Equity shares are the most common form of ownership in a company. They represent a proportional ownership in the company’s profits and assets. However, in recent times, there has been a growing trend in companies offering equity shares with differential rights. Equity shares with differential rights, also known as DVRs, are shares that have different rights attached to them than ordinary shares.
Meaning of Equity Share
Equity shares are a crucial component of a company’s capital structure and are considered the most important type of stock for a company. The Companies Act, 2013 defines equity shares as a type of security that represents ownership in a company and provides voting rights to the shareholder. These shares can be traded on stock exchanges, and their value is dependent on the financial performance of the company.
Key Features of Equity Shares
The following are the key features of Equity Shares:
- Represent Ownership: Equity shares represent ownership in a company and provide the shareholder with a portion of the company’s profits and assets.
- Voting Rights: Equity shareholders have the right to vote on important matters such as the appointment of directors, changes to the company’s articles of association, and major business decisions.
- Dividends: Equity shareholders are entitled to receive dividends declared by the company. The amount and frequency of dividends are determined by the company’s board of directors.
- Residual Claims: In the event of liquidation, equity shareholders are considered residual claimants and are entitled to any remaining assets after all debts and obligations have been satisfied.
- Transferable: Equity shares are transferable, which means they can be sold or traded on stock exchanges.
Equity Shares with Differential Rights under Companies Act, 2013
Equity shares with differential voting rights (DVRs) are the kind of shares issued by a company that offers shareholders varying levels of the voting power. This means that some shareholders have more voting power than others and this can significantly impact the control and decision-making capabilities of the company. In India, the Securities and Exchange Board of India (SEBI) first introduced the concept of DVRs in 2000. However, they are not so popular in India.
Companies can issue DVRs with different voting rights in two ways:
Inferior Voting Rights: Under this scheme, a company can issue shares with fractional voting rights. For example, a shareholder may be given 1:5 rights, meaning they get 1 vote for every 5 shares owned.
Superior Voting Rights: Under this scheme, a company can issue shares that offer multiple votes per share. For example, shareholders may be given 5:1 rights, which makes it 5 votes per share owned.
Section 43 of the Companies Act, 2013 deals with the issuance of equity shares with differential rights. It states that a company may issue equity shares with differential rights, including the right to receive dividends, voting rights, or any other rights, in accordance with the rules prescribed by the central government.
The central government, in turn, has prescribed the rules for the issuance of equity shares with differential rights through the Companies (Share Capital and Debentures) Rules, 2014. These rules set out the conditions and requirements that companies must follow when issuing such shares.
Conditions to be complied with the company in this regard provision of Companies Act, 2013
Conditions for issuing shares with differential rights (Rule 4) Companies (Share Capital and Debentures) Rules, 2014: Only a company limited by shares can issue equity shares with differential rights as to dividend, voting or otherwise. Such company has to comply with the following conditions, namely:-
- The articles of association of the company authorize the issue of shares with differential rights;
- The issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders.
- When 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 a postal ballot.
- Though with Companies (Amendment) Act, 2017 coming into force, any item of business required to be transacted by means of postal ballot, may be transacted at a general meeting by a company that is necessary to provide the facility to members to vote by electronic means under section 108).
- The shares with differential rights shall not exceed 74% of total voting power, including voting power in respect of equity shares with differential rights issued at any point of time; (MCA Notification G.S.R. 574(E) dated 16th August 2019
- 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.
- 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 a dividend;
- the company has not been penalized by Court or Tribunal during the last three years of any offence under the RBI Act, 1934, the SEBI Act, 1992, the Securities Contracts Regulations Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.
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;
Benefits of Equity Shares with Differential Rights
- Flexibility in Capital Structure: Equity shares with differential rights provide companies with the flexibility to raise funds without diluting the control of existing shareholders.
- Increased Voting Rights: Equity shares with differential rights allow companies to provide their promoters or founders with higher voting rights, enabling them to have better control over the company’s affairs.
- Reduced Dividend Payout: Equity shares with differential rights with lower dividend rights can help companies conserve cash by reducing the dividend payout to shareholders.
Issue of shares with differential rights
As per Rule 4(4) of the Companies Act, 2013, The Board of Directors shall, among other things, 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:-
- the total number of shares allotted with differential rights;
- the details of the differential rights relating to voting rights and dividends;
- 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;
- the price at which such shares have been issued;
- the particulars of promoters, directors or key managerial personnel to whom such shares are issued;
- the change in control, if any, in the company consequent to the issue of equity shares with differential voting rights;
- the Diluted Earnings Per Share pursuant to the issue of each class of shares, calculated in accordance with the applicable accounting standards;
- the pre and post issue shareholding pattern along with voting rights.
FAQs
What are equity shares with differential rights (ESDR)?
Equity shares with differential rights are shares issued by a company that provide different rights to their holders compared to other equity shares of the same class. These rights could be related to voting, dividend, or other matters.
What types of rights can be attached to equity shares with differential rights?
Differential rights can include enhanced voting rights, preferential dividend rights, or special rights in the event of liquidation, among others.
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