The share capital is the contribution by the Owners of the Company. As per the provisions of the Companies Act, 2013, share capitals are of 2 kinds: –

1. Equity

2. Preference

Again the Equity shares/ capital can be further divided into: –

1. Equity shares with voting rights

2. Equity shares without voting rights.

These shares are known as shares with Differential Voting rights related to voting power (either more voting rights or less voting rights). Some shall carry voting rights and others may not. The shares with lesser voting rights can carry higher divided rates and vice a versa.

Shares with Differential Voting Rights (DVRs)

Initially, there was no provision for issuing DVR Shares under the erstwhile Companies Act, 1956. However, vide Companies (Amendment) Act, 2000Section 86 of the Companies Act, 1956 was amended to include shares having differential rights as to dividend, voting or otherwise, as equity shares. The company issues DVRs in order to improve their capital structure without diluting or losing control or management affairs of the company. This enables the promoters to retain their control over the Company even when new investors are introduced. The issue of normal equity shares means one share one voting right. But in case of DVRs it means one share may or may not carry one voting rights.

Section 43(2) of the companies act 2013 read with Companies (share capital & Debentures rules) 2014 provides that companies can issue equity shares with differential rights subject to the following conditions: –

1. DVRs authorized by Articles of Association.

2. The company shall obtain approval of shareholders by passing general resolution in General Meeting

3. 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

4. The company shall not have defaulted in repayment of matured deposits or declared dividend to the shareholders.

5. In case of listed companies, the issue of such shares shall be approved by postal ballot.

6. The company shall not have defaulted in redemption of its preference shares /debentures which are due for redemption.

7. 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.

8. The company shall not have defaulted in crediting the amount in Investor Education and Protection Fund to the Central Government.

9. the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934 , the Securities and Exchange Board of India 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

10. The company has not defaulted in payment of dues with respect to statutory payments relating to its employees to any authority

11. The company shall not have converted its existing equity share with voting rights into equity shares with differential voting rights and vice versa.

Limit in Issue of DVRs

The Companies (Share Capital and Debentures) Rules, 2014 was amended. The amendment provided that the condition for the issue of shares with differential voting rights should not exceed 74%, including equity shares with differential rights at any point in time. Earlier to the amendment, the rules provided that the condition for the issue of shares with differential voting rights should not exceed 26%.

Now, the companies can have up to 74% of differential voting right equity shares in the total post issue paid-up share capital. This amendment which increased the limit for the issue of shares with differential voting rights up to 74% is beneficial to the startups.

The amendment removed the condition that the company should earn distributable profits in the last three years to issue DVRs. However, the shares with superior voting rights must be held for a period of at least six months preceding the filing of the red herring prospectus.

DVRs for Startups

The issue of DVRs will help the Indian companies and the promoters of startups that are identified by investors globally. These global investors can acquire controlling stakes in Indian companies/startups through DVRs. By issuing DVRs, the startups and Indian companies attract global investors and gain access to cutting-edge technology development and innovation undertaken by them. The DVRs will enable the promoters of Indian companies to retain control while raising equity capital from global investors and create a long-term value for shareholders and the company’s growth.

Disclosure in Boards Report

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 DVRs issued

2. Details of DVRs 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. Details of the Shareholders to whom such shares have been issued i.e. either promoter/ director (including relatives)/ KMPs/ employees or public offerings.

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.


Disclaimer: This article is written merely for informational purposes and it should not be taken as a legal advice. The readers are advised to consult competent professionals before acting on the basis of any information provided here.

Author Bio

Qualification: CS
Company: N/A
Location: Bangalore, Karnataka, India
Member Since: 31 Jul 2021 | Total Posts: 9
Prerna Hunagund is a Practising Company Secretary, Graduate in Commerce & an Associate Member of the Institute of Company Secretaries of India, New Delhi, having knowledge in Corporate and Secretarial Law. View Full Profile

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September 2021