## Equity Shares with Differential Rights – Eligibility & Disclosure

A company that wishes to issue equity shares carrying differential rights (as to dividend, voting or otherwise) must satisfy a strict eligibility test in addition to obtaining authorisation from the AOA and an Ordinary Resolution (a postal ballot is required for listed companies).

### Cap on Differential Voting Power

Voting power of shares with differential rights shall not exceed 74% of the total post-issue voting power (including such differential shares).

### Track Record Conditions

1. No default in filing annual accounts and annual returns during the last 3 financial years.

2. No penalty by any Court / NCLT in the last 3 years under the RBI Act, SEBI Act, SCRA, FEMA or any special Act applicable to the company.

### Default-Cleared Conditions (5-year cooling-off)

The company must not be in default in:

Payment of dividend on preference shares;
Repayment of any term loan from a Public Financial Institution (PFI), State-Level Financial Institution or scheduled bank;
Payment of statutory dues of employees; or
Crediting amounts to the Investor Education and Protection Fund (IEPF).

> If such default existed, shares may be issued only after expiry of 5 years from the end of the FY in which the default was made good.

### Default-Cleared Conditions (No cooling-off – issue allowed once cured)

No subsisting default in:

Payment of dividend;
Repayment of deposits;
Redemption of preference shares / debentures; or
Interest on such deposits, debentures or dividend.

> Issue is permitted as soon as the default is made good (no 5-year wait).

### Mandatory Disclosures

Particulars of the issue must be disclosed in:

The Register of Members (with shareholder details);
The Board's Report for the FY in which the issue was completed; and
The Explanatory Statement of the meeting / postal ballot.

### Conversion Bar

Equity shares with voting rights cannot be converted into differential voting right shares, and vice-versa.

### Exemption

This section is not applicable to a private company if its MOA/AOA so provides.

Worked example

### Example 1

Example: A Ltd. defaulted in payment of dividend on its preference shares in FY 2021-22 and made good the default on 31 March 2023. Can A Ltd. issue equity shares with differential rights in FY 2024-25?

Solution: No. The default falls under the 5-year cooling-off list. A Ltd. can issue such shares only after 5 years from the end of the FY in which the default was made good, i.e., on or after 1 April 2028.

⚠️ Common exam mistakes

Treating the 74% cap as applicable only to the differential shares — it actually applies to the total post-issue voting power including the differential shares.
Confusing the two default lists — only specified defaults (dividend on preference, term loan, statutory dues, IEPF) trigger the 5-year cooling-off; other defaults (deposits, redemption, etc.) need only be cured.
Forgetting that equity shares with voting rights and differential voting-right shares cannot be inter-converted.
Overlooking that the section does not apply to a private company if its MOA/AOA so permits.

Bare-Act text Section 43 read with Rule 4, Companies (Share Capital and Debentures) Rules, 2014 · Companies Act, 2013 · click to expand

Section 43 read with Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 governs issue of equity shares with differential rights, subject to conditions on AOA authorisation, Ordinary Resolution, 74% voting-power cap, and default-related eligibility.

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Equity Shares with Differential Rights – Additional Conditions and Disclosure

Worked example

⚠️ Common exam mistakes