Equity shares with differential rights

A company limited by shares can raise capital by issuing shares that can either be a preference or equity shares. A company may issue its shares to a particular group of persons through private placement or also to the general public. Both of the shareholders are considered to be the owners of the company.

The feature that distinguishes an equity share from a preference share is that preference shares have a priority over equity shares in terms of paying dividends and repayment of capital in the event of winding up of the company. The preference shareholders are also entitled to a fixed dividend.  The equity shareholders, on the other hand, are those who invest their funds at greater risk in a company and hence are entitled to a higher return than preference shareholders. Equity shareholders are not entitled to a fixed dividend like that of preference shareholders but they are entitled to vote at the company’s general meetings.

Apart from the above two kinds of shares, one more type of equity shares that can be issued by a company are known as equity shares carrying rights that are differential. These rights which are differential shall be pertaining either to dividend or power of voting. In simple words, equity shareholders with differential rights enjoy the dividend rights and voting powers which vary from the rights of the ordinary shareholders (i.e those holding equity shares with such rights that are not differential)

Let us further get to know about the issue of equity shares with differential rights along with the legal provisions of the Indian Company Law applicable to such shares.

Issue of equity shares with differential rights- Rules applicable under Companies Act, 2013   

1) The issue of equity shares with differential rights shall be authorized by the Articles of Association of the company proposing to issue such shares.

2) Such an issue shall be authorized by passing an ordinary resolution at the general meeting of the company.

In case the equity shares of the company are listed on a recognized stock exchange, then such an issue shall be ratified by the shareholders through voting by postal ballot.

3) The power of voting which such equity shares bear shall not exceed 74% of the total voting power. Even though these shares are issued afresh in the future, the limit of 74% shall always be maintained.

4) The issuing company shall not have made a default in filing annual returns and financial statements for the last 3 years before the year of the issue.

5) The company shall also not make default in payment of dividend once it is declared. Also, payments in respect of deposits that have matured, debentures, and preference shares due to be redeemed shall be made by the company. The interest on the same if any shall also be included.

6) The company shall not have defaulted in payment of dividend on preference shares, repayment of loan taken from public financial institutions, state-level financial institutions or a scheduled bank, statutory payments due to be paid to employees (i.e provident fund, gratuity, etc.), crediting the amount to the IEPF (Investor Education and Protection Fund)

In case any of the above default is made, then such equity shares shall not be issued until a period of 5 years has expired from making good the losses.

7) The company shall not be levied with a penalty by a Court or Tribunal for any offense under the RBI Act, SEBI Act, Securities Contract (Regulation) Act, FEMA in the last 3 years prior to the year of issue.

8) The explanatory statement attached to the notice of the general meeting where such issue shall be placed for approval shall contain the details of the issue such as- the total number of shares to be issued with rights that are differential, details of rights that are differential, the issue price of such shares, persons in whose favor such shares are issued if they are the directors or key personnel of the company and such other details as prescribed by the rules.

9) No company shall convert its existing equity shares into equity shares with differential voting rights and vice versa.

10) The details of the issue as prescribed shall be disclosed by the Board of Directors of the company in the Board’s Report of the financial year in which the issue of such shares is completed.

11) Holders of shares with differential rights shall also be entitled to benefits like bonus shares and right shares and the shares so received under this benefit shall also carry the differential rights.

12) The Register of Members as maintained by the company shall also include the particulars of the issue of equity shares with differential rights along with the details of its holders.

Equity shares with rights that are differential in nature shall thus be issued by upholding shareholder’s democracy in a company and such issue shall not be made to for abusing the power conferred by such shares.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.