Procedure for Issue of Equity Shares with Differential Rights

Khushboo Sharma

Khushboo Sharma

Published on: Dec 7, 2023

Darshi Dave

Updated on: Dec 7, 2023

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Introduction:

Share capital of any company limited by shares is broadly categorized into two:

1. Equity share capital and
2. Preference share capital.

Section 43, specifies that equity share capital, in reference to any company limited by shares, refers to all the share capital which is not preference share capital and is further bifurcated into two types as under:

1. quity share capital with voting rights or
2. equity share capital with differential rights

Equity share capital with differential rights is different from the ordinary share capital in various terms as to right to dividend, voting or otherwise. The company intending to issue equity share capital with differential rights shall do so subject to adhering to the conditions specified in Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014.

Note: The provisions of Section 43 of the Act shall not apply in case of private companies where its memorandum or articles of association so provides. (Ref: Notification dated: 5th June, 2015).

Applicable Provisions:

1. Section 39, 43, 56, 96, 100, and 173 of Companies Act, 2013
2. Rule 4 and 5 of Companies (Share Capital and Debentures) Rules, 2014
3. Rule 20 of Companies (Incorporation) Rules, 2014
4. Rule 12 of Companies (Prospectus and Allotment of Securities) Rules, 2014
5. Regulation 30 and 46 of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015
6. Secretarial Standard 1 and 2

Mandatory Requirements:

1. Authorization by the Articles of Association (AOA)
2. Obtain approval from Members by passing an ordinary resolution* in a duly convened general meeting
3. Shares issued with differential rights shall not exceed 74% of the total voting power, including voting power in respect of equity shares with differential rights issued at any point of time
4. No default in filing financial statements and annual returns for 3 financial years immediately preceding the financial year in which it is decided to issue such shares
5. No subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for payment
6. No default in payment of the dividend on preference shares or repayment of any term loan that has become due and payable from a public financial institution or State level financial institution or scheduled Bank or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund
7. Not penalized by Court or Tribunal during the last 3 years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators
8. Disclosure in Board Report all the necessary details for the financial year in which equity shares with differential rights was issued and completed.

1. In case a company is listed on a recognized stock exchange, then issue of equity shares with differential rights shall be approved by the shareholders through postal ballot.
2. The company may issue equity shares with differential rights upon expiry of five years from the end of the financial year in which such default pertaining payment of dividend or repayment of any term loan was made good.
3. The company shall abstain from converting its existing equity share capital with voting rights into equity share capital carrying differential voting rights.
4. The shareholders having differential rights shall enjoy all other rights such as bonus shares, rights share etc., which the equity shareholders are entitled to subject to the differential rights with which such shares have been issued.

Procedure:

1. Alteration in Articles of Association of the Company:
   In the absence of relevant provision for issuing equity share with differential rights in the Articles of Association (AOA), company shall make suitable amendments in its Articles of Association (AOA) to this effect.
   Refer to the Procedure for Alteration of Articles of Association for the detailed procedure.
2. Convene a Meeting of Board of Directors for Approving the Issue of Equity Shares with Differential Rights:
   
   • The company shall pass a Board resolution in a duly convened board meeting, approving the following:
     • proposal for issue of equity shares with differential rights
     • allotment of the equity shares with differential rights along with the list of allottees
     • authorizing Company Secretary or such other officer/ Director for issuing the share certificates and take such necessary actions to give effect to the decision of the Board
     Please refer to the Procedure for Conducting Board Meeting for further details.
   • In case of a listed entity, the outcome of the Board meeting approving the proposal for issue of equity shares with differential rights shall be disclosed to the Stock Exchange(s) (where its shares are listed) as per the timeline specified therein and also, update about the same on its website within 2 working days.
3. Convene Extra Ordinary General Meeting:
   The company shall convene a General Meeting of its Members to pass an ordinary resolution for approving the proposal of issuing equity shares with differential rights.
   Refer to the Procedure for Conducting General Meeting and in case of listed company refer Procedure for Passing of Resolution by Postal Ballot for a detailed procedure.
4. Filing Form MGT-14 with ROC:
   The company shall file the copy of Board Resolution and Ordinary Resolution passed in its duly convened Board meeting and General meeting in Form MGT-14 within 30 days of passing such resolution along with the requisite documents and fees, with the Registrar of Companies (ROC).
5. Filing of Form PAS-3 with the Registrar of Companies:
   The company shall file Form PAS-3 with the Registrar of Companies (RoC) within 30 days from the allotment of equity shares with differential rights, along with the requisite fee as specified in the Companies (Registration Offices and Fees) Rules, 2014 and the following documents as attachments:
   • List of allottees specifying their names, address, occupation, if any, and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the Form PAS-3 as being complete and correct as per the records of the company
   • Report of a registered valuer in respect of valuation of the consideration
   • In case securities are allotted as fully or partly paid up for consideration other than cash, then copy of the contract, duly stamped, pursuant to which the securities have been allotted together with any contract of sale if relating to a property or an asset, or a contract for services or other consideration
   • Copy of Board or Shareholders’ resolution authorizing such issue
   • Copy of contract in case shares have been allotted for consideration other than cash or attachment wherein the details of contract reduced in writing by the company, if any
   • Any Other documents as required.
6. Post Allotment Obligations for Issuing Company:
   
   • The company shall intimate the details of such allotment of equity shares with differential rights, to the Depository immediately on allotment, in case allotted shares are dealt with in a Depository.
   • The company shall issue share certificate in Form SH-1 within 2 months from the date of allotment of shares.
   • The requisite stamp duty payable on every share certificate so issued as per the provisions of the Indian Stamp Act, 1899 shall be duly paid to the respective authority.
   • The particulars of every share certificate so issued shall be entered in the Register of Members maintained in accordance with the provisions of Section 88 along with the name(s) of person(s) to whom it has been issued and indicating the date of issue therein.