One of the main rights attached with shares is the right to vote. Shares with differential voting rights (DVR’s) are those shares which have higher or lower voting right as compared to Ordinary Equity Shares. They are listed and traded in the same manner as ordinary equity shares but are usually traded at a discounted price due to low voting rights. Shares with higher voting rights are issued by the promoters body to themselves or their relatives to increase their control in the decision making process of the Company which is in excess of their economic interest in the Company and shares with lower voting rights are issued to outsiders/passive investors who are not much interested in the decision making process but are interested in financial gains like shares with discounted rate and/ or shares with higher dividend rate. Issue of Shares with DVR’s is also done by the Companies to protect themselves from corporate actions such as takeovers.
Prior to the enforcement of The Companies (Amendment) Act, 2000, Companies in India were not allowed to issue equity shares with differential voting rights but after the said amendment act Section 86 (New Issues of Share Capital to be only of Two kinds) of the Companies Act, 1956 was substituted to include equity share capital- with voting rights or with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such condition as may be prescribed and Section 88 (Prohibition of issue of Shares with disproportionate rights) of the Act was repealed.
The Central Government also notified The Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001 wherein the conditions for Issue of Share Capital with Differential Voting Rights were set out. The conditions are as follows1:
Every company limited by shares may issue shares with differential rights as to dividend, voting or otherwise, if-
- The company has distributable profits in terms of Section 205 of the Companies Act, 1956 for three financial years preceding the year in which it was decided to issue such shares.
- The company has not defaulted in filing annual accounts and annual returns for three financial years immediately preceding the financial year in which it was decided to issue such share.
- The company has not failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend.
- The Articles of Association of the company authorises the issue of shares with differential voting rights.
- The company has not been convicted of any offence arising under, Securities Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, Foreign Exchange Management Act, 1999.
- The company has not defaulted in meeting investors’ grievances.
- The company has obtained the approval of share holders in General Meeting by passing resolution as required under the provision of sub-clause (a) of subsection (1) of section 94 read with subsection (2) of the said section.
- The listed public company obtained approval of share holders through Postal Ballot.
The notice of the meeting at which resolution is proposed to be passed is accompanied by an explanatory statement stating –
- the rate of voting rights which the equity share capital with differential voting right shall carry;
- the scale or in proportion to which the voting rights of such class or type of shares will vary;
- the company shall not convert its equity capital with voting rights into equity share capital with differential voting rights and the shares with differential voting rights into equity share capital with voting rights;
- the shares with differential voting rights shall not exceed 25% of the total share capital issued;
- that a member of the company holding any equity share with differential voting rights shall be entitled to bonus shares, right shares of the same class;
- the holders of the equity shares withdifferential voting rights shall enjoy all others rights to which the holder is entitled to excepting right to vote as indicated in (a) above.
Tata Motors was the first Company in India to issue rights shares with DVR option in 2008 followed by Pantaloon Retail (India) Ltd which issued bonus shares with DVR option in 2009. But after the case of Anand Pershad Jaiswal v. Jagatjit Industries Limited2 where after the issue of Shares with DVR’s; the voting rights of the promoters increased to 62% who held only 32% of economic stake in the company, concerns were raised that issue of shares with DVR’s may become a tool in the hands of the promoters to increase their control and voting rights in the company by way of issuing shares with superior voting rights to themselves, hence in July 2009, SEBI made amendments in the Listing agreement whereby a new Clause 28 A was inserted which can be read as follows3:
28 A The company agrees that it shall not issue shares in any manner which may confer on any person, superior rights as to voting or dividend vis-a-vis the rights on equity shares that are already listed
Shares with DVR’s are good option for those Companies where the promoters want to bring public funds in their company without losing control over the decision making process at the cost of an increased dividend rate. It is also beneficial for those shareholders who are more interested in higher rate of dividend rather than taking part in the decision making process of the Company. The amendment in the Listing Agreement has restricted Listed Companies to issue shares with DVR’s having superior rights with respect to voting or dividend but the option remains open for Private and Public Limited Companies.23