Shares with Differential Voting rights

The contribution of the Company's Owners is the share capital. According to the Companies Act of 2013, there are two types of share capitals.
1. Equity
2. Preference

Again, equity shares/capital can be subdivided into the following categories: –
1. Equity shares with voting rights
2. Equity shares without voting rights.

These shares are referred to as shares with Differential Voting Rights, which refers to the voting power of the shares (either more voting rights or less voting rights). Some will have voting rights, while others will not. Higher split rates can be found in shares with less voting rights, and vice versa.

Initially, the Companies Act of 1956 made no provision for the issuance of DVR Shares. Section 86 of the Companies Act, 1956 was changed by the Companies (Amendment) Act, 2000, to include shares with differential dividend, voting, or other rights as equity shares. DVRs are issued by the company in order to increase their capital structure without diluting or losing control of the company's management affairs. This allows the promoters to keep control of the business even if new investors are brought in. Normal equity shares are issued with one voting right per share. However, in the case of DVRs, one share may or may not have one vote.

Companies can issue equity shares with differentiated rights under Section 43(2) of the Companies Act 2013 and the Companies (share capital & Debentures rules) 2014 if the following conditions are met: –

1. Articles of Association authorise DVRs.
2. The company must seek shareholder approval by passing a general resolution at a General Meeting.
3. The company must not have missed filing annual returns/financial statements for the three years prior to the financial year in which the decision to issue such shares was made.
4. The company must not have missed payments on matured deposits or failed to pay dividends to shareholders.
5. In case of listed companies, the issue of such shares shall be approved by postal ballot.
6. The company shall not have defaulted in redemption of its preference shares /debentures which are due for redemption.
7. 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.
8. The company shall not have defaulted in crediting the amount in Investor Education and Protection Fund to the Central Government.
9. The company has not been penalized by Court or Tribunal during the last three 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
10. The company has not defaulted in payment of dues with respect to statutory payments relating to its employees to any authority
11. The company shall not have converted its existing equity share with voting rights into equity shares with differential voting rights and vice versa.

Limit in Issue of DVRs
The Companies (Share Capital and Debentures) Rules, 2014 was amended. The amendment provided that the condition for the issue of shares with differential voting rights should not exceed 74%, including equity shares with differential rights at any point in time. Earlier to the amendment, the rules provided that the condition for the issue of shares with differential voting rights should not exceed 26%.

Now, the companies can have up to 74% of differential voting right equity shares in the total post issue paid-up share capital. This amendment which increased the limit for the issue of shares with differential voting rights up to 74% is beneficial to the start-ups.

The amendment removed the condition that the company should earn distributable profits in the last three years to issue DVRs. However, the shares with superior voting rights must be held for a period of at least six months preceding the filing of the red herring prospectus.

DVRs for Start-ups
The issuance of DVRs will benefit Indian companies and startup promoters who have been identified by investors throughout the world. Through DVRs, these global investors can acquire controlling stakes in Indian companies/startups. Startups and Indian companies can attract global investors and gain access to cutting-edge technology development and innovation by issuing DVRs. The DVRs will let Indian company promoters to maintain control while raising equity capital from global investors, resulting in long-term value for shareholders and company growth.

Disclosure in Boards Report
Further the Board of directors is required to disclose the following information in their Board report pertaining to the year in which the issue of shares with differential voting rights has been completed

1. Number of shares with DVRs issued
2. Details of DVRs either in respect of dividend or voting rights.
3. % of shares with differential rights to the total post issue of equity share capital
4. % of shares with differential rights issued at any point of time
5. % of voting rights enjoying by the shares with differential voting rights to the total voting rights of the share capital
6. Details of the Shareholders to whom such shares have been issued i.e. either promoter/ director (including relatives)/ KMPs/ employees or public offerings.
7. The price at which such shares have been issued.
8. Pre and Post issue of shareholding pattern along with voting rights.
9. Diluted earnings per share pursuant to the issue of shares with differential voting rights.
10. Change of control in the affairs of the company if any post issue of such shares.