Equity Shares with Differential Rights (DVR) — Section 43 read with Rule 4
# Equity Shares with Differential Rights (DVR)
Governing provision: Section 43 read with Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014.
## 7 Conditions to Issue DVR
A company can issue DVR only when ALL of the following conditions are satisfied:
### 1. Authorisation in AOA
The Articles of Association must authorise the issue of DVR.
### 2. Ordinary Resolution (OR)
An OR must be passed in a general meeting.
For listed companies → resolution must be passed through postal ballot (PB).
### 3. Cap of 74%
DVR shall not exceed 74% of the total post-issue paid-up share capital (including DVR).
### 4. No default in filing FS / SAR
No default in filing Financial Statements or Annual Return for the last 3 financial years.
### 5. No subsisting default in payment of:
Dividend
Deposit
Debenture (interest or redemption)
Preference Shares
### 6. No default in repayment of:
Preference share dividend
Term loan from banks / FIs
Statutory dues of employees
IEPF (Investor Education and Protection Fund)
### 7. Clean penal record
No penalty imposed by court / tribunal during the last 3 years for offences under:
RBI Act
FEMA
Other special Acts under which the company operates
## Important Restrictions
Note 1 — No conversion:
The company is prohibited from converting:
DVR shares → normal equity shares, OR
Normal equity shares → DVR shares
Note 2 — Other rights preserved:
A DVR holder shall enjoy all other rights that an ordinary equity shareholder enjoys, including:
Bonus shares
Rights shares
Notice of meetings
Right to receive copies of financial statements
Worked example
### Example 1
Example: Sun Ltd, a listed company, wants to issue DVR. The board passes a resolution at a physical meeting. Is this valid?
Answer: No. For listed companies, the OR for issue of DVR must be passed through postal ballot, not at a physical general meeting. The procedure adopted by Sun Ltd is invalid.
### Example 2
Example: Moon Ltd defaulted in payment of debenture interest 2 years ago, but cured it 6 months ago. Can it now issue DVR?
Answer: Yes. The condition is 'no subsisting default'. Since the default has been cured and no longer subsists, Moon Ltd can issue DVR (subject to all other 6 conditions being met).
### Example 3
Example: Star Ltd has a total post-issue paid-up share capital of Rs.100 crore, of which Rs.80 crore would be DVR. Is this permitted?
Answer: No. DVR cannot exceed 74% of post-issue paid-up share capital. 80/100 = 80%, which breaches the cap. The proposed issue is invalid.
⚠️ Common exam mistakes
Stating the cap as '26%' instead of '74%' — the limit is that DVR cannot EXCEED 74% of total post-issue PUSC.
Forgetting that listed companies must pass the OR via postal ballot, not at a physical/virtual meeting.
Believing DVR can be converted to ordinary equity later — this is expressly prohibited.
Missing that the 3-year FS/AR no-default requirement is separate from the 'no subsisting default' in dividend/deposit/debenture/PS.
Forgetting that DVR holders are entitled to bonus and rights issues just like normal equity holders.
Bare-Act text Rule 4 · Companies (Share Capital and Debentures) Rules, 2014 · click to expand
Rule 4 — A company limited by shares shall not issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions: (a) AOA authorises the issue; (b) issue is authorised by ordinary resolution (postal ballot for listed company); (c) DVR shall not exceed 74% of total post-issue paid-up share capital; (d) no default in filing FS and AR for last 3 financial years; (e) no subsisting default in payment of declared dividend, repayment of matured deposits, redemption of preference shares or debentures, interest thereon; (f) no default in payment of dividend on preference shares or repayment of term loans; (g) no penalty by court or tribunal in last 3 years for offences under RBI Act, FEMA, or any other special Act.