In this article, we will discuss equity shares with the differential right. However, before diving deep into the core topic, we shall first understand; what is Share as per the Companies Act, 2013. The Companies Act 2013 defined it under Section 2 clause 84 as “Share means a share in the share capital of the company and includes stock”.
In more generic terms, when someone acquires the shares of the company, then acquirer and company enter into a contract as per the provisions of the act. Further, shares in the company represent the interest of the shareholder in the company. It signifies the right and liabilities of the shareholder towards the company. The right of shareholders to receive dividends declared by the company. The liability of the shareholder; to contribute to the asset of the company in the case of its winding-up.
Further, section 43, divides share capital broadly into two kinds;
1. Equity shares, and
2. Preference Shares.
Equity share capital are further divided into two kinds; equity share capital with
- Voting Rights;
- Differential Rights as to dividend, Voting and otherwise. Before moving further with equity share capital with differential rights, lets first understand; what is equity share.
Equity share capital, with reference to any company limited by shares, means all share capital which is not preference share capital. Equity share capital does not have any preferential right. However, it may have differential rights.
As we discussed above, equity share capital is of two kinds equity share capital with voting rights and differential rights as to dividends, voting and otherwise.
EQUITY SHARE CAPITAL WITH VOTING RIGHT
Equity share capital with the voting right is also called ordinary shares and does not have any special right attached to them. Generally, their voting right is in the proportion of shares in the paid-up share capital of the company (Ref. Section 47 of the Companies Act, 2013).
EQUITY SHARE CAPITAL WITH DIFFERENTIAL RIGHTS
The second type of equity share capital is equity share capital with differential rights. The equity share with differential rights shall be different from the ordinary shares with respect to voting, dividend, and otherwise.
EQUITY SHARES CAPITAL WITH DIFFERENTIAL VOTING RIGHT
Shares with differential voting rights are those shares that either have; higher voting right or lower voting right on each share as compared to ordinary shares.
SCOPE OF EQUITY SHARES CAPITAL WITH DIFFERENTIAL VOTING RIGHT
Rights related to differential voting may be exercised in all cases, except when voting is through the show of hand. The second important point vis-à-vis shares with the differential voting right are concerned; whether it includes equity shares with no voting right. To answer this question, we have to go to section 47 sub-section (1) of the Companies Act 2013. As per section 47 subsection (1), every member of a company limited by shares and holding equity share capital therein shall have a right to vote on every resolution placed before the company, and voting right shall be in proportion to his share in the paid-up equity share capital of the company. However, it is to be noted that these voting power are subject to the provisions of two sections of the Companies Act 2013, namely Section 50 and Section 188. We shall discuss about the impact of section 50 and 188 in separate article.
WHAT KIND OF DIFFERENTIATION DOES EQUITY SHARES MAY HAVE WITH RESPECT TO VOTING AMONGST THEMSELVES
Shares may be different in voting in these two terms broadly;
1. Shares may have more than or less than one share of one vote; however, such differentiation shall not go against the basic fundamental of democratization of the voting power.
2. Shares may have voting right only with respect to a certain matter.
SHARES WITH DIFFERENTIAL RIGHT WITH RESPECT TO DIVIDEND
Equity shares may have dividend right more or less than other equity shares or the right to have dividends only over a certain division of the company.
WHAT IS “OTHERWISE” IN EQUITY SHARE CAPITAL WITH DIFFERENTIAL RIGHT
The word “otherwise” is not defined under the Companies Act 2013. So “otherwise” is inclusive in nature and may include rights such as;
- Right to participate in the management of the company.
- Some kind of veto power when a company enter into any corporate restructuring.
- Exclusive right over the assets of the particular division or undertaking of the company.
SOME IMPORTANT POINTS TO REMEMBER WHILE ISSUE EQUITY SHARE CAPITAL WITH DIFFERENTIAL RIGHT
1. Article of Association shall have provision with respect to the issue of equity share capital with the differential right.
2. Such an issue much be approved by the Ordinary resolution.
3. The voting power shall not exceed 74% of the total voting power.
4. No default in annual filing, etc.
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