Equity shares with differential rights

As everybody knows that share capital is the capital contributed by the owners of the
company. So the capital is of two types. 1 Equity share capital 2. Preferential share
capital. Again in the equity share capital there is another class of shares i.e. Equity
shares with differential rights. The differential rights are in respect of voting power
and dividend.So generally equity shares with less voting rights carry higher rate of
dividend but whereas the equity shares with higher voting shares carries with lesser
rate of dividend.Equity shares with higher voting rights are generally given to
promoters, key managerial persons, Managing directors etc.

Equity shares with differential rights generally companies give because they want to
improve the capital base but they do not want to lose the control or management of
the affairs of the company. By issuing shares with differential voting rights, the share
capital will increase but the control and management still remains in the hands of
promoters.Hence the management of the company will not be diluted by issuing
shares with differential rights thereby helping the minority shareholders. That is these
minority shareholders do not want the change in management but still want to
increase the capital base. In such cases, the issue of shares with differential rights is
the correct answer.

In case the company issues shares with ordinary voting rights that means, generally
one share carries one vote. But in the case of differential voting rights, one share
can carry more than one voting right or can carry less than one voting right.

Now the question is why would a person want to take a share with lesser voting
right? The answer is that such shares carry higher rate of dividend.
Section 43(2) of the companies act 2013 read with companies (share capital & Debentures
rules) provides that companies can issue equity shares with differential rights subject to the
following conditions
1. Articles of association of the company must provide for issue of equity shares with
differential voting rights
2. The company shall have a consistent track record of distributable profit for last
three years
3. The company shall obtain approval of shareholders by passing general resolution
in General Meeting
4. The company shall not have defaulted in filing annual returns /financial statements
for the last three years immediately preceding the financial year in which it was
decided to issue such shares
5. The company shall not have defaulted in repayment of matured deposits or
declared dividend to the shareholders.
6. In case of listed companies, the issue of such shares shall be approved by postal
ballot.
7. The company shall not have defaulted in redemption of its preference shares
/debentures which are due for redemption.
8. The company shall not have defaulted in repayment of instalment of term loan
taken from any public financial institution or state level financial institution or from a
scheduled bank that has become due and payable.
 Equity shares with differential rights
9. The company shall not have converted its existing equity share with voting rights
into equity shares with differential voting rights and vice versa
10. Further there is no default in respect of statutory dues of the employees of the
company
The differential voting rights can be issued in two ways
c) Shares with superior voting rights
d) Shares with fractional rights
Shares with superior voting rights carry much superior voting rights when compared
to ordinary shares.Generally these shares will be issued only to the promoters.
Shares with fractional rights carry lesser voting rights compared to ordinary shares.

Voting share in case of superior voting rights should not exceed 10:1 whereas in the
fractional shares the voting share is 1:10 and company shares must be listed in the
stock exchange for the last one year.
The shareholder holding shares with superior voting rights should be a part of the
promoter group whose collective net worth does not exceed INR 500 crores.