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An equity share with differential rights is like an
ordinary equity share, but it provides fewer voting rights to the shareholder.
The difference in the voting rights can be achieved by reducing the degree of
voting power. Companies issue equity share with differential rights for
[prevention of a hostile takeover and dilution of voting rights. It also helps
strategic investors who do not want control, but are looking at a reasonably
big investment in a company.
ordinary equity share, but it provides fewer voting rights to the shareholder.
The difference in the voting rights can be achieved by reducing the degree of
voting power. Companies issue equity share with differential rights for
[prevention of a hostile takeover and dilution of voting rights. It also helps
strategic investors who do not want control, but are looking at a reasonably
big investment in a company.
Section 43 provides that the share capital of a company
limited by shares shall of two kinds, namely:-
limited by shares shall of two kinds, namely:-
(a) Equity share capital-
1. With voting rights; or
2. With differential rights as to dividend, voting or
otherwise in accordance with such rules as may be prescribed.
otherwise in accordance with such rules as may be prescribed.
Rule 4 of the Companies (Share Capital and Debentures)
Rules, 2014 provides that no company limited by shares shall issue equity
shares with differential rights as to dividend, voting or otherwise, unless it
complies with the conditions mentioned in this rules.
Rules, 2014 provides that no company limited by shares shall issue equity
shares with differential rights as to dividend, voting or otherwise, unless it
complies with the conditions mentioned in this rules.
Procedure for Issue Equity Shares With Differential Voting
Rights
1. Check whether the Articles of Association of the company
authorizes issue of equity shares with differential rights and if not, then
amend the Articles of Association of the company.
authorizes issue of equity shares with differential rights and if not, then
amend the Articles of Association of the company.
2. Hold the Board meeting to issue the notice of general
meeting for issuance of equity share with differential rights along with the
explanatory statement u/s 102 of the Act with the contents which is placed as
Annexure at the end of this lesson.
meeting for issuance of equity share with differential rights along with the
explanatory statement u/s 102 of the Act with the contents which is placed as
Annexure at the end of this lesson.
3. Before issuing equity shares with differential rights as
to dividend, voting or otherwise, ensure the following:
to dividend, voting or otherwise, ensure the following:
a. the shares with differential rights shall not exceed
twenty-six percent of the total post-issue paid up equity share capital
including equity shares with differential rights issued at any point of time;
twenty-six percent of the total post-issue paid up equity share capital
including equity shares with differential rights issued at any point of time;
b. the company has consistent track record of distributable
profits for the last three years;
profits for the last three years;
c. 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;
statements and annual returns for three financial years immediately preceding
the financial year in which it is decided to issue such shares;
d. 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;
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;
e. 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;
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;
f. 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.
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.
4. If the company is listed with any
of the recognized stock exchange, then within 15 minutes of the closure of the
aforesaid Board Meeting intimate to the concerned Stock Exchange about the
decision taken at the Board Meeting.
of the recognized stock exchange, then within 15 minutes of the closure of the
aforesaid Board Meeting intimate to the concerned Stock Exchange about the
decision taken at the Board Meeting.
5.
Pass the ordinary resolution in
the general meeting.
Pass the ordinary resolution in
the general meeting.
6. If the company is listed, then
ensure it obtains the approval of its shareholders through postal ballot as per
rule 22 of the Companies (Management and administration) Rules, 2014.
ensure it obtains the approval of its shareholders through postal ballot as per
rule 22 of the Companies (Management and administration) Rules, 2014.
7. Once the company makes any
allotment, then its shall, within 30 days thereafter, file with the Registrar a
return allotment in Form PAS-3,
along with the fees as specified in the Companies( Registration Offices and
Fees) Rules, 2014.
allotment, then its shall, within 30 days thereafter, file with the Registrar a
return allotment in Form PAS-3,
along with the fees as specified in the Companies( Registration Offices and
Fees) Rules, 2014.
8. The company shall not convert its
existing equity share capital with voting rights into equity share capital
carrying differential voting rights and vice–versa.
existing equity share capital with voting rights into equity share capital
carrying differential voting rights and vice–versa.
9. In case of listed company, forward
three copies of the notice and a copy of the proceedings of the general meeting
to the stock exchange.
three copies of the notice and a copy of the proceedings of the general meeting
to the stock exchange.
10. Complete all other proceedings for the issue of
certificate of shares with differential voting rights making necessary entries
in various registers. In case of a company whose shares are dematerialized
form, inform the depositories about the same for credit to the respective
accounts.
certificate of shares with differential voting rights making necessary entries
in various registers. In case of a company whose shares are dematerialized
form, inform the depositories about the same for credit to the respective
accounts.
11. Intimate the details of allotment of shares to the
Depository immediately on allotment of such shares.
Depository immediately on allotment of such shares.
12. Maintain the Register of Members under section 88
containing all the relevant particulars of the shares so issued along with
details of the shareholders.
containing all the relevant particulars of the shares so issued along with
details of the shareholders.
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