COMPANY LAW SERIES CHAPTER 3

ISSUE OF EQUITY SHARES WITH DIFFERENTIAL VOTING RIGHTS

While Section 43 enables companies to issue equity shares with differential rights as to dividend, voting rights etc. Rule 4 of Companies (Share Capital and Debentures) Rules, 2014 states the following conditions regarding shares with differential voting rights.

Conditions for issuing shares with differential rights (Rule 4) Companies (Share Capital and Debentures) Rules, 2014

Only a company limited by shares can issue equity shares with differential rights as to dividend, voting or otherwise. Such company has to comply with the following conditions, namely:-

  • the articles of association of the company authorizes the issue of shares with differential rights;
  • the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders. When the 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).
  • 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;
  • the company having consistent track record of distributable profits for the last three years;
  • 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;
  • 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;
  • 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;
  • 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.
  • the company has not been penalized by Court or Tribunal during the last three 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.

Company Law Series Chapter 3(A) Procedure For Issue of Equity Shares With Differential Voting Rights

DISCLAIMER: THE ARTICLE IS BASED ON THE RELEVANT PROVISIONS AND AS PER THE INFORMATION EXISTING AT THE TIME OF THE PREPARATION.IN NO EVENT I SHALL BE LIABLE FOR ANY DIRECT AND INDIRECT RESULT FROM THIS ARTICLE. THIS IS ONLY A KNOWLEDGE SHARING INITIATIVE.

SOURCE:-COMPANIES ACT 2013

THE AUTHOR CAN BE REACHED AT VINAYAK.CHARU@GMAIL.COM

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