Shares with differential voting rights

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Purohitha

Purohitha (Querist)
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08 June 2009 Dear all,

Please explain me on issue of shares with differential voting rights in all aspects.

aditi daga

aditi daga (Expert)
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10 June 2009 Indian public limited companies can issue equity shares with differential voting
rights. Previously, only Indian private limited companies could do so.
Section 86 of the Companies Act permits the issue of equity shares with DVRs, subject to conditions prescribed under the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2002 which were made by the Central Government in exercise of the powers conferred by Section 86 (a) (ii) read with Sections 642 (1) (a) and 642 (1) (b) of the Companies Act, 1956.

Under Rule 2 (a) ‘differential voting rights’ includes rights as to dividend or voting; and ‘financial year’ means financial year as defined under Section 2 (17) the Companies Act.

Conditions :

Rule 3 says that every company limited by shares may issue shares with differential rights as to dividend, voting or otherwise, if:

1. it has distributable profits in terms of Section 205 of the Companies Act, 1956 for three financial years preceding the year in which it was decided to issue such shares.

2. it has not defaulted in filing annual accounts and annual returns for three financial years immediately preceding the financial year in which it was decided to issue such share.

3. it has not failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend.

4. its Articles of Association authorize the issue of shares with differential voting rights.

5. it has not been convicted of any offence arising under, Securities Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, Foreign Exchange Management Act, 1999.

6. it has not defaulted in meeting investors’ grievances.

7. it has obtained the approval of share holders in General Meeting by passing a resolution as required under Section 94 (1) (a) read with Section 94 (2) of the Companies Act.

8. it has obtained approval of share holders through Postal Ballot if it is a listed public company

9. the notice of the meeting at which resolution is proposed to be passed is accompanied by an explanatory statement stating:

(a) the rate of voting rights which the equity share capital with differential voting right shall carry;
(b) the scale or in proportion to which the voting rights of such class or type of shares will vary;
(c) the company shall not convert its equity capital with voting rights into equity share capital with differential voting rights and the shares with differential voting rights into equity share capital with voting rights;
(d) the shares with differential voting rights shall not exceed 25% of the total share capital issued;
(e) that a member of the company holding any equity share with differential voting rights shall be entitled to bonus shares, right shares of the same class;
(f) the holders of the equity shares with differential voting rights shall enjoy all others rights to which the holder is entitled to excepting right to vote as indicated in (a) above.

Register:

Under Rule 4, every company referred to in Rule 3 is required to maintain a register in terms of Section 150 of the Companies Act containing the particulars of differential rights to which the holder is entitled.