01.1 · What a company is¶

Why this matters: when you buy a share you are not buying a ticker or a chart — you are buying a slice of a legal person, with a specific place in a queue of claimants, governed by people whose interests may not match yours. Every later lesson (accounting, valuation, forensics) assumes you know who owns what, who decides what, and who gets paid first.

Learning objectives — after this lesson you can:

Explain what "separate legal personality" and "limited liability" mean, and why limited liability turns equity into a call option on the company's assets.
Rank the claimants on a company (lenders, employees, government, trade creditors, preference and equity shareholders) and run a liquidation waterfall by hand.
Read the share-capital lines of an Indian balance sheet and explain why face value tells you nothing about what a share is worth.
Distinguish promoter-controlled from professionally managed companies, private from public from listed, and subsidiaries from associates — and compute look-through economic interest in a group.
Work out what a controlling shareholder can and cannot pass on their own (ordinary vs special resolutions, related-party votes).
Identify the three kinds of agency problem, and quantify how much a related-party overcharge moves from minority shareholders to a promoter.

Prerequisites: 00.1 What fundamental investing is · Time: ~90 min

1. A company is a legal person¶

Start with the one idea that makes everything else possible. When a business is incorporated (registered as a company under the Companies Act, 2013 in India), the law creates a new person — not a human being, but a legal person (also called a body corporate): an entity the law treats as able to own property, sign contracts, borrow, employ people, sue and be sued, and pay tax in its own name.

Compare the ways a business can be organised in India:

Form	Who owns the assets?	Who is liable for the debts?	Can ownership be sold easily?	Typical use
Sole proprietorship	The owner personally	The owner, without limit	No — you sell the business, not a share of it	Kirana shops, small traders
Partnership firm	The partners jointly	Every partner, without limit, for all firm debts	Only with other partners' consent	Family trading firms, older CA/law firms
LLP (limited liability partnership)	The LLP	The LLP; partners' liability limited to their contribution	Only per the LLP agreement	Professional firms, small investment vehicles
Private limited company	The company	The company; shareholders lose at most their investment	Restricted by the articles	Most unlisted businesses, subsidiaries, start-ups
Public limited company (may be listed)	The company	The company; shareholders lose at most their investment	Freely transferable; listed shares trade on an exchange	Everything you will analyse in this course

The last two rows are the subject of this course. Four consequences of legal personality matter to an investor:

The company's assets are not the shareholders' assets. If you own 1% of Kaveri Pumps & Motors Ltd (our fictional running example), you do not own 1% of its Coimbatore factory. You own 1% of the shares; the company owns the factory. You cannot walk in and take a pump.
The company's debts are not the shareholders' debts. A bank that lent Kaveri ₹92 Cr of term loans has a claim on Kaveri, not on you.
Perpetual succession. Shareholders die, sell, or change; the company continues. That is what allows a business to have a life longer than any owner — and what allows a share to be valued as a claim on cash flows stretching decades into the future.
Transferability. Because ownership is sliced into standardised units (shares), strangers can buy and sell slices without renegotiating anything with the company. Stock markets are only possible because of this.

The foundational case is the English House of Lords decision Salomon v A Salomon & Co Ltd (1897). Aron Salomon turned his boot-making business into a company, owned almost all the shares himself and also lent it money secured by debentures. When the company failed, unsecured creditors argued that the company was really just Salomon. The Lords disagreed: a properly incorporated company is a different person from its shareholders, even when one shareholder owns nearly all of it, and Salomon as a secured creditor was paid ahead of the unsecured ones. Indian company law inherited this principle. (Wikipedia summary of the case)

Courts can "lift the corporate veil" — ignore the separate personality — in narrow cases such as fraud, sham structures set up to evade the law, or tax evasion. For an investor the practical lesson runs the other way: promoters sometimes treat a listed company as if it were their personal property. The law says it is not, and much of Indian corporate-governance regulation exists to enforce that.

Nearly every company you will analyse is a company limited by shares: members' liability is limited to the amount unpaid on their shares. (The Companies Act also allows companies limited by guarantee and unlimited companies; you will essentially never meet them as a listed-equity investor.)

2. Limited liability: the most important asymmetry in finance¶

Limited liability means a shareholder can lose at most what they paid for their shares (or, for partly paid shares, what they paid plus the unpaid amount they are still bound to pay when the company calls it). If the company goes bust owing ₹1,000 Cr more than its assets are worth, the shareholders' shares become worthless — but no creditor can send them a bill for the shortfall.

Why this matters enormously:

It makes passive, diversified investing possible. If every shareholder were personally liable for the debts of every company they held, nobody sane would own 40 stocks, let alone an index fund of 500. You would have to monitor every company as if your house depended on it — because it would.
It shifts downside risk onto creditors. The losses beyond the equity cushion land on lenders, suppliers and (sometimes) employees and the government. Creditors know this, so they protect themselves: they ask for security (a charge over specific assets), covenants (contractual limits on leverage, dividends, asset sales), guarantees from promoters, and a higher interest rate for weaker borrowers.
It creates a payoff that is floored at zero. The shareholder's payoff is "whatever is left after everyone else is paid, or zero if nothing is left". That shape — zero on the downside, open-ended on the upside — is exactly the payoff of a call option.

Trader's lens — equity is a call on the firm

Let $A$ be the value of the company's assets at some future date and $D$ the face value of everything that ranks ahead of the equity. Limited liability gives shareholders $$\text{Equity payoff} = \max(0,\ A - D)$$ — a European call on the assets struck at the debt. Creditors, symmetrically, hold riskless debt minus a put: $\min(A, D) = D - \max(0, D - A)$. This is Merton's (1974) structural model, and it gives you three intuitions you will reuse all course: (1) equity of a highly levered company behaves like a far out-of-the-money call — small in value, huge in percentage moves; (2) shareholders of a company near distress are long vega — they gain from risk-taking that creditors pay for (see §9, "Type III" agency); (3) a lender's credit spread is the premium on the put it has written. We return to Merton properly in 06.7 Other valuation methods.

3. Who has a claim on the company: equity vs debt and the priority of claims¶

A company has many claimants — parties to whom it owes money or a share of value. It helps to sort them by the nature of their claim:

Claimant	Nature of claim	Fixed or residual?	Typical protection
Secured lenders (banks, secured NCD holders)	Contractual interest + principal	Fixed	Charge on assets, covenants
Unsecured financial creditors (unsecured bonds, inter-corporate deposits)	Contractual interest + principal	Fixed	Covenants, rating, price
Employees	Wages, gratuity, provident fund	Fixed	Labour law, statutory priority
Government	Taxes, duties	Fixed	Statute
Trade creditors (suppliers)	Unpaid invoices	Fixed	Short credit periods, credit insurance, walking away
Preference shareholders	Fixed dividend (if declared) + capital	Fixed-ish (but ranks after all debt)	Terms of issue
Equity shareholders	Whatever is left	Residual	Votes, disclosure, law

The crucial word is residual. Every other party has a contractually fixed claim: they are owed a number. Equity shareholders are owed nothing specific; they own what is left after all fixed claims are met — every year (profit after interest and tax belongs to them) and at the end (in a liquidation they are paid last). This is why:

Equity is riskier than debt of the same company, so investors demand a higher expected return on it (you will quantify this as the cost of equity in 06.2).
Equity captures all the upside. A lender to a company that becomes ten times bigger still receives only interest and principal; the shareholders receive the rest.
Shareholders are the natural owners of control — the right to vote, elect the board and make decisions — because they bear the residual risk of those decisions. (Creditors get control only when the equity is wiped out, which is precisely what an insolvency process does.)

You will meet this same split in the accounting equation in 02.1:

\[\text{Assets} = \text{Liabilities} + \text{Equity} \quad\Longleftrightarrow\quad \text{Equity} = \text{Assets} - \text{Liabilities}\]

Equity is defined as a leftover. On the balance sheet it is a book-value leftover; in the market it is a value leftover.

The legal order of payment in India¶

When an Indian company is liquidated under the Insolvency and Bankruptcy Code, 2016 (IBC), Section 53 fixes the order in which the liquidator distributes the proceeds of selling the assets. Each class is paid in full before the next receives anything; within a class, claimants rank equally (pari passu) and share pro rata if the money runs out. As of September 2026 the order is (IBC s.53 text):

Rank	Class under IBC s.53(1)
(a)	Insolvency resolution process costs and liquidation costs
(b)	Workmen's dues for the 24 months before liquidation, and debts of secured creditors who relinquish their security to the liquidation estate — ranking equally
(c)	Wages and unpaid dues of employees other than workmen, for 12 months
(d)	Financial debts owed to unsecured creditors
(e)	Government dues (for up to 2 years) and any shortfall owed to secured creditors who enforced their security themselves — ranking equally
(f)	Any remaining debts and dues (this is where most trade creditors / suppliers sit)
(g)	Preference shareholders
(h)	Equity shareholders

Two surprises for newcomers: trade suppliers, who keep the factory running, rank below unsecured financial creditors and government; and a secured lender can either enforce its security outside the queue (and join rank (e) for any shortfall) or surrender it and rank at (b).

flowchart TD
  A[Cash from selling all assets] --> B["(a) Process & liquidation costs"]
  B --> C["(b) Workmen 24m + secured creditors who relinquished security"]
  C --> D["(c) Other employees 12m"]
  D --> E["(d) Unsecured financial creditors"]
  E --> F["(e) Government dues 2y + secured-creditor shortfalls"]
  F --> G["(f) Everyone else, incl. trade creditors"]
  G --> H["(g) Preference shareholders"]
  H --> I["(h) Equity shareholders: whatever is left"]

Worked example 1 — a liquidation waterfall¶

Tapti Textiles Ltd (fictional, not a running-example company) is liquidated. Its claims, in ₹ Cr:

Claim	₹ Cr	IBC rank
Liquidation and process costs	12.0	(a)
Workmen's dues (24 months)	8.0	(b)
Secured bank loans (security relinquished)	150.0	(b)
Salaries of other employees (12 months)	6.0	(c)
Unsecured financial debt (unsecured NCDs, inter-corporate deposits)	60.0	(d)
Government dues (2 years)	20.0	(e)
Trade creditors	45.0	(f)
Redeemable preference shares	10.0	(g)
Total ranking ahead of equity	311.0

Case A: assets realise ₹240 Cr. Pay down the queue:

(a) 12.0 → ₹228.0 Cr left.
(b) 8.0 + 150.0 = 158.0, paid in full → ₹70.0 Cr left.
(c) 6.0 → ₹64.0 Cr left.
(d) 60.0 → ₹4.0 Cr left.
(e) government claims ₹20.0 Cr but only ₹4.0 Cr remains → 20% recovery.
(f) trade creditors: zero. (g) preference: zero. (h) equity: zero.

Case B: assets realise ₹400 Cr. All ₹311.0 Cr of prior claims are paid in full and equity receives $400 - 311 = ₹89.0$ Cr.

Case C: assets realise only ₹150 Cr. After (a), ₹138.0 Cr is left for class (b), which is owed ₹158.0 Cr. The class shares pari passu: each rupee of claim recovers $138/158 = 87.3\%$, so workmen get ₹6.99 Cr and the banks ₹131.01 Cr. Everyone below gets nothing.

Across all three cases, the equity payoff is exactly $\max(0, A - 311)$ — the call-option shape from §2.

Going concern vs liquidation

Liquidation is the worst case, not the usual way equity gets paid. A healthy company pays its equity holders through dividends and buybacks out of ongoing cash flows, and the market prices the shares on those future cash flows. The priority of claims still matters in good times: it is why lenders accept lower returns than shareholders, and why equity value is so sensitive to how much debt sits ahead of it (01.2 makes this precise with enterprise value).

Open the equity section of any Indian balance sheet and the first line is equity share capital. It is the most misunderstood line in the statements, so let's pin down the vocabulary.

Authorised capital — the maximum share capital the company's memorandum permits it to issue. A legal ceiling, raised by shareholder resolution when needed. Economically meaningless on its own.
Issued / subscribed capital — shares actually issued to and taken up by shareholders.
Paid-up capital — the amount actually paid on issued shares. For fully paid shares (almost all listed shares) subscribed = paid-up.
Face value (also called par value or nominal value) — an arbitrary per-share number fixed in the memorandum: ₹1, ₹2, ₹5 and ₹10 are the common ones for Indian listed companies. Share capital on the balance sheet = number of shares × face value.
Securities premium — when a company issues shares for more than face value, the excess goes to a reserve called securities premium (part of "other equity"). So cash raised = face value part + premium part.
Market price — what the share trades at on NSE/BSE today. Determined by buyers and sellers, not by the company.
Book value per share — total equity ÷ shares. An accounting number (see 02.4).

Kaveri has 6.00 crore shares of ₹5 face value. At 31-Mar-2026 (FY26):

Item	Computation	Value
Equity share capital	6.00 Cr shares × ₹5	₹30.0 Cr
Other equity (reserves & surplus)	from the balance sheet	₹676.1 Cr
Total equity (book)	30.0 + 676.1	₹706.1 Cr
Book value per share	706.1 ÷ 6.00	₹117.7
Market price (18-Sep-2026)	NSE	₹390
Market capitalisation	6.00 Cr × ₹390	₹2,340 Cr
Price-to-book	2,340 ÷ 706.1	3.31x

So one Kaveri share has three different "values" printed about it: ₹5 (face value), ₹117.7 (book value) and ₹390 (market price). Only the last two carry economic information, and only the market price is what you pay. Face value is a legal artefact from an era when shares were printed certificates.

Now suppose (hypothetically) Kaveri issued 0.50 Cr new shares at ₹390. It would receive $0.50 \times 390 = ₹195.0$ Cr of cash, booked as:

Equity share capital: $0.50 \times 5 = ₹2.5$ Cr (face value part);
Securities premium: $0.50 \times (390 - 5) = ₹192.5$ Cr.

Total equity rises by ₹195.0 Cr either way. If Kaveri's face value were ₹1 or ₹10 instead of ₹5, the split between the two lines would change and nothing else would.

Where face value still shows up (so you are not confused):

Dividends announced as a percentage of face value. Indian companies often say "the board recommends a dividend of 80%". That means 80% of face value: on Kaveri's ₹5 face value, 80% = ₹4.00 per share (Kaveri's actual FY26 dividend per share). It does not mean 80% of profits or an 80% yield — at ₹390, ₹4 is a 1.03% yield.
Bonus issues and stock splits are defined in face-value terms (a split of ₹5 shares into ₹1 shares); 01.3 covers why they change nothing economically.
Legal formalities, such as share-capital thresholds in company law.

Kinds of shares¶

Equity (ordinary) shares — one share, one vote, residual claim. What "a share" means unless stated otherwise.
Shares with differential voting rights (DVRs) — equity with fewer (or more) votes per share, usually trading at a discount to the ordinary shares. Rare in India and tightly restricted.
Preference shares — rank ahead of equity for dividends and capital, usually with a fixed dividend rate, and may be cumulative (unpaid dividends accumulate), redeemable (repaid at a fixed date — economically debt-like) or convertible. Venture-backed Indian start-ups raise money mostly via CCPS (compulsorily convertible preference shares), which convert to equity before an IPO.

5. Who runs the company: shareholders, the board, management — and promoters¶

Ownership and control are separated into three layers:

flowchart TD
  S[Shareholders<br/>own the residual claim, vote at general meetings] -->|elect / remove| B[Board of directors<br/>sets strategy, appoints & oversees management,<br/>approves accounts, dividends, big decisions]
  B -->|appoints, pays, monitors| M[Management / KMP<br/>MD & CEO, CFO, Company Secretary<br/>run the business day to day]
  M -->|reports to| B
  B -->|reports to via annual report & AGM| S
  A[Statutory auditor] -. appointed by shareholders,<br/>reports on the accounts .-> S

Shareholders elect directors, appoint the auditor, and approve fundamental changes at general meetings (§8).
The board of directors is the company's governing body. It appoints the managing director (MD)/CEO and the other key managerial personnel (KMP) — the CFO and the company secretary — approves the financial statements, declares interim dividends, and makes the big decisions (capital raising, acquisitions, major capex). Directors are executive (also employees, e.g., the MD) or non-executive; some non-executives are independent directors, who by law must have no material relationship with the company or its promoters.
Management runs the business within the authority the board gives it.

For listed companies, the Companies Act (s.149) requires at least one-third of the board to be independent, and SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, Regulation 17, go further: at least half the board must be non-executive, and at least half must be independent if the chair is an executive or connected to the promoter (one-third if the chair is a non-executive, non-promoter director). Listed boards must also have an audit committee (dominated by independent directors; it approves related-party transactions and oversees the auditor), a nomination & remuneration committee, and a stakeholders' relationship committee; larger companies also need a risk-management committee. The LODR is amended often (SEBI's regulations page showed a latest amendment dated 14-Jul-2026 when this lesson was written) — verify the current text of Regulation 17 there; 05.6 covers board quality in depth.

Promoters — the Indian twist¶

In the US or UK, most large listed companies have dispersed ownership: no single shareholder owns more than a few per cent, and professional managers run the show. India is different. Most listed Indian companies have a promoter — the founder, founding family, business group, parent company or government that set up or controls the company. Legally, a promoter is a person named as such in an offer document or annual return, or who controls the company's affairs directly or indirectly (Companies Act s.2(69); SEBI's ICDR Regulations use a similar definition). The promoter and its relatives and affiliates form the promoter group, whose holding is disclosed separately every quarter in the shareholding pattern (lesson 01.4).

Type of Indian listed company	Controlling owner	Example (verified from exchange shareholding patterns via Screener, quarter ended Jun-2026)
Family/group-promoted	A family or business group	Kaveri (fictional): Raghunathan family 58.4%
Group company held via a holding company	A group holding company	TCS: promoter (Tata Sons) 71.77%
MNC subsidiary	Foreign parent	Many consumer and engineering companies (typically 50–75% parent)
Public sector undertaking (PSU)	Government of India / a state	Government is the promoter
Professionally managed, no promoter	Nobody — dispersed institutions	Larsen & Toubro, ITC, ICICI Bank and (since its 2023 merger with HDFC Ltd) HDFC Bank report no promoter holding

Sources: Screener — TCS, L&T, ITC, ICICI Bank, HDFC Bank (shareholding tables, accessed Sep-2026; Screener compiles the quarterly filings made to NSE/BSE — verify against the exchange filing for anything important).

A controlling promoter is a double-edged sword:

Good: long horizons, owner mentality, "skin in the game", fast decisions, patient capital through cycles.
Bad: the promoter can extract value from minority shareholders in ways a dispersed-ownership company's managers usually cannot — via related-party transactions, royalties, preferential share issues to themselves, loans to group companies, or simply by running the company for family objectives. Succession is often opaque. And a promoter who pledges shares to borrow personally can be forced into selling if the share price falls (Kaveri's promoters pledged 6% of their holding in Nov-2025 to fund a promoter-group real-estate venture — a yellow flag we will keep returning to).

This is why Indian analysts spend so much time judging the promoter; §9 formalises the problem.

6. Private vs public vs listed¶

The Companies Act, 2013 distinguishes:

Private company (s.2(68)) — its articles restrict the right to transfer shares, cap the number of members at 200 (excluding employees, and with a special one-person company variant), and prohibit any invitation to the public to subscribe for its securities. Name ends in "Private Limited". Kaveri's promoter-owned supplier Kaveri Castings Pvt Ltd (fictional) is one.
Public company (s.2(71)) — any company that is not private. It may raise money from the public. Name ends in "Limited".
Listed company (s.2(52)) — a company with any of its securities listed on a recognised stock exchange. Every listed company is public, but many public companies are unlisted.

A real illustration: Tata Sons — the holding company of the Tata group — converted from a public limited company to a private limited company in 2017 and is unlisted, while many of the companies it controls are listed (Wikipedia — Tata Sons).

What changes when a company lists:

	Unlisted (private or public)	Listed
Price discovery	Negotiated, infrequent	Continuous, on NSE/BSE
Liquidity for owners	Low	High (for most large caps)
Disclosure	Annual filings with the Registrar of Companies (MCA21)	Quarterly results, shareholding pattern, material events, earnings calls, annual report under SEBI LODR
Minimum public float	None	25% public shareholding (Securities Contracts (Regulation) Rules, rule 19A), with longer phase-in periods for very large new listings under amendments notified on 13-Mar-2026 (AZB summary)
Governance rules	Companies Act only	Companies Act + SEBI LODR, insider-trading and takeover regulations

As an analyst you will spend most time on listed companies, but you will constantly meet unlisted ones — as subsidiaries, suppliers, customers and promoter vehicles. For those, the MCA21 filings are often the only primary source (03.1).

7. Group structures: holding, subsidiary, associate, joint venture¶

Large Indian businesses rarely live in one company. They sit in groups: a holding company owning stakes in other companies, which may own stakes in others.

Subsidiary — a company another company controls. Under the Companies Act (s.2(87)), control means controlling the composition of the board, or exercising or controlling more than one-half of the total voting power (alone or with other subsidiaries). The holding company consolidates a subsidiary: it adds 100% of the subsidiary's revenue, costs, assets and liabilities into its consolidated statements, and then shows the share belonging to outside shareholders as non-controlling interest (NCI), also called minority interest. (The Companies Act also restricts how many layers of subsidiaries certain companies may have.)
Associate — a company over which another has significant influence but not control, presumed at 20% or more of voting power. Accounted for by the equity method: one line on the balance sheet (the investment) and one line in the P&L (share of the associate's profit).
Joint venture — joint control by two or more parties by contract (e.g., a 50:50 venture), usually also equity-accounted.

The full accounting (Ind AS 110, 28 and 111) is in 02.8. Here we need the economics.

Real example. Tata Sons (unlisted) is the holding company of the Tata group. As of 30-Jun-2025 it held about 71.7% of TCS (a subsidiary — more than half the votes) and about 20.8% of Titan (a stake in the 20–50% zone where significant influence is presumed), among stakes in 15 listed companies. About 66% of Tata Sons itself is held by philanthropic trusts endowed by the Tata family (Wikipedia — Tata Sons, citing company filings; the TCS stake was still 71.77% in the Jun-2026 shareholding pattern per Screener).

Worked example 3 — control vs economic interest in a pyramid¶

Godavari Holdings Ltd (fictional, listed) owns 60% of Godavari Infra Ltd (listed), which owns 51% of Godavari Power Ltd.

flowchart TD
  P[Promoter family] -->|55%| H[Godavari Holdings Ltd<br/>listed]
  H -->|60%| I[Godavari Infra Ltd<br/>listed]
  I -->|51%| W[Godavari Power Ltd]

Control. Holdings controls Infra (60% > 50%); Infra controls Power (51% > 50%). So Holdings controls Power — Power is a subsidiary of a subsidiary, consolidated all the way up.
Economic interest. Holdings' look-through share of Power's profits is $0.60 \times 0.51 = 30.6\%$. If Power earns ₹100 Cr PAT, Holdings' consolidated P&L shows ₹100 Cr of Power's profit inside group PAT, but only ₹30.6 Cr is attributable to owners of Holdings; ₹69.4 Cr belongs to non-controlling interests (Infra's outside shareholders' indirect share plus Power's direct outside shareholders).
Cash. If Power pays out all ₹100 Cr as dividend, Infra receives ₹51 Cr; if Infra pays all of that on, Holdings receives $0.60 \times 51 = ₹30.6$ Cr. Cash can be "consolidated" on paper but trapped in the subsidiary in practice.
The promoter's leverage of control. The family owns 55% of Holdings, so its look-through economic interest in Power is $0.55 \times 0.306 = 16.8\%$ — yet it controls 100% of Power's decisions. Pyramids let a family control large assets with little capital. The wider the gap between control and cash-flow rights, the stronger the temptation to move value toward the entities where the family's economic share is highest.

That last point is why Indian investors read both standalone and consolidated accounts, and why holding companies often trade at a discount to the value of what they own (07.5).

8. How shareholders actually "own" a company: rights and votes¶

Owning a share gives you a bundle of rights, not a key to the factory:

Economic rights — to dividends when declared (the board decides; you cannot demand one), to participate in buybacks and rights issues on equal terms, and to the residual in a liquidation.
Voting rights — one vote per equity share, on resolutions at general meetings.
Information rights — to the annual report, quarterly results, and all LODR disclosures; to attend and ask questions at the AGM.
Pre-emptive rights — new shares must first be offered to existing holders pro rata (a rights issue) unless shareholders approve otherwise by special resolution (e.g., for a preferential allotment or QIP) — see 01.3.
Legal remedies — minority shareholders meeting thresholds in the Companies Act can petition the National Company Law Tribunal (NCLT) against oppression and mismanagement (ss.241–244), and class actions are possible (s.245). In practice these are slow and rare; your real remedy is usually to sell.

General meetings and resolutions¶

The annual general meeting (AGM) must be held within six months of the end of the financial year, with no more than 15 months between two AGMs (Companies Act s.96). For a March year-end company that means by 30 September — hence India's AGM season in July–September. Business at an AGM: adopting accounts, declaring the final dividend, appointing/reappointing directors and auditors, plus any special business.
Other meetings are extraordinary general meetings (EGMs); many decisions are also taken by postal ballot, and listed companies must offer remote e-voting.
An ordinary resolution passes if votes cast in favour exceed votes cast against. A special resolution needs votes in favour of at least three times the votes against — i.e., at least 75% of votes cast (s.114). Note: of votes cast, not of all shares.

Typical special-resolution matters include altering the articles, issuing shares on a preferential basis or via a QIP, buybacks above 10% of capital and free reserves, reducing share capital, and voluntary delisting-related approvals.

Worked example 4 — what can Kaveri's promoters pass alone?¶

Kaveri's shareholding (Mar-26): promoters 58.4%, mutual funds 14.2%, FPIs 7.9%, insurance 2.1%, retail & others 17.4% (sum = 100.0%).

Ordinary resolution. If the promoters vote their 58.4% in favour, the votes against can be at most 41.6%. Since 58.4 > 41.6, the promoters can pass any ordinary resolution alone, whatever everyone else does.

Special resolution. Needs $F \ge 3A$. With $F = 58.4$:

\[A_{\max} = \frac{58.4}{3} = 19.47\% \text{ of total shares}\]

So the resolution fails if more than 19.47% of Kaveri's shares vote against. Non-promoters hold 41.6%, so the promoters win unless more than $19.47 / 41.6 = 46.8\%$ of the non-promoter shares turn out and vote no.

If only the institutions (MFs + FPIs + insurers = 24.2%) vote, and all vote against: $58.4 / (58.4 + 24.2) = 70.7\% < 75\%$ → the resolution fails. Institutions alone can block.
If institutions split or abstain and retail doesn't vote (retail turnout is typically low), the promoters pass it.

Related-party transactions. Under SEBI LODR Regulation 23, material related-party transactions need prior approval by a shareholders' resolution, and no related party may vote to approve it. For such votes the promoters' 58.4% is sidelined and the decision belongs to the other 41.6% — effectively a "majority of the minority" test. For a company of Kaveri's size, a transaction with a related party is material if it exceeds 10% of annual consolidated turnover (the absolute cap and tiers that apply to very large companies were revised by SEBI in 2025 — verify the current Regulation 23 text before relying on it; 05.6 covers the rule in detail). Kaveri's FY26 purchases from Kaveri Castings were ₹89.2 Cr, against 10% of FY26 turnover of ₹131.8 Cr — below the line, so the audit committee's approval sufficed. But those purchases grew at a 28.5% CAGR from ₹25.5 Cr in FY21. At that pace, and with revenue following the house base case, FY28 purchases (≈₹147 Cr) would exceed 10% of FY27 turnover (≈₹145 Cr) — at which point the minority shareholders would get a vote. Worth watching.

India notes

Promoter ≠ majority. A promoter with 30–50% usually has de facto control because the rest is dispersed and turnout is low. SEBI's takeover rules treat 25% as a key threshold (crossing it triggers an open offer) — 01.4 and 12.3.
Institutional votes are public. Mutual funds must disclose how they voted on each resolution, and proxy advisory firms (e.g., IiAS, InGovern, SES) publish recommendations — reading them before an AGM is a cheap governance check.
"Dividend of 80%" means 80% of face value, not of profits (§4).
Standalone vs consolidated. Indian companies publish both. Group structures (§7) make the difference material; read both.

9. Agency problems: when the people in charge are not the people who own¶

An agency problem arises when one party (the agent) acts on behalf of another (the principal) but has different interests and better information. Jensen and Meckling (1976) put this at the centre of corporate finance. For equity investors there are three versions.

Type I — managers vs shareholders. In dispersed-ownership companies, professional managers may pursue size over returns (empire-building acquisitions), pay themselves generously, hoard cash, avoid risky-but-valuable projects that could cost them their jobs, or manage reported numbers to hit bonus targets. Remedies: boards, performance-linked pay and stock ownership, takeovers, activist investors.

Type II — controlling shareholder vs minority shareholders. The dominant problem in India. A promoter who controls the company but owns only part of its cash flows can gain by tunnelling — moving value out of the listed company to entities they own more of: overpriced purchases from promoter-owned suppliers, underpriced sales to them, royalty or brand fees to a parent, loans or guarantees to group companies, share issues to themselves at low prices, or lavish remuneration.

Type III — shareholders vs creditors. When a company is close to distress, shareholders (holding the call option of §2) gain from raising risk: a long-shot bet that pays off saves the equity, while if it fails the loss falls mostly on creditors. They may also pay out cash as dividends just before trouble. Creditors respond with covenants.

Worked example 5 — the arithmetic of tunnelling at Kaveri¶

Suppose (hypothetically — nothing in Kaveri's disclosures proves it) that Kaveri Castings' prices were 5% above arm's length. On FY26 purchases of ₹89.2 Cr:

Overcharge $= 89.2 \times \frac{0.05}{1.05} = ₹4.25$ Cr.
Kaveri's PAT falls by the post-tax amount: $4.25 \times (1 - 0.2517) = ₹3.18$ Cr.
Kaveri Castings' PAT rises by the same ₹3.18 Cr (assuming it also pays tax at 25.17%).

Now follow the money:

Party	Share of Kaveri	Share of Kaveri Castings	Change, ₹ Cr
Promoter family	58.4%	100%	$+3.18 - 0.584 \times 3.18 = +1.32$
Minority shareholders of Kaveri	41.6%	0%	$-0.416 \times 3.18 = -1.32$

The transfer is zero-sum: the promoter gains exactly what the minority loses. Per rupee of post-tax overcharge, the promoter gains the fraction of Kaveri they don't own — here 41.6 paise. The lower the promoter's stake in the listed company, the stronger the incentive to tunnel: a promoter with 30% keeps 70 paise of every post-tax rupee moved.

What is it worth? The minority loses ₹1.32 Cr a year, or $1.32 / (6.00 \times 0.416) = ₹0.53$ per minority share per year. Capitalised at Kaveri's P/E of 25.9x (₹2,340 Cr ÷ ₹90.5 Cr), the ₹3.18 Cr of lost annual profit is worth ≈₹82 Cr of market value, or ≈₹13.7 per Kaveri share — about 3.5% of the ₹390 share price, from a 5% overcharge on 10% of material costs. This is why the course keeps flagging the rising related-party share (6.5% → 10.4% of material cost, FY21 → FY26) even though the company says pricing is at arm's length.

Two real episodes¶

Satyam–Maytas (2008). In December 2008 Satyam Computer Services' board approved buying Maytas Properties and Maytas Infra — companies controlled by the family of chairman B. Ramalinga Raju — for about US$1.6 billion. Investors revolted (Satyam's shares fell about 55% on the NYSE), the deal was dropped, and four directors resigned on 29-Dec-2008. On 7-Jan-2009 Raju confessed to years of falsified accounts. A cash-rich listed company proposing to pay its cash to promoter-family companies is Type II agency in its purest form (Wikipedia — Satyam Computer Services; full case in 13 · I1).
Tata Sons–Cyrus Mistry (2016–2021). In October 2016 the Tata Sons board removed its chairman, Cyrus Mistry, whose family firm held about 18.4% of Tata Sons. The NCLAT reinstated him in December 2019; the Supreme Court upheld his removal in March 2021 (Wikipedia — Cyrus Mistry). Whatever one thinks of the merits, it shows how little an 18% minority stake can do against a holder of about two-thirds of the votes.

What limits agency costs¶

Independent directors and the audit committee; majority-of-minority votes on material related-party transactions; mandatory disclosure (related-party notes, shareholding patterns, pledge disclosures); institutional investors' voting and engagement; SEBI enforcement; auditors; and, ultimately, the share price — companies with poor governance tend to trade at lower multiples, which raises their cost of capital. None is perfect. Your job as an analyst is to estimate how much value might leak and demand a discount for it — see 05.5 and 09.5.

Trader's lens — risk-shifting is a vega trade

Equity near distress is a call close to (or below) the strike. Its value rises with the volatility of the underlying assets: $\partial C / \partial \sigma > 0$. A board acting purely for shareholders of a nearly insolvent company therefore has an incentive to increase asset volatility — a riskier project, a bigger acquisition, a bet-the-company tender — even at negative expected value, because the downside belongs to the creditors (who are short the put). This is Type III agency, and it is why bank-loan covenants restrict new debt, asset sales and dividends once leverage rises.

Common mistakes

Confusing face value with value. A ₹10-face-value share is not "worth more" than a ₹1-face-value share. "Dividend of 200%" on ₹1 face value is ₹2 a share.
Thinking you own the assets. You own a residual claim on a legal person. The company's cash is not your cash until it is paid out — and in a group it may be trapped in a subsidiary.
Reading consolidated profit as "the shareholders' profit". Use PAT attributable to owners of the parent, not group PAT including NCI.
Assuming 51% is needed for control, or that 51% gives total control. A 35% promoter can control a dispersed company; a 58% promoter still cannot pass a special resolution if institutions turn out against it, and cannot vote on its own material related-party deals.
Treating "professionally managed" as automatically better. It replaces Type II agency risk with Type I; judge the incentives, not the label.
Ignoring where you sit in the queue. Preference shares, unsecured debt and trade creditors are all ahead of you; in distress, equity is usually worth zero long before the business is.

Key terms¶

Term	Meaning
Legal person	An entity (like a company) that the law treats as able to own property, contract, sue and be sued in its own name
Limited liability	A shareholder's maximum loss is what they paid (plus any unpaid amount on partly paid shares)
Residual claim	The claim on whatever remains after all fixed claims are met — the defining feature of equity
Priority of claims	The order in which claimants are paid; in Indian liquidation, fixed by IBC s.53
Pari passu	Ranking equally; sharing pro rata if funds are insufficient
Secured creditor	A lender with a charge over specific assets
Authorised / paid-up capital	Legal ceiling on share capital / the amount actually paid on issued shares
Face value (par)	Nominal per-share amount; share capital = shares × face value
Securities premium	Excess of issue price over face value, held in other equity
Book value per share	Total equity ÷ number of shares
Market capitalisation	Shares outstanding × market price
Preference share	Share ranking ahead of equity for dividends and capital, usually fixed-rate
Board of directors	Governing body elected by shareholders; appoints and oversees management
Independent director	Non-executive director with no material relationship with the company or promoters
KMP	Key managerial personnel: MD/CEO, CFO, company secretary (and whole-time directors)
Promoter / promoter group	The controlling founder, family, group, parent or government, and persons connected to it
Private / public / listed company	Restricted-transfer company with ≤200 members / any non-private company / company with securities on a recognised exchange
Subsidiary	A company controlled by another (board control or >50% voting power); consolidated line by line
Associate	A company over which another has significant influence (presumed at ≥20% votes); equity-accounted
Non-controlling interest (NCI)	Outside shareholders' share of a consolidated subsidiary
Look-through interest	Product of ownership percentages down a chain of holdings
AGM / EGM	Annual / extraordinary general meeting of shareholders
Ordinary / special resolution	Passed by votes for > votes against / votes for ≥ 3 × votes against
Related-party transaction (RPT)	A transaction between the company and a party connected to it (promoters, directors, group companies)
Agency problem	Conflict of interest between a principal and the agent acting for them
Tunnelling	Transferring value from a listed company to entities owned more heavily by its controller
Pledge	Promoter shares given as collateral for a loan; a forced-selling risk if the price falls

Check your understanding¶

Why does limited liability make equity look like a call option? What is the "strike"?

Answer
Shareholders receive whatever is left after all prior claims, but never less than zero because they are not liable for shortfalls. The payoff is $\max(0, A - D)$ where $A$ is asset value and $D$ is the total of claims ranking ahead of equity — a call on the assets struck at $D$.
Tapti Textiles (Worked example 1) realises ₹300 Cr instead of ₹240 Cr. How much do the government, the trade creditors, the preference holders and the equity holders each receive?

Answer
After (a) 12.0, (b) 158.0, (c) 6.0 and (d) 60.0, ₹64.0 Cr is left. Government dues (e) take ₹20.0 Cr in full → ₹44.0 Cr left. Trade creditors (f) are owed ₹45.0 Cr and get ₹44.0 Cr (97.8% recovery). Preference and equity get nothing. Check: $\max(0, 300 - 311) = 0$.
A company has 12 crore shares of ₹2 face value trading at ₹640, and total equity of ₹1,920 Cr. What are its share capital, book value per share, market cap and P/B? If it announces a "dividend of 250%", how much is paid per share, and what is the yield?

Answer
Share capital $= 12 \times 2 = ₹24$ Cr. BVPS $= 1{,}920 / 12 = ₹160$. Market cap $= 12 \times 640 = ₹7{,}680$ Cr. P/B $= 7{,}680 / 1{,}920 = 4.0$x. Dividend $= 250\% \times ₹2 = ₹5$ per share; yield $= 5/640 = 0.78\%$.
A promoter holds 45% and votes in favour of a special resolution. What percentage of total shares voting against would defeat it? If institutions holding 20% vote against and nobody else votes, does it pass?

Answer
Needs $F \ge 3A$, so it fails if $A > 45/3 = 15\%$ of total shares. With 20% against: $45/(45+20) = 69.2\% < 75\%$ → fails.
Holdings owns 70% of A; A owns 40% of B (an associate of A). B earns ₹50 Cr. How much of B's profit shows up in Holdings' consolidated profit, and how much is attributable to Holdings' owners?

Answer
A equity-accounts B: A's P&L includes $0.40 \times 50 = ₹20$ Cr as "share of profit of associate". Holdings consolidates A fully, so the ₹20 Cr appears in Holdings' consolidated PAT; of that, $0.70 \times 20 = ₹14$ Cr is attributable to Holdings' owners and ₹6 Cr to A's non-controlling interest. Look-through: $0.70 \times 0.40 = 28\%$ of ₹50 Cr = ₹14 Cr.
In Worked example 5, redo the tunnelling arithmetic for a promoter that owns 30% of the listed company (and 100% of the supplier). Per ₹1 of post-tax overcharge, how much does the promoter gain? Why does this matter for how you read promoter holdings?

Answer
Promoter gains ₹1.00 via the supplier and loses $0.30 \times ₹1.00$ via the listed company: net +₹0.70; the minority loses ₹0.70. The smaller the promoter's stake in the listed entity (relative to its stake in the counterparty), the stronger the incentive to tunnel. A falling promoter stake combined with rising related-party dealings is a classic Type II warning sign.
Why do trade creditors often recover less than banks in an Indian liquidation, even though suppliers keep the business running?

Answer
Under IBC s.53, secured creditors (who relinquish security) rank at (b) with workmen, unsecured financial creditors at (d) and government dues at (e), while most trade (operational) creditors fall into (f), "remaining debts". Banks also protect themselves with security and covenants; suppliers typically extend unsecured credit.

Go deeper¶

Salomon v A Salomon & Co Ltd [1897] AC 22 — the separate-personality case; a short read in any company-law casebook (summary).
Michael C. Jensen & William H. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure", Journal of Financial Economics 3(4), 1976 — the founding paper on agency costs.
Robert C. Merton, "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates", Journal of Finance 29(2), 1974 — equity as a call on the firm; required reading for an options person.
Reinier Kraakman et al., The Anatomy of Corporate Law (3rd ed., OUP, 2017) — the three agency problems and the legal strategies used against them, compared across countries.
IndiaCorpLaw — the best running commentary on Indian company and securities law (promoters, related-party rules, SEBI orders).

← Previous: 00.3 The investor's map · Module index · Next: 01.2 Shares, market cap & enterprise value →