EQUITY SHARES WITH VOTING RIGHTS

Meaning of Voting right:

The term ‘voting right’ is defined in Section 2(93) of Act, as “Voting right” is the right of a member of a company to vote in any meeting of the company or by means of postal ballot. As per dictionary “voting rights” means “delegable right of a common stock (ordinary share) holder to take part in a firm’s decision-making process, by voting on matters of policy and to choose members of the board of directors”. Since voting rights are either contractual or statutory rights, the Companies Act, 1956, envisaged the possibility of such voting rights being curtailed by contract viz., the Articles of Association. In order to prevent such contractual contraception, the Companies Act contains Section 9, which confers overriding effect to the provisions of the Act, upon the Memorandum and Articles of Association of a Company. [B. Ramachandra Adityan vs Tamil Nadu Mercantile Bank v. Tamil Nadu Mercantile Bank Shareholders Welfare Association, Application No.2954 of 2008 in C.S.No.481 of 2008, decided on 26thNovember, 2011]

Voting rights if the amount paid by the member but not called up:

As per the section 50(2) of the Act, member of the company limited by shares shall not be entitled to any voting rights in respect of the amount paid by him until that amount has been called up even though the company accepted the amount from any member, the whole or a part of the amount remaining unpaid on any shares held by him, even if no part of that amount has been called up. Therefore, the calling up of the money from the company is condition precedent to get the entitlement of voting right by the members of the company. This ensures that no voting rights which are above the rights of others shareholders will accrue to any shareholder. It conforms to the fundamental tenets of shareholder democracy.

As per the provisions of section 43 of the Act, a Company may issue equity shares with voting rights or with differential rights as to dividend, voting or otherwise. A company may issue equity shares which carry rights only with respect to dividend and do not carry any voting rights.

Superior Voting Rights:

Superior voting right means any right that gives the shareholder more than one vote per share. The term “differential voting rights” emanates from its usage in Section 86(a)(ii) of the Companies Act, 1956. The validity of such shares has also been subjected to judicial determination. In Anand Pershad Jaiswal v. Jagatjit Industries Limited, MANU/CL/ 0002/2009, the Company Law Board (CLB) upheld the validity of issue of shares with differential voting rights as being valid under Section 86 of the Companies Act as well as the Companies (Issue of Share Capital and Differential Voting Rights) Rules, 2001. Unfortunately, the CLB did not have the opportunity to devolve into the details of the issues raised in that matter because it was settled through a consent order. An unlisted public company can issue shares with superior voting rights subject to the provisions of Rule 4 of the Companies (Share Capital and Debenture) Rules, 2014. However, section 47 and related rules are not applicable to a private company and hence a private company may issue shares with differential rights as to voting, dividend or otherwise without complying the provisions mentioned in section 47 subject to the condition that such a provision is contained in the memorandum or articles of the company. [MCA Notification dated 5th June 2015

Superior Voting Rights in case of listed companies:

SEBI vide press release No. 192/2009 dated 18th June 2009 prohibited the issue of shares with “superior voting rights” by listed companies, in order to “avoid the possible misuse by the persons in control to the detriment of public shareholders”. Further regulation 41(3) of LODR specifies that the listed entity shall not issue shares in any manner which may confer on any person, superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed. It is possible for listed companies to issue shares with differential voting rights which provide voting rights below the normal “one-share-one-vote” rule. However, conferring voting rights greater than normal is prohibited.

Differential Voting Rights Under Companies Act, 2013:

The companies can issue equity shares with differential rights under Section 43(2) of the Companies Act, 2013 read with the Companies (Share Capital and Debentures) Rules, 2014, subject to the following conditions-

  • The Articles of Association (AOA) of a company should provide for the issue of equity shares with differential voting rights.
  • The company must obtain approval from the shareholders by passing an ordinary resolution in the general meeting.
  • There should be no default by the company in filing its financial statements or annual returns for the last three financial years preceding the financial year of the issue of the DVRs.
  • The company should not have defaulted in repayment of declared dividends or matured deposits to the shareholders. 
  • In case the company is listed, the issue of differential shares should be approved by postal ballot.
  • There should be no default by the company to repay the instalment of term loan taken from any state-level or public financial institution or scheduled bank. 
  • There should be no default by the company in the redemption of its debentures or preference shares which are due for redemption and payment of any statutory dues of its employees.  

The DVRs should be issued according to the conditions mentioned in the Companies Act, 2013 read with the Companies (Share Capital and Debentures) Rules, 2014 (As mentioned above in this article). Along with these conditions, the start-ups need to keep in mind the following points while issuing DVRs-

  • The company/start-up should pass an Ordinary Resolution for the issuance of DVRs in the General Meeting of the shareholders.
  • The voting power of DVRs equity shares should not exceed 74% of the total voting powers.
  • There should be no penalty on the start-ups by any court or tribunal for any offence for the past three financial years.
  • Once the shares with DVRs are issued, it cannot be changed later.

Voting rights in case of preference shares:

As per the provisions of sub-section (2) of section 47, the preference shareholder is entitled to vote on such resolutions directly affecting the rights attached to the preference shares placed before company. Rights of the preference shareholders are specified under section 43. Further they are also entitled to vote on other resolutions such as

  • winding-up of the company,
  • repayment or reduction of equity or preference share capital of the company.

However, his voting rights shall be in proportion to paid-up preference capital of the company. The proportionate voting rights between equity share capital and preference share capital shall be same proportion of paid-up capital of respective capital in the total paid-up capital of the Company.

Special voting rights- due to non-payment of dividend to preference shareholders:

As per the second proviso to sub-section 2 of section 47, where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company. This proviso specifies as “class of preference share” which may be cumulative preference share or any other class. In case the company does not pay the dividend for a period of 2 years or more to such class of preference shares, such class of preference shares shall have a right to vote on all the resolutions placed before the company till such time all pending dividends are paid, for such preference shares, if declaration of dividend by the company year on year is a contractual obligation either under terms of issue of such shares or under a provision in the memorandum or articles.

[i]References


[i] ICSI study material of COMPANY LAW (Executive Programme)

Ministry of corporate affairs notifications

SEBI circulars and press notes

Companies Act 2013 Bare Act

https://www.mca.gov.in/MinistryV2/access+to+capital.html

https://pib.gov.in/newsite/PrintRelease.aspx?relid=192676

https://law.asia/mca-differential-voting-rights/

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