Rights of the equity shareholders

LIC of India v. Escorts Ltd. [1986] 59 Comp Cas 548, the equity shareholders have the following rights :

(a) Right to elect directors of the company and through them participate in the management of the company ;

(b) Right to vote on resolutions at meetings of the company ;

(c) Enjoy benefits earned by the company in the shape of dividend ;

(d) Right to apply to court and get relief in the case of oppression and mismanagement;

(e) Right to move the court for winding up ; and

(f) Share surplus on winding up of the company.

The value or market price of equity shares and preference shares of the same company will be different as a preference shareholder does not have the same rights in a company as an equity shareholder. An equity shareholder has the right to elect the directors and through them participate in management. A preference shareholder does not have the right to elect directors and essentially there is no participation in the management. An equity shareholder has the right to vote on each resolution in a general body meeting of the shareholders and in case of poll his voting right is in proportion to the shares of the paid-up equity capital of the company.

A preference shareholder does not have the right to vote in respect of all resolutions; he has the right to vote only on resolution, which directly affect rights attached to the preference shareholders. It is only if the dividend due on cumulative preference shares remains unpaid for an aggregate period of not less than two years preceding the date of commencement of meeting that a cumulative preference shareholder gets the right to vote on all resolutions. Section 87 of the Companies Act is relevant for this purpose. The preference shareholders have no voting rights. u/s 87(2), the rights conferred are restricted. The inevitable conclusion is that the transaction constituted transfer of property.

As noted above, the rights of preference shareholders are not the same as equity shareholders. In Escorts Farms (Ramgarh) Ltd. Vs. Commissioner of Income Tax, New Delhi, the apex court had occasion to examine the question of valuation of shares and the impact of issue of bonus shares. It was held that the issue of bonus shares results in the reduction of the market value of the shares. Though the number of shares held by the assessed increases the total market value remains the same. This is because the rights of the shareholders, even after the issue of bonus shares, remain the same.

Therefore, that on conversion of equity shares, held by the assesseds, to preference shares, there was a transfer of property amounting to gift within the meaning of Section 2(xii) of the Act. The value of the shares, if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch, if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as a holder subject to the articles, but the fact that a special buyer would for his own reasons give a higher price than the price in the open market shall be disregarded.