Overview

Differential Voting Rights [“DVR”] means differential rights as to higher or lower dividend, voting or otherwise associated with equity/ ordinary shares of a company in India. It is an exception to the general rule of ‘one share-one vote’. For instance, an equity share offering higher dividends are typically priced lower at issuance and; in return, the voting rights are limited.

It helps companies which prefer equity over debt capital in raising funds through issuance of equity shares without resulting in dilution of control. Usually, this kind of structure enables promoter/ founder led companies to retain decision-making powers and rights vis-à-vis other shareholders.

Regulatory Framework in India

Section 43(a)(ii) of the Companies Act, 2013 [“Act”] permits a company incorporated under the Act and having share capital limited by shares to have equity shares with differential voting rights as part of its share capital. The differential rights appended to such equity shares may be with respect to dividend, voting or otherwise. Such equity shares may be issued by a company in accordance with the conditions specified in Companies (Share Capital and Debentures) Rules, 2014 prescribed under the Act.

Conditions for issuance of equity shares with DVR

Rule 4 of Companies (Share Capital and Debentures) Rules, 2014 [“Rules“] sets out following requirements to be complied with by the companies which intend to issue shares with differential rights as to dividend, voting or otherwise:

• The articles of association of the company shall authorize the issue of shares with differential rights;
• The issue of such shares with DVR shall be authorized by an ordinary resolution passed at a general meeting of the shareholders;
• The voting power in respect of such shares shall not exceed 74% of total voting power at any point of time;
• The company shall have a consistent track record of distributable profits for the last three years;
• The company has not defaulted in filing financial statements and annual returns for preceding three financial years;
• The company has no subsisting default in the payment of dividend, repayment of deposits, redemption of preference shares or debentures or interest thereon;

The company has not defaulted in following payments:

• Dividend on preference shares
• Repayment of any term loan or interest thereon
• Statutory dues relating to its employees;
• Credit to Investor Education and Protection Fund

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.

The company has not been penalized by any Court or Tribunal during the last three years of any offence under the following acts:

• Reserve Bank of India Act, 1934;
• Securities and Exchange Board of India Act, 1992;
• Securities Contracts Regulation Act, 1956;
• Foreign Exchange Management Act, 1999;
• Any other special Act under which such companies being regulated by sectoral regulators

Conversion of shares with DVR

The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice–versa.

Rights of shareholders with DVR

The holders of the equity shares with differential rights enjoy all rights such as bonus shares, right shares etc., which the holders of other equity shares are entitled to, subject to the differential rights with which such shares have been issued.