Differential voting rights under section 43(a)(ii) of the Companies Act, 2013 are those rights which distinguishes between shares in terms of dividend & voting between their other classes. If we speak about voting and issuing dividends, every shareholder of a company needs right concerning their shareholding. Major shareholders are generally inclined to hold voting rights, while minority shareholders are inclined to hold dividend rights. Promoters are more concerned about voting rights because it helps them to play a significant role in controlling their company. The concept of DVRs helps promoters to maintain power over the company without dilution of their rights, by enabling public investors to own shares with Superior Voting Rights (SR) or lower or fractional voting rights.
TATA motors & Pantaloons previously issued DVRs with 1/10th fractional voting rights in exchange for 5% higher dividend than ordinary shares.
Facebook once issued shares with differential voting rights to the investors wherein Mark Zuckerberg sold his percentage holding without any effect on his voting right shares which allowed him to maintain a substantial level of control over the company.[1]
Promoters usually avoid dilution of control in the company with other investors as it allows interference with the management and with the motto of the company. By issuing DVRs, promoters can focus on the company without being afraid of dilution of control. The company can also issue DVRs in different proportion concerning voting right. Sometimes hostile takeovers by investors can also take place just by holding a substantial number of shares in the company. Issuance of DVRs will prevent such takeovers as the shareholders holding such shares will have limited voting rights.
Issuance of differential voting rights has its own set of advantages for investors. DVR shareholder will be eligible for other rights such as bonus shares, rights shares, dividend, issue of ESOPS etc. An investor can enjoy these rights while holding DVRs. In comparison to other ordinary equity shares, DVRs are offered at discounted rates with a higher dividend. The reason for providing such is the non-involvement of investors in the company subject to voting where investors will have an option of opting DVRs with higher dividend in lieu of voting rights. Countries like the US, Canada, Hong Kong also allow issuance of shares with superior voting rights.
By circular letter dated 21 July 2009, SEBI prohibited companies from issuing any kind of shares in any manner that might confer upon any individual superior voting rights or dividends in respect of the rights to equity shares already listed.
As per Rule 4 of the Companies (Share Capital and Debenture) Rules, 2014, no company shall issue equity shares with differential voting rights unless it complies with the following conditions:
A Company which consists of superior voting rights shareholders shall be allowed to issue shares via Initial Public Offering (IPO) of only ordinary shares to be listed on the mainboard subject to the following conditions:
After the general public issue, shares with superior voting rights must be listed on the securities market, and there’ll be a perpetual lock-in until conversion into ordinary shares. No exchange/transfer of such shares between the promoter shall take place and they shall be freed from any lien, costs nor may they be pledged.
Shares with superior voting rights shall in all respects, which include dividends as well, will be treated as ordinary shares, except in the case of voting on resolutions. the overall voting rights of SR shareholders including ordinary shares post-listing must not exceed 74% of the total voting power.
2/3 of the board and committees (excluding audit committee) must comprise of independent directors as prescribed by SEBI (LODR) regulations and Audit Committee shall compromise of only independent Directors.
Post-IPO, superior right shares will be considered as ordinary shares in terms of voting under the following situations:
On certain event, SR shares shall convert automatically into ordinary shares:
SEBI stated that issuance of fractional right shares by existing listed companies won’t be allowed as of now unless enough experience has been gained from the concept of issuing special right shares.
Clause (d) Rule 4(1) of SCDR, which requires companies to issue DVRs must have a profitable track record of previous 3 years has been deleted and previous limit of 26% on the percentage of shares of differential rights out of post-issue paid-up equity share capital has been revised and has been increased to 74%.
The new framework of DVRs will help entities in raising capital for their business and will also allow promoters to maintain substantial control over the company which in the past at many instances was being diluted with the rights of other shareholders resulting in loss of control over the business and in decision making. It will help protect promoters and major shareholders from the dilution of shareholdings and hostile takeovers which in turn will also benefit minority shareholders who are not interested in voting rights and are satisfied with other rights involved into bonus issues, dividends, ESOPS etc.
Authored by
Jayant Saxena
Department of Law, University of Lucknow
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