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.
