What Are Differential Voting Rights (DVRs) And What Recently Changed?
Differential voting rights according to section 43 (a)(ii) of Companies Act,
2013 are those rights which allows differentiation between shares among its
other classes in term of Dividend & Voting. Every shareholder of a company
requires right related to their shareholding when we talk about voting and
issuing dividends. Usually, Major Shareholders are inclined towards possessing
voting rights whereas minority Shareholders towards Dividend rights.
are more concerned about voting rights as it allows them to play an important
part in governing their company. The concept of DVRs is letting promoter retain
control over the company without dilution of rights, by allowing shares with
superior voting rights (SR) or lower or fractional voting rights to public
investor. Previously, Tata Motors & Pantaloons issued DVRs with 1/10th
fractional voting rights as compared to ordinary shares in exchange for 5%
higher dividend as compared to ordinary shares.
SEBI by circular dated July 21, 2009 prohibited companies from issuing any sort
of shares in any manner which may confer on any person, superior rights as to
voting or dividends vis-à-vis the rights on equity shares that are already
Countries like US, Canada, Hong Kong also allows issuance of shares with
superior voting rights.
As per Rule 4 of The Companies (Share Capital and Debenture) Rules, 2014, no
company shall issue equity shares with differential voting rights unless it
complies with the following conditions:
Framework Of Issuance
- Article of association of a company should authorize the issue of shares
with differential rights.
- Permission from shareholders in the general meeting by passing an
- The voting power in respect of shares with differential rights of the
company shall not exceed 74% (earlier 26%) on post-listing of shares
(including ordinary shares).
- There has been no default in filing of annual returns & financial
statements for 3 financial years immediately preceding the financial year in
which shares are being issued.
- The company has not endured any default in payment of dividend to
shareholders or repayment of debenture holders or preference shareholders on
their maturity & redemption or repayment of any term loan from a public
financial institution or State level financial institution or scheduled bank
that has become repayable or interest payable.
- The company has not been penalized in last 3 years of any offence under
Reserve Bank of India Act, 1934, the Security and Exchange Board of India
Act, 1992, the Securities and Contract Regulation Act, 1956, the Foreign
Exchange Management Act, 1999 or any other Special Act.
Company consisting superior voting rights shareholders shall be allowed to do an
Initial Public Offering (IPO) of only ordinary shares to be listed on the main
board with following conditions:
- Issuer company should be a tech company as per innovators growth
platform which is intensive in the use of technology, information
technology, intellectual property, data analytics, bio-technology/nano-technology to provide
products, services or business platforms with substantial value addition.
- The superior right holder should be a part of promoter’s group whose net
worth should not exceed Rs. 500 Cr excluding the shares held by SR shareholder
of share company.
- The SR shares can only be issued to executive positions such as of
promoter or founder.
- The issues of SR shares can only be issued through a special resolution
passed at a general meeting of shareholders.
- SR shares must be been held by the holder at least for a period of 6
months prior to the filing of Red Herring Prospectus.
- SR holders shall have the voting rights in ratio of minimum prescribed
2:1 to maximum 10:1 in compared to ordinary shareholder.
List-in and Lock-in
Shares having superior voting rights must be listed on stock exchange after
public issue and there will be a perpetual lock-in until conversion into
ordinary shares. There shall be no transfer of such shares among the promoter
and those shares must be free from any sort of lien or charges neither can they
Rights of Superior Voting Right Shares
Shares possessing superior voting rights shall always be treated at par in
compared to ordinary shares in every respect, including dividend, except in case
of voting on resolutions. The total voting rights of SR shareholders including
ordinary shares post listing must not exceed 74% of total voting power.
Enhanced Corporate Governance
2/3 of the board and committees (excluding audit committee) must comprise of
Independent Directors as prescribed by SEBI (LODR) Regulations and Audit
Committee shall compromise of only independent directors.
Coat-Tail ProvisionsPost IPO, superior right shares will be considered as ordinary shares in terms
of voting under following situations:
- Appointment/removal of independent director and/or auditor.
- In case promoter is willingly transferring the control to other company.
- Related party transactions as per SEBI (LODR) regulations involving SR
- Voluntarily winding up of company.
- Changes to be done in MOA and AOA except any change affecting SR instrument.
- Initiation of voluntarily resolution plan under IBC.
- Utilization of funds for purposes other than business.
- Passing of special resolution in respect of buy back of shares or
On certain event SR shares shall convert automatically into ordinary shares:
- On the demise of promoter holding such shares.
- On resigning of shareholder holding such shares from executive position.
- In case of M&A, where shareholder of having SR shareholder where the
control would be no longer with him.
Fractional Right Shares
SEBI has stated, the issuing of fractional right shares by existing listed
companies won’t be allowed as of now unless enough experience has been gained
from the concept of issuing Special Right shares.
Clause (d) rule 4(1) of SCDR, which requires companies in order to issue DVRs
must have a profitable track record of previous 3 years has been deleted and
previous limit of 26% on percentage of shares of differential rights out of post
issue paid-up equity share capital has been revised to 74%.
New framework of DVR will help entities in raising capital for their business
and will also allow promoters gain substantial control over the company which in
past at many instances had been diluted with the rights of other shareholders
resulting in loss of control over the business and in decision making. It will
prevent promoters and major shareholders from the dilution of shareholdings and
hostile takeovers which will also benefit to minority shareholders who are not
interested in voting rights and are satisfied with other rights involved into
bonus issues, dividends, ESOPs etc.