SCHOOL OF LAW

UNIVERSITY OF PETROLEUM AND ENERGY STUDIES

PROJECT: – COMPANY LAW- I

TOPIC: – EQUITY SHARE WITH DIFFERENTIAL

VOTING RIGHT

Under the Supervision of: Prof. ARATRIKA DEB

NAME: __HARISH KUMAR__,__41__

__AKSHAY KUMAR__,__17__
__ADITYA JAKHAR__,__10__
__KRISHNA PARNAMI__,__53__

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 TABLE OF CONTENTS
____________________________________________

Acknowledgement ………………………………………………………………. 3

Chapter 1: Introduction ………………………… ...…………………………... 4-6

Chapter 2: DVR’S………. ………………………...………………………………...

7

Chapter 3: Procedure …………………………………………………………….... 8-9

Chapter 4: Advantages & disadvantages………………………………………….....

10

Chapter 5: SEBI……………………………….………………………..………...... 11-

12

Chapter 6: Conclusion ………………....…………………..………………………..

13

Chapter 7: Bibliography…..........................................................................................
………. 14

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 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my

Company Law Professor ARATRIKA DEB for his exemplary guidance, monitoring
and constant encouragement throughout the course of this assignment. The blessings,
help and guidance given by her time to time shall carry me a long way in the journey
of life which I am about to embark.
I am obliged to staff members of Faculty of law, for the valuable information provided
by them in their respective fields. I am grateful for their cooperation during the period
of my project.
Lastly, I thank almighty, my parents, brother, sister and friends for their continuous
encouragement without which this assignment could not be possible.

Harish kumar
Akshay kumar
Aditya Jakhar
Krishna Parnami

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 INTRODUCTION

The recent trend in the area of corporate laws has led to the emergence of various
investments tools with multiple ways and options to retain control in the company. These
instruments have been brought to fore to keep in tune with the changing scenario in the area
of corporate laws, the various ways to invest in a particular sector given the regulatory
regime and other hurdles. In the wake of growing competition, the need for adoption of
various strategies to survive by the companies has become indispensable. Today, demand for
a sound capital base is growing. With companies needing more and more capital through
equity and less and less interference in the management, the concept of shares with
Differential Voting Rights (“DVRS”) has gained momentum. Recently, the most talked about
issue in the corporate industry was India's largest e-commerce market place operator Amazon
which subscribed to DVRS issued by Witzig Advisory Services in order to comply with the
new FDI norms which were enforced from February 1, 20191.
A share is one unit into which the total share capital is divided. Each share forms a unit of
ownership and is offered for sale so as to raise capital for the company. The shares any
member in a company are movable property transferable in the manner provided by the
articles of the company. Face value of a share is the par value of the share. It is also known as
the Nominal value or denomination of a share. “Share” means a share in the share capital of a
company and includes stock2. Thus, in other words, shares are divisions of the share capital
of a company. A share represents a fractional part of the share capital of the company
Every company limited by shares must have a share capital. Share capital of a company
refers to the amount invested in the company for it to carry out its operations. The share
capital may be altered or increased, subject to certain conditions. A company’s share capital
may be divided into small shares of different classes. The different classes of share capital
and the rights attached to these classes are different.

1
https://www.lakshmisri.com/insights/articles/issuance-of-shares-with-differential-voting-rights/#
2
Section 2(84) of the Companies Act, 2013.
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The amount of capital which a company may raise in future is mentioned in capital clause of
the Memorandum of Association. The capital is fixed after making careful analysis of present
and future requirements of the company.
The company’s capital may be divided into following categories:

(a) Authorised or Nominal Capital:

This is the maximum amount of capital which a company can issue. The company, in no
case, can issue more capital than authorised by its Memorandum. It is called Authorised
Capital because the company has an authority to issue this much capital. The maximum limit
of capital to be issued is fixed at the time of registration of the company that is why it is
called Registered Capital also. While deciding about authorised capital, present and future
needs of the concern should be taken into consideration.
The company can fix any amount as authorised capital. In case a company wants to issue
more capital than authorised, it will have to alter capital clause in the Memorandum. The
alteration of this clause involves lot of formalities. The authorised capital is divided into a
number of shares. It may be written as the authorised capital of the company will be Rs. 10
lakhs, divided into 10,000 shares of Rs. 100 each. It is not necessary that the whole of
authorised capital be issued for subscription. The company can issue shares as per its
requirements. The authorised capital fixes only the maximum limits beyond which it cannot
go.

(b) Issued Capital:

The company will issue shares according to its requirements. It may not need the entire
capital at one time. Rather, capital needs go along with its development stages. The capital
which is offered to the public for subscription is known as Issued Capital. The part of capital
which is not issued is known as unissued capital. If out of 10,000 shares of Rs. 100 each, the
company issues 8,000 shares for public subscription, then Rs. 8 lakhs will be issued capital
and Rs. 2 lakhs will be unissued capital.

(c) Subscribed Capital:

The shares issued by the company for public subscription may not be applied for in full.
Subscribed capital denotes the share capital taken up by the public. Continuing the earlier
example, suppose the public subscribed for only 5,000 shares out of 8,000 shares issued ;

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then subscribed capital will be Rs. 5 lakhs. The issued and subscribed capitals can be same
also.
If all the 8,000 shares are subscribed for by the public then issued and subscribed capital will
be Rs. 8 lakhs. The subscription of share capital depends upon reputation of the company. If
the company carries a sound reputation, it will have no problem in selling the shares.
The applications for shares may be more or less than the number of shares offered by the
company. If the applications are for more shares than the issued, it is known as Over
subscription. On the other hand, if applications are far less shares than offered for
subscription, it is known as under subscription.

(d) Called-up Capital:

After the receipt of share applications, the Board of Directors makes allotment of shares to
the applicants. Certain amount is payable on application and the balance is called at the time
of allotment and calls. The capital is called up as per requirements for funds. The amount of
capital is called called- up capital.
Taking the earlier example, suppose the company calls for Rs. 50 per share out of Rs. 100;
then called up capital will be Rs. 4 lakhs, if all the 8,000 shares have been subscribed for. The
part of capital which has not been called-up is known as Un-called capital. The shareholders
are under obligation to pay the money whenever it is called-up.

(e) Paid-up Capital:

The amount of capital actually received is termed as Paid-up Capital. The shareholders are
asked to pay the calls within a certain period. In case whole of the called-up money has been
received from the shareholders, called-up and paid-up capital will be the same. There may be
some defaulters and the money which has not been received is called calls-in-arrears.
Continuing with the earlier example, if Rs. 3, 75,000 have been received out of Rs. 4 lakhs,
then paid-up capital will be Rs. 3, 75,000 and Rs. 25,000 will be calls in-arrears.

(f) Reserved Capital:

A limited company may earmark a part of uncalled capital as Reserved Capital. The reserved
capital is called-up only in case of winding up of the company. This is done in order to create
confidence in the minds of the creditors. Capital can be reserved by passing a special
resolution by the shareholders.

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 Dvr’s

Differential voting rights in the simplest of its form means and includes rights as to dividend
or voting. In other words we can say that DVRS are those shares in which equity shares are
allotted to the shareholders, however the 1 (one) voting right per share rule is deviated.
Hence, either less than 1(one) or nil voting rights per equity shares or more than 1 (one)
voting right per share is issued. It is logical to follow that the investor investing through
DVRS will compromise on the voting rights only with the prospect of earning higher rate of
dividends.

Section 43(2) of the Companies Act, 2013 (“2013 Act”) read with Companies (Share Capital
& Debenture Rules), 2013 (“Rules”) permits the issuance of DVRS. Since these are a
distinctive class of shares altogether hence, they need some extraordinary conditions to be
prevailing for their issuance.

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 PROCEDURE FOR ISSUE OF EQUITY
SHARES WITH DIFFERENTIAL VOTING
RIGHTS

 Check whether the Articles of Association of the company authorizes issue of equity
shares with differential rights and if not, the name and the Articles of Association of
the company.
 Hold the Board meeting to issue the notice of general meeting for the issue of equity
share with differential rights.
 Before issuing equity shares with differential rights as to dividend, voting or
otherwise, ensure that the conditions of issue are fully satisfied
 If the company is listed with any of the recognized stock exchange, then within 15
minutes of the closure of the aforesaid Board Meeting intimate to the concerned Stock
Exchange about the decision taken at the Board Meeting.
 Pass the ordinary resolution in the general meeting or through Postal Ballot under
section 110 of the Act.
 Once the company makes any allotment, then it shall, within 30 days thereafter, file
with the Registrar a return allotment in Form PAS-3, along with the fees as specified
in the Companies (Registration Offices and Fees) Rules, 2014.
 The company shall not convert its existing equity share capital with voting rights into
equity share capital carrying differential voting rights and vice–versa.
 In case of listed company, send copies of the notice and a copy of the proceedings of
the general meeting to the stock exchange within 24 hours of the occurrence of event.
[Regulation 30 (6) of SEBI (Listing Obligations and Disclosure Requirements), 2015]

 Complete all other proceedings for the issue of certificate of shares with differential
voting rights making necessary entries in various registers. In case of a company
whose shares are dematerialized form, inform the depositories about the same for
credit to the respective accounts.

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  Intimate the details of allotment of shares to the Depository immediately on allotment
of such shares.
 Maintain the Register of Members under section 88 containing all the relevant
particulars of the shares so issued along with details of the shareholders

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 ADVANTAGES AND DISADVANTAGES

ADVANTAGES:
 Equity shares do not create any obligation to pay a fixed rate of dividend.
 Equity shares can be issued without creating any charge over the assets of the
company.
 It is a permanent source of capital and the company has to repay it except under
liquidation.
 Equity shareholders are the real owners of the company who have the voting rights.
 In case of profits, equity shareholders are the real gainers by way of increased
dividends and appreciation in the value of shares.

DISADVANTAGES:
 If only equity shares are issued, the company cannot take the advantage of trading on
equity.
 As equity capital cannot be redeemed, there is a danger of over capitalisation.
 Equity shareholders can put obstacles for management by manipulation and
organising themselves.
 During prosperous periods higher dividends have to be paid leading to increase in the
value of shares in the market and it leads to speculation.
 Investors who desire to invest in safe securities with a fixed income have no attraction
for such shares.

Securities exchange board of india

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Historically, Securities Exchange Board of India (‘SEBI’) has not commented much on the
issuance of DVRS in India till yet. In 2002, SEBI primary market has made vague
recommendations on certain issues including DVRS. It recommended that SEBI equity issue
guidelines can apply to DVRS too. But these recommendations failed to serve the purpose as
it failed to satisfy more intricate questions regarding the nature and purpose of DVRS.

SEBI ruling in the Jagatjit Singh case 3indicates that the SEBI did not have any authority to
issue any guidelines on DVRS. This case deals with issue of DVRS to the promoters.
According to the members, these shares were randomly given to the promoters without
following any proper procedure. Hence, this allotment DVRS to the promoters was deemed
to be arbitrary and improper by the company. SEBI in this case gave a clear-cut analysis of
how it came to its conclusion. The earlier provisions of issuance of DVRS under the then
Companies Act, 1956 (“1956 Act”) under Section 8 4the Act were resorted to. Section 55-
A5 of the 1956 Act provided for the list of those provisions in which SEBI had a clear-cut
authority. A glance to this list undoubtedly suggested that erstwhile Section 86 does not fall
under the ambit of this section. A rational conclusion that was drawn was that SEBI has no
authority to issue guidelines for the issue of DVRS.  Hence, the absence of formal guidelines
in this regard was the biggest impediment on popularity of DVRS amongst the Indian
Companies.

However, the 2013 Act had cleared this confusion to a great extent. Additionally, a
Consultation Paper was issued by SEBI on DVRS. It provides that the DVRS are more
relevant for new technology firms with asset light models and promoter led companies. Most
importantly, it provides for a system of recognizing the rights vis-à-vis the shareholder rather
than in terms of shares.

It further proposes 2 (two) types of DVRS that can be issued:

 Shares with superior voting rights (Superior DVRS)) and

3
Defined in Section 43(2) of the Companies Act, 2013
4
Section 86 (2) -: New Issue of share capital to be done with differential rights as to dividends, voting or
otherwise in accordance with such rules and subjects to such conditions as may be prescribed.
5
Section 55-A POWERS OF SECURITIES AND EXCHANGE BOARD OF INDIA
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  Shares with fractional rights (Fractional DVRS)

Superior DVRS will have superior voting right when compared to ordinary shares, which
shall be issued only to the promoters of the company. There are further conditions attached to
the issuance of Superior DVRS including the maximum voting ratio of 10:1.

The Fractional DVRS allow for lower voting rights as compared to the ordinary shares.
These can be issued by companies whose equity shares have been listed for at least 1 (one)
year. Further there are restrictions on the class of Fractional DVRS. There are other
conditionalities attached including that the voting rights cannot exceed a 1:10 ratio.

Conclusion

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 Hence, we see that today the concept of DVRS is gaining momentum with some level
of clarity provided by SEBI and the 2013 Act. What is peculiar is the timing of their
emergence in the Indian markets, when we come across so many hostile takeovers
strategies in the Indian corporate world. The best known recent example is the L&T
bid for Mindtree which dominated the front pages of the newspapers for weeks. The
increasing volatility of the Indian stock market and the fluctuating dividends and
earnings of the shareholders adds to another good reason as to why it is a ripe time for
entrepreneurs to resort to issuance of DVRS.
The only remaining aspect for further strengthening these instruments is to carry out
corresponding amendments to the provisions of the 2013 Act, SEBI ICDR
Regulations, Securities Contract (Regulation) Rules, SEBI Takeover Code, SEBI Buy
Back Regulations and SEBI Delisting Regulations and other related regulations
pursuant to clarity received from SEBI. Once the regulatory regime is clear and
unambiguous, only then the underlying purpose behind the inception of DVRS could
be completely justified and properly implemented.

Bibliography

 www.companylawclub.co.uk/classes-of-shares

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  www.investopedia.com/terms/c/class.asp
 www.informdirect.co.uk/shares/types-of-share-a-company-can-have

Primary Sources :
 Principles of modern company law by Gregory Davies
 Companies act, 1956 and companies act, 2013

Secondary Sources:
 www.legalserviceindia.com
 www.lawteacher.net
 www.investopedia.com
 www.informdirect.co
 www.companylawclub.co.uk/classes-of-shares

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