Under Section 47 of the Companies Act, 2013, every shareholder of a company has the right to vote on all the resolutions presented before it subject to the limitations if any, provided under its Memorandum and Articles. These documents provide for different classes of shareholders having different voting rights in the company. Section 43(a)(ii) of the Act permits such Differential Voting Rights (hereinafter “DVRs”) on dividend, voting or otherwise. Private companies can issue shares with DVRs in the manner prescribed under their AOA by exempting applicability of Section 43 and 47 of the said Act read with Rule 4 of the Companies (Share Capital & Debentures) Rules 2014, on such private companies. To that end, no such exemption is available to public companies when they issue equity shares with DVRs. Rule 4 inter alia prescribes certain important conditions for issuance of shares with DVRs. One such condition was that the shares with DVRs should not exceed 26% of the total post-issue paid-up equity share capital. Another important condition was that the company should have consistent track record of distributable profits for the past three (3) years.
The MCA vide its notification dated August 16, 2019 has now relaxed the aforesaid conditions. As per the notified Companies (Share Capital and Debentures) Amendment Rules, 2019, the voting power in respect of shares with differential rights of the company should not exceed 74% of total voting power including voting power in respect of equity shares with differential rights issued at any point of time. Further, for issuing DVRs, the requirement of the company to have consistent track record of distributable profits for the past three (3) years has been done away with.
The author is a Corporate and M&A lawyer at Sarin Partners Advocates & Legal Consultants. The views in the article should not be construed as legal advice. Please contact the author for any clarification.
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