EQUITY SHARES WITH DIFFERENTIAL RIGHTS

According to Section 43 of the Companies Act, 2013 as we have already discussed in detail here, Equity share capital may be Equity Share Capital with voting right or Equity Share Capital with differential right as to dividend, voting or otherwise.

Rule 4 of the Companies (Share Capital and Debentures) Rules 2014 deals with equity shares with differential rights.

Which Company may issue:

A company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, when it complies with the following conditions, namely:-

(a) The articles of association of the company authorize the issue of shares with differential rights.

(b) The issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders. Where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot.

(c) the shares with differential rights shall not exceed twenty-six percent of the total

post-issue paid up equity share capital including equity shares with differential rights issued at any point of time.

(d) The company having consistent track record of distributable profits for the last three years;

(e) The company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares.

(f) The company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend.

(g) The company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government.

(h) the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

This may be noted here, penalty by regulators itself cause no disqualification.

Explanatory Statement Annexed to Notice:

The explanatory statement to be annexed to the notice of the general meeting or of a postal ballot shall contain the following particulars, namely:-

(a) The total number of shares to be issued with differential rights;

(b) The details of the differential rights;

(c) The percentage of the shares with differential rights to the total post issue paid up equity share capital including equity shares with differential rights issued at any point of time;

(d) The reasons or justification for the issue;

(e) The price at which such shares are proposed to be issued either at par or at premium;

(f) The basis on which the price has been arrived at;

(g) In case of

(i) Private placement or preferential issue-

(a) details of total number of shares proposed to be allotted to promoters, directors and key managerial personnel;

(b) details of total number of shares proposed to be allotted to persons other than promoters, directors and key managerial personnel and their relationship if any with any promoter, director or key managerial personnel;

(ii) Public issue-

Reservation, if any, for different classes of applicants including promoters, directors or key managerial personnel;

(h) The percentage of voting right which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;

(i) The scale or proportion in which the voting rights of such class or type of shares shall vary;

(j) The change in control, if any, in the company that may occur consequent to the issue of equity shares with differential voting rights;

(k) The diluted Earning per Share (EPS) pursuant to the issue of such shares, calculated in accordance with the applicable accounting standards;

(l) The pre and post issue shareholding pattern along with voting rights as per clause 35 of the listing agreement issued by Security Exchange Board of India from time to time.

Please note here, Clause 35 is specially made applicable to the company issuing equity shares with differential rights for the purpose of this sub – rules.

No Conversion:

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

Disclosure in Board’s Reports:

The Board of Directors shall, inter alia, disclose in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed, the following details, namely:-

(a) The total number of shares allotted with differential rights;

(b) The details of the differential rights relating to voting rights and dividends;

(c) The percentage of the shares with differential rights to the total post issue equity share capital with differential rights issued at any point of time and percentage of voting rights which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;

(d) The price at which such shares have been issued;

(e) The particulars of promoters, directors or key managerial personnel to whom such shares are issued;

(f) The change in control, if any, in the company consequent to the issue of equity shares with differential voting rights;

(g) The diluted Earning per Share (EPS) pursuant to the issue of each class of shares, calculated in accordance with the applicable accounting standards;

(h) The pre and post issue shareholdings pattern along with voting rights in the format specified under sub-rule (2) of rule 4.

General Rights available:

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

Entry in Register of Members:

Where a company issues equity shares with differential rights, the Register of Members maintained under section 88 shall contain all the relevant particulars of the shares so issued along with details of the shareholders.

The differential rights attached to such shares issued by any company under the provisions of Companies Act, 1956, shall continue till such rights are converted with the differential rights in accordance with the provisions of the Companies Act, 2013.