Issuing shares with differential voting rights has become more prescriptive and restrictive under the Companies Act of 2013. The Act now requires that any company issuing such shares must meet several preconditions, including limiting differential voting shares to 26% of total equity, obtaining shareholder approval, and not having any defaults on financial obligations or legal penalties for the past 3 years. Meeting all these requirements may be difficult for new startups that do not have a consistent track record of profits. Additionally, shares with differential voting rights introduce complexity when calculating the balance of voting rights between equity and preference shareholders.

1. Voting Rights when there are Shares with Differential
Voting Rights
There are a few subtle changes in the Companies Act, which
bring about challenges in voting rights for different classes
of shares and still be able to meet the requirement of
balance of equity: preference in total voting rights.
Earlier to the Companies Act 2013 (Act), private companies could
determine voting rights of equity(including differential rights) and
preference shareholders as per their convenience, because of the
Saving section 90 of old Companies Act, 1956.
The Act now has increased the boundaries for voting rights for
preference shares, which now includes any resolutions which
directly affect the rights attached to preference class and any
resolution for the winding up of the company or for the repayment
or reduction of its equity or preference share capital.
In private equity deals (angels, VC) that opt for preference shares
as the instrument, then having a list of matters (called as Reserved
Matters)which requires the preference shareholder voting, then
the Act enables it. However, the proviso describes that the
“proportion of the voting rights of equity shareholders to the voting
rights of the preference shareholders shall be in the same proportion
as the paid-up capital in respect of the equity shares bears to the
paid-up capital in respect of the preference shares”. It looks like
additional language is required to be captured in the shareholders
agreement at the time of investment, to protect the affirmative
consent by the investors.
Issuing shares with
differential rights
has become more
prescriptive and
restrictive in the
Companies Act, 2013.
New startups may
find it difficult to
meet the
precondition of
consistent track
record of
distributable profits
for last 3 years.

2. This balance (pro-rata of equity: preference) gets murky when there is a class of shares with
differential voting rights.
Shares with differential voting rights:
Any company, whether private or public, will now have to comply with the below requirements.
 The shares have to be ‘equity’ class.
 The company cannot convert its existing share capital to a differential voting class but has
to be fresh issuance of shares.
 Issuance requires prior shareholders approval through ordinary resolution and the
Articles of Association shall authorize issue of such shares. Also, there is a limit that
such shares that it should not exceed 26% of the total post-issue paid up equity share
capital. Further the Company should not have defaulted in filing financial statements
and annual returns for 3 financial years. The Company should not have any
subsisting default in the payment of
- a declared dividend to its shareholders or
- repayment of its matured deposits or
- redemption of its preference shares or debentures that have become due for
redemption or
- Payment of interest on deposits or debentures
 Besides this, the Rules require that the Company should not have defaulted on
- Repayment of loans from banks and public financial institutions or interest thereon
- Payment of dividend on preference shares
- Payment of statutory dues for employees
- Depositing moneys into the Investor Education and Protection Fund.
(Our comment: Would an earlier default now made good still be considered as
default under this clause, given there is a separate clause on “subsisting default”? )
 The Company should also not have been penalized by Court or Tribunal during the last 3
years of any offence under RBI, SEBI, SCRA, FEMA or any other special Act, under which such
companies being regulated by sectoral regulators.
 Disclosure of relevant details in the shareholder notice, like, total number of such shares to
be issued, details of the differential rights, percentage of shares with differential rights to the
total post issue paid up equity share capital, reasons or justification for the issue; price at
which such shares are proposed to be issued either at par or at premium; basis on which the
price has been arrived at, change in control(if any) and other details in Explanatory
Statement and Director’s Report is required by Companies (Share Capital and Debentures)
Rules, 2014.