MCA addresses differential voting rights

voting rights

The Ministry of Corporate Affairs (MCA) notified the Companies (Share capital and Debentures) Amendment Rules, 2019 on 16 August 2019, to amend the provisions in the Companies (Share capital and Debentures) Rules, 2014 relating to issuance of shares with differential voting rights.

Shares with differential voting rights (DVRs) are shares that have rights that are disproportionate to the economic rights over the shares. Shares can be issued with differential rights to a shareholder either in terms of superior voting rights, inferior voting rights, or differential rights as to dividend.

The MCA has issued a press release stating that the intent of the amendments made to the rules is to enable promoters of Indian companies to retain management control of the company, despite raising substantial foreign equity from global investors.

The changes have come about in response to representations made by innovative technology companies and startups that have identified global investors interested in investing in such companies and acquiring controlling stakes in the share capital of such companies.

In order to enable the Indian companies to raise significant foreign capital, without the promoters having to cede control of such companies as a result, the following amendments have been brought about to the rules:

While the voting power of shareholders holding shares with DVRs was previously restricted to 26% of the total voting power in a company at any point in time, this limit has now been enhanced to 76%;

As a precondition to issuing shares with DVRs, companies had to previously have a consistent track record of distributable profits for three years preceding the issuance of such shares. This condition has now been done away with, and company, irrespective of its revenue and profitability, can issue shares with DVRs;

Another condition to issuance of shares with DVRs was the absence of default in payment of dividend on preference shares, in repayment of any term loan from a public or state-level financial institution or scheduled bank, in payment of statutory employee dues, and in crediting the amount in the Investor Education and Protection Fund to the Central Government. While this condition still exists, the amendment to the rules has brought in an exception that a company may issue shares with DVRs if five years have lapsed since the financial year in which such default committed, was made good.

Issuance of shares with DVRs continues to be subject to other conditions under the rules that have not undergone any amendment, which include the requirement for: (1) articles of association of the company permitting such issuance, (2) the issuance being authorized by an ordinary shareholders resolution, and (3) absence of default in filing financial statements and annual returns in the preceding three years.

The business law digest is compiled by Nishith Desai Associates, a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. The firm specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.