Equity Shares with Differential Rights | Taxmann

Table of Content

1. Equity Shares with Differential Voting Rights
2. Issue of shares with differential rights

1. Equity Shares with Differential Voting Rights 

Conditions to be complied with the company in this regard provision of Companies Act, 2013

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 authorize 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 a 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 that is necessary to provide the facility to members to vote by electronic means under section 108).
  • The shares with differential rights shall not exceed 74% of total voting power, including voting power in respect of equity shares with differential rights issued at any point of time; (MCA Notification G.S.R. 574(E) dated 16th August 2019
  • 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 a dividend;
  • 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 Regulations Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

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;

However, 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.

2. Issue of shares with differential rights

As per Rule 4(4) of the Companies Act, 2013, The Board of Directors shall, among other things, disclose in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed, the following details, namely:-

• • the total number of shares allotted with differential rights;
  • the details of the differential rights relating to voting rights and dividends;
  • the percentage of the shares with differential rights to the total post issue equity share capital with differential rights issued at any point of time and percentage of voting rights which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;
  • the price at which such shares have been issued;
  • the particulars of promoters, directors or key managerial personnel to whom such shares are issued;
  • the change in control, if any, in the company consequent to the issue of equity shares with differential voting rights;
  • the Diluted Earnings Per Share pursuant to the issue of each class of shares, calculated in accordance with the applicable accounting standards;
  • the pre and post issue shareholding pattern along with voting rights.