Issue of Shares with Differential Voting Rights

Issue of Shares with Differential Voting Rights

What does Issue of Shares through Differential Voting Rights means?

 

The issue of Shares with Differential Voting Rights (DVRs) means shares that give the holder differential rights as to voting (either more or less voting right) as against the Ordinary shareholders of the company.

 

As per Section 43(a)(ii) of the Companies Act, 2013, a company incorporated in India and limited by shares is permitted to have equity shares with differential voting rights as part of its share capital. The differential rights appended to such equity shares may be with respect to dividend, voting or otherwise. Such equity shares may be issued by a company as per Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014 prescribed under the Companies Act, 2013. Private companies can issue shares with differential voting rights in the manner prescribed under their Articles of Association, provided the Articles exempt the applicability of the Section 43 and 47 of the Companies Act, 2013 read with rule 4 of the Companies (Share Capital & Debentures) Rules 2014.

 

Section 47 of The Companies Act, 2013, provides for every shareholder of a company to have a right to vote on every resolution presented before the company. However, in the event that the memorandum and articles of association of the company so provide, a private company may opt to not accord every member with such right to vote.

 

What are the benefits of issuing shares with differential voting rights?

 

A company may choose to issue shares with differential voting rights for obtaining investments without offering voting rights to the investor and thereby avoiding any attempts at a hostile takeover. Similarly, the promoters can get investment without diluting the control on decision making capabilities. Shares with differential voting rights are favorable to private companies which do not have abundance of dispensable funds or distributable profits and are susceptible to a hostile takeover. Issuance of shares with differential voting rights affords an opportunity to such private companies to broaden their capital base without having to lose control over or management of the company.

 

What is the Procedure for issue of issue of shares with DVR?*

 

1) No company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions, namely:-

 

(a) the articles of association of the company should authorizes the issue of shares with differential rights;

 

(b) The Company should call board meeting and shareholders meeting for passing ordinary resolution for issue of shares with DVR;

 

Provided that where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot;

 

(c) the voting power in respect of shares with differential rights of the company shall not exceed seventy four per cent. of total voting power including voting power in respect of equity shares with differential rights issued at any point of time;

 

(d) the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;

(e) the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;

(f) the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government;

 

Provided that a company may issue equity shares with differential rights upon expiry of five years from the end of the financial Year in which such default was made good.”]

 

(g) the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

 

(2) The explanatory statement to be annexed to the notice of the general meeting in pursuance of section 102 or of a postal ballot in pursuance of section 110 shall contain the following particulars, namely:-

 

(a) the total number of shares to be issued with differential rights;

(b) the details of the differential rights ;

(c) the percentage of the shares with differential rights to the total post issue paid up equity share capital including equity shares with differential rights issued at any point of time;

(d) the reasons or justification for the issue;

(e) the price at which such shares are proposed to be issued either at par or at premium;

(f) the basis on which the price has been arrived at;

(g) (i) in case of private placement or preferential issue-

(a) details of total number of shares proposed to be allotted to promoters, directors and key managerial personnel;

(b) details of total number of shares proposed to be allotted to persons other than promoters, directors and key managerial personnel and their relationship if any with any promoter, director or key managerial personnel;

(ii) in case of public issue – reservation, if any, for different classes of applicants including promoters, directors or key managerial personnel;

(h) the percentage of voting right which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;

(i) the scale or proportion in which the voting rights of such class or type of shares shall vary;

(j) the change in control, if any, in the company that may occur consequent to the issue of equity shares with differential voting rights;

(k) the diluted Earning Per Share pursuant to the issue of such shares, calculated in accordance with the applicable accounting standards;

(l) the pre and post issue shareholding pattern along with voting rights as per clause 35 of the listing agreement issued by Security Exchange Board of India from time to time.

 

(3) The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice–versa.

 

(4) The Board of Directors shall, inter alia, disclose in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed, the following details, namely:-

 

(a) the total number of shares allotted with differential rights;

(b) the details of the differential rights relating to voting rights and dividends;

(c) the percentage of the shares with differential rights to the total post issue equity share capital with differential rights issued at any point of time and percentage of voting rights which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;

(d) the price at which such shares have been issued;

(e) the particulars of promoters, directors or key managerial personnel to whom such shares are issued;

(f) the change in control, if any, in the company consequent to the issue of equity shares with differential voting rights;

(g) the diluted Earning Per Share pursuant to the issue of each class of shares, calculated in accordance with the applicable accounting standards;

(h) the pre and post issue shareholding pattern along with voting rights in the format specified under sub-rule (2) of rule 4.

 

(5) The holders of the equity shares with differential rights shall enjoy all other rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.

 

(6) In case issue of DVR affects the rights of existing class of shares then obtain consent form that class shares (3/4th) or by passing special resolution by having meeting of separate class of shares and file form MGT-14 with ROC;

 

(7) Where a company issues equity shares with differential rights, the Register of Members maintained under section 88 shall contain all the relevant particulars of the shares so issued along with details of the shareholders.

 

*The provisions of Section 43 and Section 47 of the Companies Act, 2013 shall not apply to private companies in case MOA and AOA of the company provide otherwise.

Webinar on Prevention of Sexual Harassment At Workplace

Prevention of Sexual Harassment At Workplace

When : August 23, 2019 | Timing: 4.30 p.m to 5.30 p.m.

What Will The Webinar Cover?
Not sure whether you need a POSH Policy or an Internal Complaints Committee (ICC)? Worried about a #metoo situation in your office? Join LexStart for a discussion on the key requirements under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (POSH Law) and understand what the law actually requires.
Who Should Attend?
  • Founders, Promoters, Entrepreneurs
  • Directors
  • Investors
  • HR Personnel

 

Key Takeaways
  • Understand the law in India on Prevention of Sexual Harassment at Workplace
  • Key terms that should go into a Policy for Prevention of Sexual Harassment at Workplace
  • Constitution of Internal Complaints Committee
  • ABCs of how to respond to a #metoo situation

 

About the Speaker
Deeksha Singh is a corporate lawyer with more than a decade of experience in corporate laws. She regularly advises on laws relating to prevention of sexual  harassment at workplace. She also regularly conducts sensitization training programs for employees at companies and training programs for ICC members on how to stay compliant with POSH Law and handle complaints addressed to the ICC.

Important Update | Dematerialization of Securities Mandatory from August 1, 2019

Dematerialization of Securities Mandatory from August 1, 2019

As per a recent amendment to the Companies Act, 2013, every private limited company may have to maintain its shares in dematerialised form, w.e.f. August 01, 2019.

While a specific timeline for dematerialisation has not yet been notified, it is important that every private limited company takes steps immediately to dematerialise their securities, before making any fresh offer for issue/buyback/transfer of any securities to any investors or existing shareholders.