Worried about losing control in Company? Issue Shares with Differential Voting Rights

When we think about issue of shares in a Company consequently & automatically we think about the ownership of stake in that company by the shareholder. It is quite often that equity shareholder is somehow the owner of the Company, but what to do if we want to raise the money simultaneously we don’t want that the ownership get transfer to other person?…..in this case we have a gateway option given in the Companies Act itself under Section 43(a)(ii),  which talks about “Issue Of Share With Differential Voting Rights”, which means we can issue equity share without affecting the ownership over the Company.

However there are two requirements to proceed further:-

First is, checking the Articles of Association (AOA) of the Company whether power is given to issue equity shares with DVRs, or not (If not then amend the AOA).

Second is, if the power persists in the AOA then hold the General Meeting & Pass the Ordinary Resolution for issue of equity shares with DVRs.

Now, there are some conditions which required to be met before you go for the issue…….so according to Rule 4 of Cos. (Share Capital & Debenture) Rules, 2014, the condition for issue of equity with DVRs are as follows:-

• Equity with DVRs shall not be more than 26% of the Post Issue Share Capital (Cannot issue much amount through DVR).
• Company issuing DVRs shall have a consistent track record of Distributable Profits for last Three (3) Years.
• Company should not have made default in filling Financial Statement & Annual Return for last Three (3) Years.
• No default shall be made in payment of declared dividend, repayment of matured deposits or redemption of its preference shares/debentures/payment of any interest thereon.
• Company has not been penalized by court/Tribunal during the last three years of offence under:-

-RBI Act

–SEBI Act

-SCRA Act

-FEMA Act

-Special Act

To issue shares with differential voting rights company shall hold General Meeting…and for convening General Meeting Notice shall be duly sent with Explanatory Statement, where Explanatory Statement shall contain:-

• Total Number of Shares
• Detail of Differential rights
• Percentage of shares with DVRs (Total post issue capital including equity with Differential Voting Rights).
• Reason/justification of issue
• Price at which such shares are issued/at premium
• Basis of computation of price of the shares
• Percentage of Voting rights etc.

Point to be noted: A Company cannot convert its existing equity share capital with voting rights into shares with Differential Voting Right and vice-versa.

In the Board Report for the Year in which such issue has been taken place, Director’s shall disclose:

• Total Number of shares allotted with DVRs.
• Details of Differential Rights, whether is to Dividend or whether is to Voting Right.
• Percentage of shares i.e. post issue share capital.
• Price of the Share
• Particulars of promoters and Directors, KMPs to whom such shares are issued.
• Change in control, if any.
• Diluted Earnings Per Share (EPS).

Well we have discussed lots of important points on issue off share with differential voting rights but some other important aspects are:

• Shares with DVR holder enjoys all other rights pertaining to that issue i.e. entitlement for Bonus Share, Right Shares etc.
• Register of Members shall contain all detailed particulars of the shareholder of Shares with DVRs.

(The author is a Company Secretary in Practice & can be reached at mail@csdeepikashukla.com)