04 六月 2019

Issuance of shares with differential voting rights



The recent trend in the area of corporate laws has led to the emergence of various investments tools with multiple ways and options to retain control in the company. These instruments have been brought to fore to keep in tune with the changing scenario in the area of corporate laws, the various ways to invest in a particular sector given the regulatory regime and other hurdles. In the wake of growing competition, the need for adoption of various strategies to survive by the companies has become indispensable. Today, demand for a sound capital base is growing. With companies needing more and more capital through equity and less and less interference in the management, the concept of shares with Differential Voting Rights (“DVRS”) has gained momentum. Recently, the most talked about issue in the corporate industry was India's largest e-commerce market place operator Amazon which subscribed to DVRS issued by Witzig Advisory Services in order to comply with the new FDI norms which were enforced from February 1, 2019.[see endnote 1]

What are DVRS [see endnote 2] ?

Differential voting rights in the simplest of its form means and includes rights as to dividend or voting.[see endnote 3] In other words we can say that DVRS are those shares in which equity shares are allotted to the shareholders, however the 1 (one) voting right per share rule is deviated. Hence, either less than 1(one) or nil voting rights per equity shares or more than 1 (one) voting right per share is issued. It is logical to follow that the investor investing through DVRS will compromise on the voting rights only with the prospect of earning higher rate of dividends.

Section 43(2) of the Companies Act, 2013 (“2013 Act”) read with Companies (Share Capital & Debenture Rules), 2013 (“Rules”) permits the issuance of DVRS. Since these are a distinctive class of shares altogether hence, they need some extraordinary conditions to be prevailing for their issuance.

Conditions for the issuance of DVRS:

The conditions for the issuance of DVRS in India laid down under the Rules are enumerated below:

  • The most important conditions for the issuance of DVRS is that the articles of association of a company desiring to issue such shares shall authorize such issuance;
  • The company shall have a consistent track record of distributable profit for the last 3 (three) years;
  • The company shall have obtained the approval of shareholders in General Meeting by passing ordinary.
  • In the event the equity shares of the company are listed on recognized stock exchange, the issue of such share shall be approved by postal ballot.
  • The company shall not have defaulted in filing financial statements and annual returns for the last 3 (three) financial years immediately preceding the financial year in which it was decided to issue such share.
  • The Company shall not have defaulted in payment of declared dividend to its shareholders or repayment of its matured deposits.
  • The Company shall not have defaulted in redemption of its preference shares/debentures that have become due for redemption.
  • Additionally, the company shall not have defaulted in repayment of any term loan from public financial institutions or state level financial institutions or scheduled bank that has become repayable.
  • No default in payment of any statutory dues relating to employees shall have been made.
  • The company shall not have converted its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa.
  • The following details need to be disclosed by the Board of Directors of the company in the Board's Report for the financial year in which DVRS issuance was completed:
  • the total number of DVRS allotted;
  • the details of the differential rights relating to voting and dividends;
  • the percentage of the shares with differential rights to the total post issue equity share capital with differential rights issued at any point of time;
  • the percentage of voting rights which the DVRS shall carry to the total voting right of the aggregate equity share capital;
  • the price at which such shares have been issued;
  • the particulars of promoters, directors or key managerial personnel to whom such shares are issued;
  • the change in control, if any, in the company consequent to the issue of equity shares with differential voting rights;
  • the diluted earnings per share pursuant to the issue of each class of shares, calculated in accordance with the applicable accounting standards;
  • the pre and post issue shareholding pattern along with voting rights in the format specified under the Rules.


The most imperative purpose which proves to be the biggest advantage of the issuance of DVRS is that it goes a long way in the protection of the rights of the minority stakeholders. The management of company does not get diluted by the ingress of increasing number of shareholders. The management and control remain in the hands of handful of skilled members and yet the company can satisfy its ever-increasing capital requirements without much complexity. It straightaway affects the structuring of the company in a positive manner. It prohibits any harmful impact in the skeleton of policies, rules and regulations which a company decides for its functioning, due to enlargement of the membership. Since, the administration and control of the company is in safe hands the chances of hostile takeovers and related threats are reduced.

DVRS if given a comprehensive glance, seems to be a perfect device for passive investors. It is an ideal investment strategy for those who want to earn more dividends without much painstaking. Sometimes the technicalities involved in the whole investment procedure is very difficult for any normal investor to comprehend, in such a case DVRS prove to be a boon for these credulous investors. Moreover, the holders of DVRS enjoys all other rights such as bonus shares, rights share etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.

Securities Exchange Board of India on DVRS

Historically, Securities Exchange Board of India (‘SEBI’) has not commented much on the issuance of DVRS in India till yet. In 2002, SEBI primary market has made vague recommendations on certain issues including DVRS. It recommended that SEBI equity issue guidelines can apply to DVRS too. But these recommendations failed to serve the purpose as it failed to satisfy more intricate questions regarding the nature and purpose of DVRS.

SEBI ruling in the Jagatjit Singh case[see endnote 4] indicates that the SEBI did not have any authority to issue any guidelines on DVRS. This case deals with issue of DVRS to the promoters. According to the members, these shares were randomly given to the promoters without following any proper procedure. Hence, this allotment DVRS to the promoters was deemed to be arbitrary and improper by the company. SEBI in this case gave a clear-cut analysis of how it came to its conclusion. The earlier provisions of issuance of DVRS under the then Companies Act, 1956 (“1956 Act”) under Section 86[see endnote 5] the Act were resorted to. Section 55-A[see endnote 6] of the 1956 Act provided for the list of those provisions in which SEBI had a clear-cut authority. A glance to this list undoubtedly suggested that erstwhile Section 86 does not fall under the ambit of this section. A rational conclusion that was drawn was that SEBI has no authority to issue guidelines for the issue of DVRS.  Hence, the absence of formal guidelines in this regard was the biggest impediment on popularity of DVRS amongst the Indian Companies.

However, the 2013 Act had cleared this confusion to a great extent. Additionally, a Consultation Paper was issued by SEBI on DVRS. It provides that the DVRS are more relevant for new technology firms with asset light models and promoter led companies. Most importantly, it provides for a system of recognizing the rights vis-à-vis the shareholder rather than in terms of shares. It further proposes 2 (two) types of DVRS that can be issued:

  • Shares with superior voting rights (Superior DVRS)) and
  • Shares with fractional rights (Fractional DVRS).[see endnote 7]

Superior DVRS will have superior voting right when compared to ordinary shares, which shall be issued only to the promoters of the company. There are further conditions attached to the issuance of Superior DVRS including the maximum voting ratio of 10:1[see endnote 8].

The Fractional DVRS allow for lower voting rights as compared to the ordinary shares. These can be issued by companies whose equity shares have been listed for at least 1 (one) year. Further there are restrictions on the class of Fractional DVRS.[see endnote 9] There are other conditionalities attached including that the voting rights cannot exceed a 1:10 ratio.


Hence, we see that today the concept of DVRS is gaining momentum with some level of clarity provided by SEBI and the 2013 Act. What is peculiar is the timing of their emergence in the Indian markets, when we come across so many hostile takeovers strategies in the Indian corporate world. The best known recent example is the L&T bid for Mindtree which dominated the front pages of the newspapers for weeks. The increasing volatility of the Indian stock market and the fluctuating dividends and earnings of the shareholders adds to another good reason as to why it is a ripe time for entrepreneurs to resort to issuance of DVRS.

The only remaining aspect for further strengthening these instruments is to carry out corresponding amendments to the provisions of the 2013 Act, SEBI ICDR Regulations, Securities Contract (Regulation) Rules, SEBI Takeover Code, SEBI Buy Back Regulations and SEBI Delisting Regulations and other related regulations pursuant to clarity received from SEBI. Once the regulatory regime is clear and unambiguous, only then the underlying purpose behind the inception of DVRS could be completely justified and properly implemented.

[The author is a Joint Partner in Corporate practice, Lakshmikumaran & Sridharan, New Delhi]


  1. Issued by Ministry of Commerce & Industry, Department of Industrial Policy & Promotion Press Note 2 (2018 Series)
  2. Abbreviation used for Shares with Differential Voting Rights
  3. Defined in Section 43(2) of the Companies Act, 2013
  4. WTM/TCN/01 /CFD/ APRIL /08
  5. Section 86 (2) -: New Issue of share capital to be done with differential rights as to dividends, voting or otherwise in accordance with such rules and subjects to such conditions as may be prescribed.
  7. Under Companies Act, 2013 both SR shares and FR shares can be issued whereas presently SEBI permits the issuance of FR shares only.
  8. For additional information please refer to https://www.sebi.gov.in/reports/reports/mar-2019/consultation-paper-on-issuance-of-shares-with-differential-voting-rights_42432.html
  9. Only one class of Fractional DVRS can be issued

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