COMPANY LAW

Issue of Equity Shares with Differential Rights

The Companies (Share Capital and Debentures) Rules 2014 (“Rules”) comes into force on the date of publication into official gazette. These Rules govern:

(a)      All listed companies

(b)      All private companies

(c)      All unlisted public companies

The Rules however, cannot be in conflict with any other provision in this regard issued by SEBI.

 The equity or ordinary shares do not have voting rights, fixed rate of return and they are not entitled to get capital on winding up before paying up of preference share holder. So, after paying up the dividends to the preference shareholders, equity shareholders are entitled to entire profits. Under the Rules, a company limited by shares may issue equity shares with differential rights (voting and dividends or otherwise) after fulfilment of the following conditions:

• A clause to that effect in article of association
• Authorisation by ordinary resolution in general meeting
• The shares with differential rights cannot exceed 26% of the total post issue paid up capital including equity shares issued with differential rights at any time.
• Companies should have consistent record for past three years for distributable profits.
• Preceding three financial years, there should not be defaulted on any financial statements or annual returns.
• No default in payment of declared dividends to its shareholders
• No default in redemption of matured preference shares or debentures or deposits that have become due.
• No default in repayment of term loan of financial institution/scheduled banks/state level financial institutions
• The company has not been penalised by any court or tribunal for any offence under the following under the following Act:

(i)           RBI Act, 1934

(ii)         SEBI Act, 1992

(iii)       SEBI Contract Regulation Act, 1992

(iv)       FEMA Act, 1999

Conclusion

The issuance of shares with differential voting rights has not been so well used in India so far. Though the mechanism is important to raise the capital but has been misused by promoters to have complete control over the company. Section 86 of the New Companies Act permit issuance of the shares with differential rights subject to Rules. However, shares with differential voting rights can rescue them in the duration of take-overs

This article is contributed by Jyoti Srivastava, Partner Legal Imperials, Head Litigation Desk and the article is only informatory in nature and does not advise for or against the subject to its readers in any manner.