CS Jatin Bajaj
Q. What is Equity shares with differential voting Right?
A. An Equity Shares with differential rights is an ordinary equity shares but it provides fewer voting rights to its shareholder. The difference in the Voting Rights can be achieved by reducing the degree of voting rights.
Q. Why companies issue equity shares with differential Voting Rights?
i. Companies issue Equity Shares with differential Voting Rights for prevention of a hostile takeover and dilution of voting Rights.
ii. It also helps strategic investor who do not want control but looking for a big investment in the Company.
Section 43 of Companies Act 2013 defines:
i. Equity Shares with equal voting rights
ii. Equity shares with differential voting Rights
Rule 4 of Companies (Share Capital & Debentures) Rules 2014, Provides that no Company shall issue shares with differential voting Rights unless following conditions are satisfied:
i. There must be the provision in the Articles of Association of Company, if not amend the Articles of Association of the Company
ii. Issue of shares is authorized by passing ordinary resolution in general meeting of the Shareholders
Important Note: Where equity shares of a Company are listed on a recognized stock exchange, the issue of equity shares shall be approved by the Shareholders through postal ballot.
iii. The shares with differential voting rights shall not exceed 26% of total post issue paid up equity share capital including equity shares with differential voting rights at any point of time.
iv. The Company has the Consistent track record of distributable profit for the last 3 years.
v. The Company has not defaulted in filing Financial Statements and annual returns for 3 financial year immediately preceding the financial year in which it decided to issue such shares.
vi. The Company has not been penalized by the Court or Tribunal during last 3 years of any offence under :
- RBI Act 1934
- SEBI Act 1992
- SCRA Act 1956
- FEMA Act 1999
- Any other special Act under which Company may be regulated by Sectoral regulators.
IMPORTANT Note:
The Company shall not convert its existing Equity share capital with voting Rights into Equity share capital carrying differential voting Rights and vice versa.
Disclosure under Board Report
The Board of Directors shall disclose in Board’s Report for the financial year in which the equity shares with differential voting rights was completed, the following are the details:
- Total number of shares allotted with differential rights
- Details of Differential Rights relating to voting Rights and dividends
- Price at which shares have been issued
- Particulars of Promoters, Directors or KMP to whom shares have been issued.
- The diluted Earnings Per share pursuant to issue of each class of shares , calculated in accordance with applicable accounting standards
IMPORTANT POINTS:
♠ The holders of Equity shares with differential Voting Rights shall also enjoy all other rights such as :
- Bonus Shares
- Right Shares
- ESOP etc
Which the equity shareholders are entitled to subject to differential voting Rights which such shares have been issued.
♠ Where the Company issues equity shares with differential Rights, Register of Member (Form MGT 1) under section 88 shall contains the relevant particulars of shares so issued along with the details of Shareholders.
