Shares with differential voting rights – Legal Position In India

The recent times have witnessed the promotors and founders grappling with maintaining control over their company especially in cases where public investors are involved. With examples like investorsof HDFC Bankvoting against the reappointment of Mr. Deepak Parekh as Non-Executive Director in August 2018 and the more recent hostile takeover of Mindtree Ltd. by the Larsen and Toubro, the promoters crave to have more power over the decision making in the company. This has seen the emergence of several investment instruments to help the promoters retain control over the company without eroding its capital. One such instrument which allows the company to do so is through issuing the shares with a differential voting rights (“DVR Shares”).

What are shares with differential voting rights?

Section 43 of the Companies Act, 2013 states that there are two types of share capitals i.e. equity share capital and preference share capital. Further, Section 43(a)(ii) states that equity share capital of the company can be with with differential rights as to dividend and voting.Simply put, DVR Shares denote those equity shares allotted to the shareholders with a deviation from the one voting right per share rule. These shares either carry less than one voting right per share, or more than one voting right per share. However, this concession on the voting rights is compensated by the prospect of earning dividend at a higher rate and vice versa.

Legal development

Initially, there was no provision for issuing DVR Shares under the erstwhile Companies Act, 1956. However, vide Companies (Amendment) Act, 2000, Section 86 of the Companies Act, 1956 was amended to include shares having differential rights as to dividend, voting or otherwise, as equity shares. Consequently, two Indian companies, among others, issued DVR Shares, which are, Tata Motors Ltd. and Future Enterprises Ltd.

However, on 21st July, 2009 Securities Exchange Board of India (“SEBI”) issued a Circular bearing no. SEBI/CFD/DIL/LA/2/2009/21/7 which prohibited listed companies from issuing shares with superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed. Thus, listed companies were barred from issuing shares with superior voting rights or lower voting rights with higher dividends as compared to ordinary equity shares.

Current position

Presently, the issue of DVR Shares is governed by Section 43of the Companies Act, 2013 read with Rule 4 of the Companies (Share Capital and Debenture) Rules, 2014 (“Rules”).

On 16th August, 2019, the Rules were amended vide Companies (Share Capital and Debenture) Amendment Rules, 2019 whereby the government relaxed the norms for issue ofDVR Shares. Firstly, the government removed the requirement of distributable profits for three (3) years for a company to be eligible to issue DVR Shares. Secondly, the limit of maximum DVR Shares that can be issued by a company was revised from “twenty-six percent (26%) of the total post issue paid-up equity share capital” to “seventy-four percent (74%) of total voting power”.

Also, in June 2019, SEBI released a Framework for Issuance of Differential Voting Rights Shares for a) companies whose equity shares are already listed on stock exchanges and b) companies with equity shares not hitherto listed but proposed to be offered to the public.

Conditions for Issue of Shares with Differential Voting Rights

Rule 4 of the aforementioned Rules lays down the following conditions that have to be fulfilled by all companies in order to issue DVR Shares, whether it’s a public company or a private company however, in case of a public listed company, it will have to comply with the SEBI Regulations in addition to the conditions mentioned hereinafter:

  1. The articles of association of the company should authorise the issue of DVR Shares.
  2. The issue of DVR Shares is needed to be authorised by an ordinary resolution passed at a general meeting of the shareholders.
  3. The voting power in respect of DVR Shares of the company shall not exceed seventy-four percent (74%), of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.
  4. The company has not defaulted in filing financial statements and annual returns for three (3) financial years immediately preceding the financial year in which it is decided to issue DVR Shares.
  5. The company has no subsisting default in the payment of a declared dividend to its shareholders, the repayment of its matured deposits, redemption of its preference shares, redemption of its debenture, payment of interest on such deposits or debentures or payment of dividend.
  6. The company has no subsisting default in the payment of the dividend on preference shares, 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 thereon, payment of dues with respect to statutory payments relating to its employees to any authority or crediting the amount in Investor Education and Protection Fund to the Central Government.

However, the company may issue DVR Shares upon expiry of five years from the end of the financial year in which the default mentioned above were made good.

  1. The company has not been penalised by court or tribunal during the last 3 years of any offence under Reserve Bank of India (RBI) Act, 1934, SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, Foreign Exchange Management Act (FEMA), 1999 or any other special Act, under which such companies being regulated by sectoral regulators.
  2. The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa.
  3. The holders of the equity shares with DVRs shall enjoy all other rights such as bonus shares, rights shares, etc. which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.

Features of Shares with Differential Voting Rights

The following may be kept in mind while taking decisions regarding issue of DVR Shares:

Prevents Dilution of Voting Rights- Since DVR Shares are able to separate economic interests with voting rights, promoters are able to exercise greater control over the company even when other investors have contributed more capital. Consequently, this prevents hostile takeovers.

Better Rate of Dividend- Shares having inferior voting rights offer a better rate of dividend than other equity shares. This is beneficial for those strategic investors who are primarily interested in the returns, without getting involved in the management and affairs of the company.

Less transparency-With promoters having greater control over the company, even while making lesser economic contribution, there is a major risk of the DVR Share structure making the corporate governance standards in the company less transparent and also leading to potential oppression of minority shareholders.

Thinly traded DVR Shares-Due to relatively low popularity, trading volume of listed DVR Shares is generally lower in comparison to the ordinary shares of the company and also, the DVR Shares are traded at a lower pricethus, the liquidity of DVR Shares has not been good.


DVR Shares may be used by the promoters who are unable to provide for the company’s increasing requirement for funds, by seeking investment from other investors without the fear of losing control over the business decisions.With the recent amendment removing the requirement of distributable profits for three (3) years for a company to be eligible to issue DVR Shares, a number of newly incorporated companies especially start-ups would be keen on issuing DVR Shares to its investors. However, the question that how significant and effective the DVR Share structure proves to be in this struggle for power between the promoters and the investors, that only time will tell. 

Disclaimer: This article is written merely for informational purposes and it should not be taken as a legal advice. The readers are advised to consult competent professionals before acting on the basis of any information provided here.