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Institutional investor can be a company or an organization that manages and invests large sums of money in the market in order to generate profits on behalf of their clients. They do not use their own money, but rather invest money on others’ behalf. Common examples of institutional investors are pension funds, banks, mutual funds, hedge funds, endowments, and insurance companies.
Individual investors, on the other hand, invest their own money by themselves in smaller amounts to maximize profits. Because of the low volume and low frequency of trade, individual investors often have to pay higher commissions and fees on their investments.
The main differences between the institutional investor and the individual investor are (i) the rate at which each trades, (ii) the volume of money involved in their trades, (iii) the costs each pays to invest, (iv) their investment knowledge and experience, and (v) the access each have to important investment research.
Investment in unlisted companies can be made when companies raise a round of funding or at the time of a secondary transfer of shares. If investors hold demat accounts, then the shares are directly transferred into their demat account. Another option is by way of approaching portfolio managers. Apply caution while selecting an intermediary. Make sure that they help you close the deal and avoid any counterparty risk.
Majority shareholders directly or indirectly hold more than 50% of shares or the controlling interest in a company. They have a significant amount of influence over the company and can take part in significant decisions that include:
- Appointment and removal of directors
- Attend and vote at general meetings
- Initiate liquidation/winding up of the company
- Mergers and amalgamations
- Sales of undertakings
- Variations of shareholder rights
- Alterations in memorandum of association or articles of association
- Approval of audited financials and boards reports
- Declarations of dividends
- Reduction in capital
Additional rights agreed in the shareholders’ agreement include the right to:
- Inspect statutory registers and minutes books.
- Receive copies of financial statements.
- Board representations.
- Management rights.
- Access to additional information and records of the company.
- Liquidation preferences.
Minority shareholders own a smaller percentage of the company’s equity. They have some authority, but they don’t have complete control because they own less than half of the corporation. Generally, they can vote and have their perspectives heard, but their votes are not enough to directly impact a company’s decision.
Minority shareholders can influence the board’s decision by getting affirmative voting rights through shareholders/investment agreements. Such rights should also be incorporated in the articles of association of the company. Also since the board of directors have to act not just for the benefit of the company but also in their fiduciary capacity to protect the shareholders, the Companies Act 2013 has laid down certain provisions for the protection of minority shareholders to prevent oppression and mismanagement. Company and its board have to work consistently to strike a balance between the rule of the majority and the rights of the minority.
Affirmative voting rights, also known as veto or reserved or consent rights, refer to legally agreed-upon issues that are typically found in shareholder agreements, joint venture agreements and other investor agreements. It is a safeguard given to the investors whereby it is mandatory for the founders and the board of directors of the company to obtain shareholders’ consent before making decisions on subjects covered by affirmative voting rights. No decision can be implemented by the company unless the holders of affirmative rights agree. This right is applicable even if the majority shareholders have sufficient shareholding to approve such decisions. These matters generally protect the rights of the minority shareholders.
Few examples of affirmative matters include:
- Mergers, demergers, amalgamations, consolidations;
- Acquisition of other businesses by way of purchase of shares, business transfer, asset purchase;
- Creation of joint ventures or partnerships, creation of a subsidiary;
- Any strategic, financial or other alliance with a third party which results in investments by the company;
Approval of any business plan or annual plan; (vi) changes in terms relating to vesting of founders and so on.