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Applicable Provisions: Section 43(2) of the Companies Act, 2013 along with Rule 4 of Companies (Share Capital and Debentures) Rules, 2014.

As per section 43(2) of the Companies Act, 2013: Company can issue shares with differential right as to dividend, voting or otherwise.

The differential rights are in respect of voting power and dividend, so generally equity shares with less voting rights carry higher rate of dividend but whereas the equity shares with higher voting shares carries with lesser rate of dividend. Equity shares with higher voting rights are generally given to promoters, key managerial persons, Managing directors etc.

Differential Voting Rights of Company Under Companies Act 2013

Eligibility/Condition for issue of shares with Differential Voting Rights (DVRs)*

1. The Articles of Association of the Company authorizes the issue of shares with differential rights.

2. The issue of shares is authorized by an Ordinary Resolution passed at a general meeting of the shareholders.

3. The voting power in respect of shares with differential rights of the company shall not exceed 74% of total voting power including voting power in respect of equity shares with differential rights issued at any point of time (DVR does not exceed 74%).

4. No default in filing of Financial Statement and Annual Return for last three financial years immediately preceding the financial year in which it is decided to issue such shares.

5. No default in payment of declared dividend or repayment of matured Deposit or redemption of Preference Shares or Debentures (including both Principal Amount and interest or dividend thereon).

6. No default in repayment of term loan from the PFI or State level FI or scheduled Bank or interest payable thereon.

7. No default in statutory payments relating to its employees to any authority or crediting the amount in IEPF to the CG.

* [“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.”]

8. The company has not been penalized by Court or Tribunal during the last three years under RBI Act, 1934, SEBI Act 1992, SCRA Act, 1956, FEMA Act 1999 or any other act under which such companies being regulated by Sectoral regulators.;

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

PROCEDURE FOR ISSUANCE OF SHARES:

STEPS PARTICULARS
STEP 1 Check whether the Articles of Association of the company authorizes issue of equity shares with differential rights and if not, alter the Articles of Association of the company by passing Special resolution and file Form MGT 14 within 30 days of meeting.
STEP 2 Convene a Board Meeting with two Directors or by a majority of Directors.
1. Hold the Board meeting to issue Differential Voting Rights.
2. Fix a date, place, time and agenda for a General Meeting of the Company.
STEP 3 In case of Listed Entity, intimation regarding the decision of Board Meeting shall be provided to the Recognized Stock Exchange.
STEP 4 Issue notice in writing for the calling of Extra Ordinary General Meeting of the Company, proposing the resolution, with suitable explanatory statement.
STEP 5 Holding an Extra Ordinary General Meeting and pass the Ordinary Resolution, in the general meeting or through Postal Ballot under section 110 of the Act (In case of Listed entity or company having more than 200 members).
STEP 6 As per Regulation 30(6) of SEBI (LODR) 2015, in case of a listed company, forward the copies of notice as well as proceedings/minutes of general meeting within 24 hours of such event having taken place.
STEP 7 Once the company makes any allotment, then it shall, within 30 days thereafter, file with the Registrar a return of allotment in Form PAS-3.
STEP 8 Complete all other proceedings in relation for the issue of Certificate of Shares.
STEP 9 In case of a company, whose shares are dematerialized form; inform the depositories about the same for credit to the respective accounts.
STEP 10 Make entry in Register of Members as per section 88 of the Companies Act, 2013

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Disclaimer: –The above mentioned article has been based on relevant provisions of Companies Act, 2013. Under no circumstance, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

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