Applicable Provisions: Section 43 of Companies Act, 2013 r/w Rule 4 of Companies (Share Capital and Debentures) Rules, 2014.

Section 43 enables a company to issue equity shares with differential voting rights as to dividend, voting rights, etc. and at the same time Rule 3 of 2014 Rules states that the provisions of these rules stand applicable to:

-All Unlisted Public Companies,

-All Private Companies, and

-Listed companies so far as they do not contradict or conflict with any other regulation framed in this regard by the Securities and Exchange Board of India

Whereas Rule 4 states the conditions for issuing such shares, and the same are mentioned below (applicable only to the company limited by shares):

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 and if 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. (Though with Companies (Amendment) Act, 2017 coming into force, any item of business required to be transacted by means of postal ballot, may be transacted at a general meeting by a company which is required to provide the facility to members to vote by electronic means under section 108).

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.

4. 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.

5. 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.

6. 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 (IEPF) to the Central Government.

7. However, such company may issue equity shares with differential rights upon expiry of 5 years from the end of the financial year in which such default was made good.

8. The company hasn’t been penalized by Court or Tribunal during the last 3 years of any offence under the RBI Act, 1934, the SEBI 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.

Let’s now talk about the procedure to issue such shares:

1. Ensure that Articles of Association gives power to issue such type of shares, and if not, then amend the same.

2. Hold Board Meeting to issue further notice of holding General Meeting regarding issuance of shares.

3. If the company is listed on any of the recognized stock exchange, then within 30 minutes of the closure of the such Board Meeting intimate to the concerned Stock Exchange about the decision taken at the Board Meeting.

4. Pass the ordinary resolution in the general meeting or through Postal Ballot under Section 110 of the Act.

5. 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.

6. Once the company makes such kind of allotment, then it shall, within 30 days, 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.

7. Complete any other formalities 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.

8. Intimate the details of allotment of shares to the Depository immediately on allotment of such shares, in case of dematerialization.

9. Maintain the Register of Members under section 88 containing all the relevant particulars of the shares so issued along with details of the shareholders.

10. And finally, company must ensure that no conversion of its existing equity share capital with voting rights into equity share capital carrying differential voting rights take place and vice–versa.

Note: The above-mentioned procedures and conditions are Ad Verbatim as per the same given under Companies Act, 2013 and Companies Rules of 2014 as cited earlier.

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Disclaimer: – The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation, and the views expressed here are personal in nature. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.

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Qualification: CS
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Location: Shubham Phophalia, Gujarat, India
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I am Shubham from Batch 2016-21 of GNLU. I am in my final year of 5 years integrated BA LLB course from GNLU, Gandhinagar, and I have completed Company Secretary Course meanwhile with 3rd Rank in Ahmedabad, Gujarat in CS Professional. I am a keen reader and enthusiastic listener of Corporate laws an View Full Profile

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