Differential Voting Rights under Companies Act

The Ministry of Corporate Affairs has amended the provisions relating to issue of shares with Differential Voting Rights (DVRs) provisions under the Companies Act.

OBJECTIVE

It is done with the objective of enabling promoters of Indian companies to retain control of their companies in their pursuit for growth and creation of long-term value for shareholders, even as they raise equity capital from global investors.

HIGHLIGHTS

The amendments to the Companies (Share Capital & Debentures) Rules brings in:

• An enhancement in the previously existing cap of 26% of the total post issue paid up equity share capital to a revised cap of 74% of total voting power in respect of shares with Differential Voting Rights of a company.
• The removal of the earlier requirement of distributable profits for 3 years for a company to be eligible to issue shares with Differential Voting Rights.
• Another major step taken is that the time period within which Employee Stock Options (ESOPs) can be issued by Startups recognized by the Department for Promotion of Industry & Internal Trade (DPIIT) to promoters or Directors holding more than 10% of equity shares, has been enhanced from 5 years to 10 years from the date of their incorporation.

SIGNIFICANCE

The initiatives have been taken in response to strengthen the hands of Indian companies and their promoters who have lately been identified by deep pocketed investors worldwide for acquisition of controlling stake in them to gain access to the cutting edge innovation and technology development being undertaken by them.

DIFFERENTIAL VOTING RIGHTS

Differential voting rights or dual-class shares give the holders more voting and dividend power than ordinary shares. It helps promoters retain decision-making powers by retaining shares with superior voting rights or by issuing scrips with lower or fractional voting rights.

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