBI (securities exchange board of India), it is mandatory that the company’s shall conduct audit and submit the report. SEBI keeps a check on a company’s activities and makes sure that the interest of investors is safeguarded.
- Recognition: A public company, who is operating excellently and provides good interest to its stakeholders, has a great reputation. A private company cannot expand its business at the rate and scale as that of a public company because of limited availability of capital. If a public company is recognized by a stock exchange and has good ratings in terms of return on investment it will only see a hike in the price of its shares due to high demand in the market. A public company has a great level of goodwill and trust among its customers due to its wide usage in the global market. So, turning public for sure brings recognition for the company in the market if the members know how to utilize that money effectively and efficiently.
- Mergers and acquisitions: mergers and acquisitions may take place by making an initial public offer by a private company, who has turned into a public company. This is often seen that the money received by making an initial public offer is used to make mergers and acquisitions.
- Transparency: public companies are regulated by SEBI and are under the control of SEBI. They must comply with the rules and regulations set by SEBI, otherwise high penalties may be imposed on them. They must submit their annual report with the SEBI, and because of this check, there is transparency in the public companies which brings confidence amongst the investors.
Demerits of a Public Company
Being a public company means having more prestige as the company deals on a large scale and some are that large that they are even enlisted on the New York stock exchange. So, it clearly implies that there is a large amount of profit in public companies. However it also comes up with few demerits as mentioned below in the article:
- Higher Responsibility: Being a huge firm obviously entails making larger profits, but it also entails meeting a high degree of corporate governance and regulatory requirements, as well as a variety of pre- and post-incorporation compliances. According to the Sarbanes-Oxley Act of 2002, which mandates extensive control and internal management in businesses, public corporations must install numerous internal controls, auditing, board meetings, quarterly reports, etc.
- Excessive Regulatory Check: Public firms must satisfy the quarterly profit forecasts set by Wall Street, which necessitates financial and accounting engineering on their part. This forced public corporations to prioritize short-term accomplishments over long-term objectives, which results in a loss of research and development.
- Loss of Control: there is no limit over the maximum requirement of members in a public company, it can have N no. Of members who are also the investors of the company. The investors influence and have a controlling the working of the company, which could give rise to major disagreements and disputes. Large no. Of members could eventually cause loss of control and quite chaotic for the directors of the company.
- Turning of Snap: Snap Inc. (SNAP), which is mostly recognized for its main line of products called Snap chat, is one well-known firm that suffered after its IPO. In March 2017, the corporation raised $3.4 billion.
The stock had a brief rise over its $17 IPO price, but it had trouble holding onto those gains. Snap revealed a growth in user numbers in its first quarterly report as a publicly traded firm. Investors filed a lawsuit in May 2017 claiming the business had made “materially false and misleading” representations about user growth. Snap made a settlement in January 2020 for $187.5 million.
Addressing to Basic Queries Pertaining to the Company’s Shareholders
Following are some basic queries pertaining to the Company’s Shareholders
- Where do the Types of the Company’s Shareholders Come from?
An investor who possesses more than 50 percent of a company’s total outstanding shares is considered to be the majority shareholder in that company. The majority of the times, these shareholders are either the heirs or descendants of the company. People are considered to be minor shareholders if they own less than 50 percent of a company’s total shares.
- In what ways are shareholders absolutely necessary for a business?
The shareholders of a company have a variety of rights that are very important. These rights include the power to inspect the company’s books and records, as well as the right to bring legal action against the company for the illegal actions of its directors or officers. In addition, they have the authority to sanction mergers, to receive dividends, to take part in annual meetings, to cast major votes by proxy, and to receive a proportionate share of the company’s profits in the event that the company is ultimately wound up and liquidated.
- What are the most salient characteristics that differentiate preferred shareholders from ordinary shareholders?
Voting rights are often granted to ordinary shareholders, as opposed to preferred shareholders, who do not have voting rights. Preferred shareholders, on the other hand, have a larger claim on earnings than ordinary shareholders have, and as a result, preferred shareholders get dividends before regular shareholders. If a company owes money, has bonds, or has preferred stock, such creditors and shareholders be paid back before the company pays regular shareholders.
Shareholders, or the owners of existing shares, are entitled to a set number of votes and have input on how the company is run. Directly in the form of dividends or indirectly via the open market sale of their shares, stockholders are entitled to a part of a company’s earnings. This entitlement may be exercised in one of two ways. Investors may acquire common stock either via the services of a broker or, if the option is made available, directly from the issuing company. Options to purchase one’s own shares of a company’s stock are a common perk granted by businesses in many countries. In the event that a company declares bankruptcy, however, regular shareholders will get compensation only after creditors and preferred shareholders. Preferred shareholders get a dividend payment from their stock holdings that is consistently greater than the dividend payment that ordinary shareholders receive, but preferred shareholders have no vote in the operation of the company. Because of the features that they possess, preferred shares have the potential to be seen as a combination of debt and equity.