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SHAREHOLDING PATTERN & SHAREHOLDERS AGREEMENT

Shareholders Agreement

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Page 1: Shareholders Agreement

SHAREHOLDING PATTERN

&SHAREHOLDERS

AGREEMENT

Page 2: Shareholders Agreement

WHO CAN HOLD SHARES IN A COMPANY?

• Share Holding can be done by any investor right from a person to a corporation to a FII.

• When an entity or a person buys a large chunk of share in another company, their intention may be to get control in:-

• The decision making power of the company

• Election of the Board of Directors of the company

• Controlling the management of the company

Page 3: Shareholders Agreement

PATTERN

• Data regarding the share holding pattern is available in the stock exchange’s website, in the company’s website and annual reports. Share holding pattern of a company generally involves:-

• Promoters’ Holding – Promoters may include domestic and foreign promoters. Promoters are the entities that floated the company, and to a large extent have seats on the Board of Directors or the management.

• Persons acting in concert with the Promoters. Relatives of the promoters who hold shares fall under this class and are termed as the Promoter group.

• Holding of the Non-Promoters – these include institutional investors like Banks, Financial Institutions, Insurance Companies, Mutual Funds , Foreign Institutional Investors and others like private Corporate bodies, Trusts, Foreign Companies , you and me ..

Page 4: Shareholders Agreement

Shareholding Pattern

Page 5: Shareholders Agreement

BASIC RULES.

• As a rule of thumb, higher promoter’s stake is perceived as positive and a lower equity stake could mean low confidence of promoters in their own company.

• Rise in promoter stake is considered positive because promoters will commit additional fund only when they are optimistic about future growth of their company.

• Similarly a higher FIIs stake is considered as positive and a lower FII participation could mean low confidence of FIIs in the company.

• Rise in FII stake is considered positive as they will commit funds only when they are totally optimistic and confident about the future prospects of the company.

• Too high or too low of promoters stake or FII holding is not favorable.

Page 6: Shareholders Agreement

PROMOTERS AND FIIs – The two categories of shareholders to watch

• While analysing the shareholding pattern of the company, the two important categories to be watched are the promoter’s stake and the FIIs stake in that company.

• An increase in promoter stake does not always constitute a sign of confidence.

• It is also necessary to see whether fresh funds have come in. If fresh fund have been invested, where will they be invested. Answers to these questions would help investors to determine whether jump in promoter stake is beneficial to the company.

• However, an increase in FIIs stake is a good sign – It shows that they are bullish on the stock. At the same time, the flip side of huge FII holding is that the stock price will be subject to huge price volatility when they off load the stake.

Page 7: Shareholders Agreement

HOW TO ANALYSE

Analysing the holdings of various categories of investors would give you insights into the pattern of control in the company.

• Rise or fall in promoters holding is to be studied by looking at two aspects. First what is purpose of promoters in raising or reducing their equity stakes and second, the methods promoters have adopted to increase or reduce their ownership.

• If the promoters are increasing their stake to pay off debts and strengthen their balance sheet. This is certainly positive for the shareholders.

• Companies that have gone for share buy back also see rise in promoter’s stake.

• The core objective of a buyback is to create wealth, but it also increases promoter’s equity stake at no additional cost. A rise in promoter’s stake due to merges or buyback means little for investors in real terms.

Page 8: Shareholders Agreement

• Promoters of companies that have opted for rights issue are forced to step in and bail out the unsubscribed portion just in case the rights are undersubscribed. Here, there will be an unintentional rise in promoter’s stake.

• Shareholders declining to subscribe to rights issue and promoters chipping to rescue the issue do not qualify to be positive development.

• A decline in promoter holding should also be analyzed in detail.

• Decline in promoter holding can be due to various factors such as issuing fresh share towards employee stock option, or it could be due to offloading/issuing of fresh shares to strategic/financial partners. These changes should be carefully studied.

• Promoters offloading their holdings in the open market are a warning signal.

• Some dubious companies announce positive development periodically; promoters keep on offloading equity stake at the same time. It is well laid-out trap for investors.

Page 9: Shareholders Agreement

• If you see promoters increasing their stakes in successive quarters, you know that the financial performance is going to be good and the stock prices would possibly be higher.

• However, it’s unusual to see promoters’ holding increase on a regular basis. They usually step in to buy after a sharp market decline to shore up their holdings.

• A very high promoter holding is not a good sign. A diversified holding and a good presence of institutional investors indicates that promoters have little room to make and carry out random decisions that benefit them without gauging how it would affect earnings and other shareholders.

• Very low stake of promoters is perceived as diminishing confidence of promoters. This results in rampant sell off which results in loss for investors.

• FII holdings in stocks are used as indicators in stock selections; stocks with high FII holdings are largely favored. However, such stocks could take a hit should the FIIs decide to sell their stake. Retail investors may perceive such selling off to be a lack of faith in the stock by the FII.

Page 10: Shareholders Agreement

• Holding by mutual funds and insurance companies is an indicator on how favored a stock is.

• Multiple funds holding the stock could be a sign of growth potential. Therefore, such high institutional holding may mean your investment is a tad safer since that company may then be more professionally run.

• While looking at the shareholding pattern, figures for a single period is also unlikely to tell you much. Compare holding patterns with those of the previous quarters to check how holdings have changed.

• Along with holding patterns, companies also disclose the entities — other than the promoters — that hold more than 1 per cent in the share capital.

• Companies are also required to declare the promoters’ shares that have been pledged as debt collateral.

Page 11: Shareholders Agreement

Shareholders’ Agreement e Shareholders

A Shareholders’ Agreement is a contract between shareholders of a company with the various provisions that will govern each of the shareholders who are party to the agreement vis-à-vis the Company and the shares held by each such shareholder and also the provisions that will govern the management of the Company as agreed to by the parties to the agreement.

Page 12: Shareholders Agreement

NEED FOR EXECUTING SHAREHOLDERS AGREEMENT Shareholders’ agreements lay down clearly defined

rights and obligations between and of the parties, i.e.: a. Appointment of Directors and quorum requirements;

b. Determining the matters requiring special resolution or providing veto rights to certain shareholders (more so in case of private equity and venture capital partners);

c. Financing the requirements of the company;

d. Restrictions on right to transfer shares freely;

e. Defining the obligation of each of the shareholder towards the company.

Page 13: Shareholders Agreement

MECHANISMS DOES THE LAW OF INDIA PERMIT FOR REGULATING SHARE TRANSFERS?

A. Right of first refusal:

• This is an agreement between the existing shareholders whereby the shareholder wishing to sell to a third party must first offer the shares to the holder of the first refusal right.

• If the holders of the right of first refusal do not buy the shares, the shareholder can normally sell freely to a third party.

Page 14: Shareholders Agreement

B. Right of first offer:

• This is a variation of the right of first refusal in which a fixed price is agreed to from the outset.

• The shareholder wishing to sell shall first offer the shares to the holder of the right of first offer holder at the fixed price.

• If the holder of the right does not purchase the shares, the shareholder wishing to sell is free to sell it to a third party.

Page 15: Shareholders Agreement

C. Drag-along and Tag-along Rights:

• 'Drag-Along Rights' A right that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller..

• Tag-along right (TAR) :Tag-along right is the opposite - is a legal concept in corporate law. The right assures that if the majority shareholder sells his stake, minority holders have the right to join the deal and sell their stake at the same terms and conditions as would apply to the majority shareholder. This right protects minority shareholders.

Page 16: Shareholders Agreement

D. Buy-back rights:

• These give the company the right to redeem the shares of a certain shareholder in specific circumstances, such as withdrawal or death of the shareholder.

Page 17: Shareholders Agreement

E. Call option: an option to buy assets at an agreed price on or before a particular date.

• Call option gives its holder the right to buy a specified number of shares of the underlying stock at a predetermined price (strike price) between the date of purchase and the options expiration date.

Page 18: Shareholders Agreement

F. Put Option: an option to sell assets at an agreed price on or before a particular date

• Put option gives its holder the right to sell a specified number of shares of the underlying common stock at a predetermined price (strike price) on or before the expiration date of the contract.

Page 19: Shareholders Agreement

ARE MINORITY SHAREHOLDERS PERMITTED TO PARTICIPATE • There are no specific provisions under

Indian law to ensure participation of minorities on the board of directors of a company.

• Also, Indian law does not provide for provisions ensuring minority control over board of directors.

• However, the minority shareholders can be given the right to nominate directors on the board of directors by contractual arrangement between the shareholders.

Page 20: Shareholders Agreement

TYPES OF SHAREHOLDERS AGREEMENTS

• Pre-incorporation/formation agreement an agreement put in place between the parties who intend to form a company and to be its initial shareholders.

• Subscription and shareholders agreement: a shareholders agreement entered into between parties who are subscribing for shares contemporaneously with the entry into the shareholders agreements.

• Shareholders agreement governing a 50:50 shareholding position.

• Shareholders agreement governing a majority/minority situation.

• Shareholders agreement governing a joint venture situation.

Page 21: Shareholders Agreement

ADVANTAGES - SHAREHOLDERS AGREEMENT

• Privacy: The predominant reason for using a Shareholders agreement is that it is a private document between parties thereto which can be made subject to express confidentiality restrictions.

• By contrast the Articles of Associate are a public document available for inspection by members of the public in the Companies Registration Office.

• This makes the Articles of Association an unsuitable means for dealing with matters such as, for eg., the remuneration of directors or other sensitive internal management matters.

Page 22: Shareholders Agreement

• Greater Binding Effect: As explained above articles of Association can only bind a shareholder in his capacity as Shareholder.

• By contrast shareholders’ agreements may be used to give rights and impose obligations on shareholders. Eg., binding a person in his capacity as director or as a creditor or agent.

• However one needs to be very careful in imposing obligations on a party in his capacity as a Director.

Page 23: Shareholders Agreement

• Variation: As explained above Articles of Association can be amended by way of a special resolution.

• By contrast, unless a shareholders agreement expressly provides for a specific variation mechanism it can only be varied by unanimous agreement of the parties thereto.

Page 24: Shareholders Agreement

DISADVANTAGES• Binding Effect: Because of its nature a shareholders

agreement only binds the parties thereto and does not automatically bind all shareholder.

• Therefore if a party transfers his shares the transferee will not automatically be bound by the terms of the shareholders agreement.

• To circumvent this it is normal to provide in a shareholders agreement that an existing shareholder who is party to a shareholders agreement can only transfer his shares if he procures that the transferee enters into what is known as a deed of adherence which joins the transferee as a party to the shareholders agreement.

Page 25: Shareholders Agreement

• Interpretation: Again as shareholders agreements are contracts they are subject to the ordinary rules of contract law, in the event a dispute arising as to the meaning of a provision in the shareholders agreement a court would, as a primary means of interpretation, seek to establish what was the intent of the parties based on the wording of the contract.

• By contrast the language in articles of association has become in many respects fairly standardized and many of the provisions used in articles of association have been judicially considered over the years and there may therefore be available judicial precedent to assist in the interpretation of those provisions.

Page 26: Shareholders Agreement

WHEN A SHAREHOLDER BE COMPELLED TO TRANSFER HIS SHARES

• Where an individual shareholder becomes bankrupt.

• Where a corporate shareholder becomes insolvent or has a receiver or an examiner appointed.

• Where a corporate shareholder transfers shares to another member of its group and that transferee ceases to be member of the group.

• Sometimes but less frequently, where an individual shareholder dies.

• Where an individual shareholder is an employee of the company and he ceases to be employed by that company.

Page 27: Shareholders Agreement

THANK YOU