As everybody knows that share capital is the capital contributed by the owners of the company. So the capital is of two types. 1 Equity share capital 2. Preferential share capital. Again in the equity share capital there is another class of shares i.e. Equity shares with differential rights. 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.
Equity shares with differential rights generally companies give because they want to improve the capital base but they do not want to lose the control or management of the affairs of the company. By issuing shares with differential voting rights, the share capital will increase but the control and management is still remains in the hand of promoters. Hence the management of the company will not be diluted by issuing shares with differential rights thereby helping the minority shareholders. That is these minority shareholders do not want the change in management but still wants to increase the capital base. In such cases, the issue of shares with differential rights is the correct answer.
In case the company issues shares with differential voting rights that means, generally one share carry one voting power. But in the case of differential voting rights, one share carries more than one voting right or carries with lesser than one voting rights.
The question comes is why the person will take shares with lesser voting rights is that such shares carry higher rate of dividend. Though he is enjoying higher rate of dividend, but his rights in respect of bonus shares, rights shares are remain provided these shares are issued with such facility.
Section 43(2) of the companies act 2013 read with companies (share capital & Debentures rules) 2013 provides that companies can issue equity shares with differential rights subject to the following conditions
1. Articles of association of the company must provide for issue of equity shares with differential voting rights
2. The company shall have a consistent track record of distributable profit for last three years
3. The company shall obtain approval of shareholders by passing general resolution in General Meeting
4. The company shall not have defaulted in filing annual returns /financial statements for the last three years immediately preceding the financial year in which it was decided to issue such shares
5. The company shall not have defaulted in repayment of matured deposits or declared dividend to the shareholders.
6. In case of listed companies, the issue of such shares shall be approved by postal ballot.
7. The company shall not have defaulted in redemption of its preference shares /debentures which are due for redemption.
8. The company shall not have defaulted in repayment of instalment of term loan taken from any public financial institution or state level financial institution or from a scheduled bank that has become due and payable.
9. The company shall not have converted its existing equity share with voting rights into equity shares with differential voting rights and vice versa
10. Further there is no default in respect of statutory dues of the employees of the company
The company having shareholders with superior voting rights are subject to enhanced corporate governance as follows:-
a) At least ½ of the Board and 2/3rd of the committee (excluding audit committee) as prescribed under the SEBI (Listing obligation & Disclosure requirements) regulations 2015 SEBI (LODR) regulations shall comprise of independent directors
b) Audit committee shall comprise only of independent directors
Post the initial public offering by the issuer company, the shares with superior voting rights shall be treated as Ordinary shares in terms of voting rights (One superior voting right share shall have only one vote) in the following circumstances
a. Appointment or removal of independent director and/or auditor;
b. In case where promoter is willingly transferring control to another entity;
c. Related party transactions in terms of SEBI (LODR) Regulations involving the shareholder holding shares with superior voting rights;
d. Voluntary winding up of the company;
e. Changes in the company’s Memorandum or Articles of Association except for changes affecting the shares with superior voting rights;
f. Initiation of a voluntary resolution plan under the Insolvency and Bankruptcy Code;
g. Utilization of funds for purposes other than business;
h. Substantial value transaction based on materiality threshold as prescribed under the SEBI (LODR) Regulations;
i. Passing of special resolution in respect of delisting or buy-back of shares; and
j. Any other provision, as may be notified by SEBI in this regard, from time to time.
Further the shares with superior voting rights shall be converted into ordinary shares in the following circumstances
a) On completion of 5th anniversary of the listing. The validity can be extended once by 5 years through a resolution. But shareholders with superior voting rights are not permitted to vote in such resolutions.
b) On happening of certain events like death, resignation, mergers or acquit ions where control of the management would no longer with the existing shareholder enjoying superior voting rights
Until companies Act 2013, there are no clear cut guidelines on equity shares with differential voting rights. The differential voting rights can be issued in two ways
c) Shares with superior voting rights
d) Shares with fractional rights
Shares with superior voting rights carry much superior voting rights when compared to ordinary shares.Generally these shares will be issued only to the promoters. Shares with fractional rights carry lesser voting rights compared to ordinary shares. Voting share in case of superior voting rights should not exceed 10:1 whereas in the fractional shares the voting share is 1:10 and company shares must be listed in the stock exchange for the last one year. The shareholder holding shares with superior voting rights should be a part of the promoter group whose collective net worth does not exceed INR 500 crores.
Further the Board of directors is required to disclose the following information in their Board report pertaining to the year in which the issue of shares with differential voting rights has been completed
1. Number of shares with differential rights are issued
2. Details of the differential rights either in respect of dividend or voting rights.
3. % of shares with differential rights to the total post issue of equity share capital
4. % of shares with differential rights issued at any point of time
5. % of voting rights enjoying by the shares with differential voting rights to the total voting rights of the share capital
6. Particulars of promoters, directors or key managerial personnel to whom such shares are issued
7. The price at which such shares have been issued.
8. Pre and Post issue of shareholding pattern along with voting rights.
9. Diluted earnings per share pursuant to the issue of shares with differential voting rights.
10. Change of control in the affairs of the company if any post issue of such shares
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