Differential

Voting Rights

Introduction:
Due to a growing trend in the corporate activities since the last decade, corporate
governance practices were considered to be a major impact on the companys
performances. One of the prime features of a public company is the separation of
ownership and controlling management. The management of a company acts as an
agent of the owners i.e. shareholders in managing the day-to-day functions of the
company.2 The equity shareholders are usually given voting rights in the affairs of
the company which acts as one of the efficient means to control the activities of
management. The Government of India, in the year 2000, brought in significant
changes in the voting rights of the shareholders thus giving more power to control
the management and to ensure meaningful shareholders democracy in working of
a company. The Companies Act, 1956 (hereinafter referred to as the Act) was
amended in the year 2000, with effect from 13.12.2000,3 whereby issuance of
shares with differential voting rights was introduced by Section 86. Moreover,
Section 2(46A) was also introduced in relation to shares with differential rights. The
amended provisions stand as follows: 2(46A). Share with differential rights means
a share that is issued with differential rights in accordance with the provisions of
Section 86. 86. New issues of share capital to be only of two kinds- The share capital
of a company limited by shares shall be of two kinds only, namely:- (a) equity share
capital- (i) with voting rights; or (ii) with differential rights as to dividend, voting or
otherwise in accordance with such rules and subject to such condition as may be
prescribed. Simultaneously, Section 88 of the Act was repealed which prohibited
issue of equity shares with disproportionate rights as to voting, dividend, capital or
otherwise which applied to public companies only. Basically, the amendment
entitled a public as well as a private company to issue shares with different voting
rights. Prior to the Amendment in the year 2000, a Committee headed by Mr. M.J.
Pherwani on Expert Study Group into establishment of new stock exchange in the
year 1991 also mooted for the proposal of non-voting shares by dividend paying
companies which had a track record of dividend payment in the past two years
and/or in four out of five previous years or five out of seven years.4 Moreover, The
Companies Bill, 1993 also made provision for issuance of non voting shares and
Clause 78 of Companies Bill, 1997 also provided for issue of equity shares with
differential rights as to voting, dividend or otherwise, not exceeding 25% of the
issued share capital with voting rights and subject to the terms and conditions as
prescribed by the Central Government.

The Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001:
Subsequently, the Central Government notified The Companies (Issue of Share
Capital with Differential Voting Rights) Rules (hereinafter referred to as Rules) in
the year 20016 in pursuant to the powers conferred by sub-clause (ii) of clause (a)
of Section 86 read with clauses (a) and (b) of sub-section (i) of Section 642 of the
Act. Rule 3 of the Rules prescribes certain terms and conditions for a company to
issue shares with different rights as to dividend, voting or otherwise. The conditions
are: 1. The company has distributable profits in terms of Section 205 of the
Companies Act, 1956 for preceding three financial years preceding the year in
which it was decided to issue such shares. 2. The company has not defaulted in
filing annual accounts and annual returns for three financial years immediately
preceding the year in which it was decided to issue such share. The period of three
financial years prescribed will be reduced proportionately where the companies are
in existence for less than three financial years. And in circumstances where the
default of the company has been condoned, it will not be liable under the abovesaid
rule.7 3. 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. 4. The Articles of
Association of the company must authorize the issue of shares with differential
voting rights. If the Articles do not authorize, they have to be altered before the
issuance of such shares. 5. 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. 6. The company
has not defaulted in meeting investors grievances. 7. The company has obtained
the approval of the shareholders in general meeting by passing resolution as
required under the provision of sub clause (a) of subsection (1) of Section 94 read
with sub-section (2) of Section 94 of the Act. 8. The listed company has obtained the
approval of the shareholders in a postal ballot.