An equity share with differential rights is like an ordinary equity share, but it provides more or fewer voting rights to the shareholder. The difference in voting rights can be achieved by increasing or reducing the degree of the voting power. Companies Act, 2013 allows shares with superior and inferior voting rights. For any company planning to get listed on the stock exchanges, SEBI will allow it to continue to have DVR with superior voting rights only to technology driven companies, obviously subject to certain conditions as discussed later in the article.

Issue of DVRs under Companies Act, 2013

Section 43 of the Companies Act, 2013 provides that Equity share capital can be –

  1. with voting rights or
  2. with differential voting rights as to dividend, voting or otherwise.  

As regards issue of fresh DVR, a company is required to comply with the conditions contained in Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014. Pursuant to the notification dated 5th June 2015, section 43 and conditions given under the rules does not apply to the private company limited by shares in respect of DVR if the memorandum or articles of association of the company provides so.

Conditions contained in Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014 are as follows:

  1. Issue of DVR must be authorised by the Articles of Association (AOA) of the Company.
  2. Issue of DVR is authorized by an ordinary resolution at the General Meeting. In case of companies having more than 200 members, companies are required to pass the resolution through postal ballot. For companies which proposes to list their shares on the stock exchange must pass special resolution, the same has been covered in detail in the later part of this article.
  3. Shares with DVR shall not exceed 26% of the total post issue paid-up equity share capital including equity shares with differential rights issued at any point of time. There is no bar on the quantum of superior or inferior voting right attached to the equity share which means Company may issue shares with differential voting rights which are having voting rights more than 26 % but total post issue paid-up equity share capital shall not exceed 26% including shares with DVR issued at any point of time.
  4. Consistent track record of distributable profits for the last three years

The word “Distributable Profit” is different from the word “Profit”. Companies Act, 2013 does not define distributable profits but sub-section (2) of section 123 of the Companies Act, 2013 states the sources from which company can pay dividend accordingly one can interpret the word Distributable Profit. While Computing distributable profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of liability on measurement of the asset or the liability at fair value shall be excluded. There exist some ambiguity regarding whether company which is in existence for less than 3 years is eligible to issue shares with DVR.

  1. No default in filing financial statements and annual return for three financial years preceding the financial year in which issue is proposed to be made.
  2. No default in payment of declared dividend to equity and preference shareholders.

It is important to note that existing ordinary equity shares of the company cannot be converted into equity shares with differential voting rights and vice versa.

Need of DVR for Start-up companies

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