Issue of Shares without Voting Right under Companies Act, 2013

Introduction:

Provisions of section 43 and 47 deals with the kinds of shares which may be issued by a Company and the voting rights attached to such shares. In this article we will analyze the present law with reference to the issue of shares without voting rights.

Kinds of Share Capital:

The share capital of a company limited by shares shall be of two kinds, namely:—

(a) Equity share capital:

• with voting rights; or
• with differential rights as to dividend, voting or otherwise; and

(b) Preference share capital

As per the provisions of the Companies Act, 2013 these limitations on kinds of share capital applied to all Companies including private Companies also. Therefore even private Companies could not structure their share capital in the form and fashion that they deem fit unless in conformity with the requirement of the said Act.

However, as per the recent amendment in Companies Act, 2013, now private Companies have been exempted from the requirement of provisions of section 43 and 47 of the Companies Act, 2013 subject to the provisions contained in the memorandum and articles of the Company i.e. in a nut shell Private Companies have now been given the freedom to structure their share capital in accordance with their requirement.

Voting Rights:

Section 47 of the Companies Act deals with the provisions pertaining to the voting rights of the members which states that:

• 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

• His voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company.

Further, preference shareholders are also given voting rights on the matters directly affecting their rights and, any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital. Where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.

It is pertinent to note here that as per the Companies Amendment Act, 2015, the Private Companies now have been given exemption, subject to the provisions contained in the memorandum and articles of the Company from the above requirement also.

Shares with Differential Rights:

• The equity shares issued “with differential rights as to dividend, voting or otherwise” would mean having rights different than the rights attached with the equity shares with voting rights. Such rights may be different in nature as regards dividend, as regards voting, or as regards “otherwise”.

• As per the Companies Act, 2013, when a Company issues equity shares with differential rights, they are required to adhere certain conditions.

• The Companies (Share Capital and Debentures) Rules, 2014 lays down several conditions for a company to issue equity shares with differential voting rights. The Share with differential rights at any point of time shall not exceed 26% of the total post issue paid up equity share capital, including equity shares with differential rights issued.

Can a Company Issue Non Voting Share:

 It is a debatable question that a Company can issue non-voting share, it may be argued that section 47 offers every member a right to vote and therefore, a company cannot issue non-voting shares.

• As per the provisions of section 43 of the Companies Act, 2013 a Company may issue equity shares with voting rights or with differential rights as to dividend, voting or otherwise, further, section 47 offers every member a right to vote. If we read the provisions of both of the above stated provision then it may be said a Company may issue shares with differential right as to dividend or voting but it cannot issue shares without voting right at all.

• However, as per the Companies Amendment Act, 2015 now the Private Companies subject to the provisions of memorandum and articles of the Company have been given exemption from both of the above provision, hence making the situation of Private Companies at par with the situation as was in erstwhile Companies Act, 1956, which allows Private Companies to issue nonvoting right shares.

Conclusion:

In a view of above stated provision it may be said that by virtue of the Companies Amendment Act, 2015, a Private Company unless it is a subsidiary of Public Company may issue without voting right shares including the nonvoting preference shares, subject to the provisions of memorandum and articles of the Company. However, a public Companies shall still be subjected to the provisions of section 43 and 47 of the Companies Act, 2013, hence cannot issue nonvoting right shares.

The said amendment would benefit all Private Companies who wish to raise funds by structuring their capital without dilution of control.

(Author is a Company Secretary from Delhi and can be contacted at [email protected])