Variation of Shareholders Right

June 9, 2016

 

Shareholders are the Owners of a company and shares are the deed of ownership. It is a cliché that, in democracy common man controls the Government through this right to vote, but in reality a simple majority of 51% is controlling a sizeable minority of 49%. Likewise in case of a company many of the policy decisions are being taken by shareholders at their general meetings and decisions supported by majority of the votes will be treated as passed. As per the provisions of the Companies Act 2013 all shares are equal in its rights , privileges and characteristics. One share carries one vote and every shareholder has the right to use the said votes in his discretion.  Having said that, there are provisions under the Act to create shares with differential voting rights (DVR). Companies issue DVR for preventing back door acquisitions and also to accept investments without diluting the control over the affairs of the company. DVR shares are ideal for the investors who are interested in higher returns rather than taking control over the affairs of the company. Investors can also take advantage of the price difference of DVR with normal shares.  

 
The rights attached with equity shares can be with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed. When the company is planning to issue the shares with differential voting rights consent in writing of the holders of not less than three-fourths of the issued shares of that class or by means of a special resolution passed at a separate meeting of the holders of the issued shares of that class. If variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained and the provisions of this section shall apply to such variation. Where the holders of not less than ten per cent. of the issued shares of a class did not consent to such variation or vote in favour of the special resolution for the variation, they may apply to the Tribunal to have the variation cancelled, and where any such application is made, the variation shall not have effect unless and until it is confirmed by the Tribunal

Conditions for issuing DVR

  1. Every company limited by shares may issue shares with differential rights as to dividend, voting or otherwise, if-   

  2. The company has distributable profits for  three financial years preceding the year in which it was decided  to issue such shares.   

  3. The  company  has  not  defaulted  in  filing  annual  accounts  and  annual  returns  for three financial years immediately preceding  the financial year in which it was  decided to issue such share.  

  4. The company has not failed to repay its  deposits or interest thereon on due date  or redeem its debentures on  due date or pay dividend.   

  5. The  Articles  of  Association  of  the  company  authorizes  the  issue  of  shares  with differential voting rights.  

  6. The  company  has  not  been  convicted  of  any  offence  arising    under,  Securities  Exchange  Board  of  India  Act,  1992,  Securities  Contracts  (Regulation)  Act,  1956, Foreign Exchange Management Act, 1999.  

  7. The company has not defaulted in  meeting investors’ grievances.   

  8. The company has obtained the approval of  share holders in  General Meeting by  passing  resolution  

  9. The  listed  public  company    obtained  approval  of  share holders  through  Postal  Ballot.  
     

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