Differential Voting Rights of Company under Companies Act 2013

The meaning of term differential voting rights is the difference between voting rights of two classes of shareholders. Now, this difference can either give them more or less voting rights. In this article we will understand the concept of Differential Voting Rights of Company. We will see that what are the relevant legal provisions for such issue? Also, will discuss the conditions that a company should fulfil to issue such shares.

Meaning of Differential Voting Rights of a Company

Section 43(ii) of the Companies Act, 2013 allows the company to issue shares with differential rights. It also specifies that differential rights of a company can differ in terms of voting, dividend or otherwise. The differential voting rights of a company means the equity shares that have either more or less voting rights compared to other shareholders. Normally,

• The shares with more voting rights have less dividend rates
• And the shares with more dividend have less voting rights.

KMP’s or directors of the company generally get the shares with more voting rights.

Class of Shares with Differential Voting Rights

As discussed above, company can issue equity shares with Differential Voting Rights. The preference shares anyhow carry preferential rights over equity shareholders. However, equity shareholders with differential voting rights have an advantage over other equity shareholders.

Also the company cannot convert its existing equity shares to shares with differential voting rights or vice-versa.

When can a company issue shares with Differential Voting Rights?

As per Rule 4 of Companies (Share Capital and Debentures) Rules, 2014 a company needs to satisfy following conditions to issue shares with Differential Voting Rights-

• The articles of association of a company should contain provision to issue such shares.
• An ordinary resolution should be passed at a general meeting of shareholders.
• The total voting rights given in the form of differential voting rights cannot increase 74% of total. The percentage of 74% will include all shares issued with differential voting rights at all times.
• There should not be any default in filing financial statements and annual returns during the previous three years preceding the year of issue.
• The company has not defaulted in payment any of following dues-
• Declared dividend payment
• Payment of interest on debentures or deposits.
• Repayment of matured deposits or redemption of preference shares.
• There is no default by company in repayment of loan or payment of interest on a loan from a public financial institution, scheduled bank etc.
• The company has not defaulted in paying statutory dues relating to employees and payment in Investor Education and Protection Fund.
• Company should not be penalised by court or tribunal for any offence under RBI act, SARFAESI Act, SCRA Act, FEMA and any other similar acts regulating companies.

Still a company defaulting in any of the above cases (except last point) can issue shares with differential voting rights. It can issue such shares after 5 years of making good the defaults.

Procedure to issue shares with Differential Voting Rights by a Company

Following is the procedure to issue shares with differential voting rights:-

• First and foremost company has to amend its articles of association by a Special Resolution if same does not authorise to issue such shares.
• A board meeting should be scheduled to discuss the issue of shares with differential voting rights. Board members should also decide the schedule for General meeting.
• EGM notice should contain an explanatory statement. It should contain all needed details. The details include price, justification, number of shares, percentage of voting rights, dilution of existing shareholders etc. That means all necessary details required by shareholders to arrive at a decision.
• The company should pass an ordinary resolution in General Meeting. The listed company has to pass this resolution by way of postal ballet.
• The company can allot shares after the resolution. The details of allotment should be given to ROC under from PAS-3.
• The company should give share certificates to shareholders and also alter its register of members.

Wrap up

The above discussion gave us an insight on the concept of shares with differential voting rights of a company. The shares that are issued with differential voting rights gives an edge to the shareholders having such shares. Although these shareholders are ranked below preference shareholders in all aspects, still they have an advantage over other equity shareholders. The shareholders having differential voting rights of a company can impact any decision even if they are less in number. However, to issue shares with differential voting rights company should fulfil all conditions and follow the necessary procedure.