EQUITY SHARES WITH VOTING RIGHTS
This article has been written by Ms. Sheereen Iqbal, a student of South Calcutta Law College, Calcutta
INTRODUCTION
According to section 43 of Companies Act,2013 there are two kinds of share capital:-
(a)Equity Share capital
(i) with voting rights or
(ii) with differential voting rights; and
(b) preference share capital.
Equity share capital, also referred to as share capital, is the money a firm raises by selling shares. It is the money that investors and business owners contribute to a company’s capital and utilise to grow or scale up the operations of their endeavour. The Companies Act, describes preference share capital as when referring to a company limited by shares, the term “preference share capital” refers to the portion of the company’s issued share capital that carries or would carry a preferential right with regard to (a) the payment of dividends, either as a fixed amount or an amount calculated at a fixed rate, which may be free of or subject to income tax; and (b) the repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or not a preferential right to the payment of any fixed premium or premium on any predetermined scale, as stipulated in the company’s memorandum or articles, exists, or is regarded to have been paid-up.
Equity Share Capital with Voting Rights:-
Section 47(1) of Companies Act,2013 deals with the voting rights specifies that every member of a company limited by shares and holding equity share capital therein has the right to vote on any resolution brought before the company, subject to the provisions of Section 43 and Subsection (2) of Section 50. His voting right on a poll shall be proportionate to his share in the paid-up equity share capital of the company. Section 47(2) says that every member of a company limited by shares holding any preference share capital therein shall, with respect to such capital, have the right to vote only on resolutions brought before the company that directly affect the rights attached to his preference shares, and any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital. His voting right on a poll shall be proportionate to his share in the paid-in capital.
Equity Shares with differential voting rights (DVR):-
Tata Motors issued the first DVR shares in 2008, and other businesses like Gujarat NRE Coke, Future Enterprises, and Jain Irrigation also followed suit. However, there hasn’t been much interest in this, and many other businesses have turned down the offer of DVR shares. Shares that can be issued with different voting and dividend rights are known as Differential Voting Rights (DVR) shares. There are two key ways in which DVR shares differ from regular shares. First off, they have less voting rights than common shares do. Therefore, these DVR shares are highly helpful for businesses that want to obtain capital without losing actual control of the company. The shares with Differential Voting Rights (DVR) in a company are basically those shares which provides the shareholders the differential rights connected to voting. Differential voting rights generally gives either more voting rights or less voting rights. When a shareholder is given less voting rights then it carries a higher dividend rate on the other hand when the shareholder is given higher voting shares then it carries a lesser dividend rate. Thus, as mentioned there are two types of DVRs, shares with superior voting and shares with inferior voting.
Under Companies (Share Capital and Debentures) Rules,2014 Rule 4, there are few conditions which the company should comply with in order to issue equity shares with differential rights :-
1)The company’s articles of association provide the issuance of shares with differentiated rights.
2)The issue of shares must be authorized by an ordinary resolution passed at the general meeting. This rule also adds up that when equity shares are registered on a recognized stock exchange, it has to be approved through a postal ballot by the shareholders.
3) The total post-issue paid up equity share capital, including equity shares with differential rights issued at any point in time, shall not include more than 26% of the shares with differential rights.
4) The company must have a good track record with respect to distributing profits and has not defaulted in distributing profits for the previous three years,
5)The company must not have default in filing financial statements, annual accounts and annual returns in the last three financial years. Here three financial years are those which are immediate preceding of the financial year in which the company decided to issue such shares.
6)There are no subsisting default made by the company while making payment of a declared dividend or while repaying its matured deposits or redemption of its preference shares or debentures.
7) The company has not missed any payments related to statutory payments pertaining to its employees to any authority or defaulted in crediting the amount in the Investor Education and Protection Fund to the Central Government: [Provided that a company may] miss payments related 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.
8)The company issuing equity share should not have made legal non compliance or should not have been penalized by the court or the tribunal in the last three years on any offence under Reserve Bank of India Act,1934, the Securities and Exchange Board of India Act,1999, The Securities Contract Regulation Act, 1956, The Foreign Exchange Management Act,1999 or any other special Act.
AMENDMENT OF 2014 in Companies (Share Capital and Debentures)
A change was made to the 2014 Companies (Share Capital and Debentures) Rules. The amendment stated that the requirement for the issuance of equity shares with differential voting rights, including at any time, shall not exceed 74%. Prior to the modification, the regulations stipulated that no more than 26% of the shares could be issued with discriminatory voting rights.In the total post-issue paid-up share capital, the firms may now hold up to 74% of equity shares with differentiated voting rights. The startups will benefit from this amendment, which raised the upper limit for the issuance of shares with distinct voting rights to 74%.The requirement that the company must have generated distributable profits over the previous three years was eliminated by the amendment.
RELATED CASE LAWS
1)In the case of Rahul Mehra vs Union of India, Rahul Mehra, the petitioner, presented the Delhi High Court with thirteen grounds for consideration. These problems related to administrative shortcomings and weaknesses that Indian sports officials were taking advantage of. According to the court’s assessment and interpretation based on pertinent precedents and sports law, it has provided a point-by-point breakdown of each “pitfall.” It has also established a number of suggestions and guidelines, some of which call for the repeal of existing executive actions. An extremely bizarre trend that the court struck down was the concept of divisive/differential votes. It observed that certain sports federations had votes that were 1/2 or 1/3 in value as they had been divided based on the number of people per vote. Quite specifically, there is a mention of anomalous weightage in each vote to different sports bodies which is against the basic tenets of the Sports Code. Striking the divided voting rights down, the court reiterated the importance of following election procedures based on the Sports Code only.
2) In the case of M/S EMGEE HOMES PVT. LTD& ANR.V. SAHANIKA PVT.LTD& ORS, the petitioners filed this application, among other things, to prevent the implementation of resolutions passed on September 18, 2015, altering the association’s bylaws, particularly the resolution to issue equity shares with differential voting rights, divide the capital of the company, change the share capital, reduce equity, issue equity shares, issue Employees’ Stock Option Shares (ESOP), issue equity shares with differential rights, and issue redeemable preference shares. As of the date the CLB’s directives were passed, respondents are prohibited from maintaining the status quo. This Bench hereby directs the company not to give effect to the amendments of the A when there is a restraint order against the company’s shareholding pattern because I do not believe there is any urgency for the company to amend the Articles solely relating to the share capital and issuing of Bonus shares, dividing of shares, issuing of equity shares and the provision for ESOPs, and issuing of equity shares with differential rights and redeemable preference shares.
3) This case, Miheer H. Mafatlal v. Mafatlal Industries Ltd., served to define the circumstances surrounding mergers. The court made it clear what particular circumstances and compliance it must consider before sanctioning the plan, such as majority, etc. Only items with a connection to the plan and the potential to invalidate votes are required to be declared, according to the rules. Voters should have access to all necessary information to make an informed decision about whether to approve a plan. Thus even the dissident members of the concerned class of voters must abide by the majority decision since it is just and fair to the class as a whole.
CONCLUSION
In concluding remarks we must end with the benefits of the amendment regarding DVR and its effect in the corporate sector.The DVR issue will benefit Indian businesses and startup entrepreneurs who attract international investment. Through DVRs, these foreign investors can purchase majority interests in Indian startups or corporations. By issuing DVRs, entrepreneurs and Indian businesses can have access to cutting-edge technology development and innovation while also attracting foreign investors. The DVRs will give Indian company promoters the ability to maintain control while obtaining equity funding from international investors, resulting in long-term value for shareholders and the expansion of the business.
SOURCES
1) https://cleartax.in/s/differential-voting-rights-startups
2) Unacademy CA intermediate Group 1 (youtube channel)
3)http://manupatra.com/roundup/331/Articles/Miheer%20H.pdf
4) https://www.mondaq.com/india/shareholders/860576/introducing-differential-voting-rights
5)Companies (Share Capital and Debentures) Rules,2014
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