# Equity Shares with Differential Rights (DVR Shares)

## What are they?

Equity shares which carry rights different from ordinary equity shares — the differential may relate to:

Dividend (higher/lower dividend rate)
Voting (fractional or multiple voting power, or no voting)
Or otherwise (any other right)

They are governed by Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014.

## Conditions for issuing DVR shares

A company limited by shares may issue equity shares with differential rights only if all of the following are satisfied:

### (a) Authorisation by AOA

The Articles of Association must authorize the issue of such shares. If AOA is silent, AOA must first be amended by special resolution.

### (b) Shareholders' approval

Ordinary resolution in general meeting.
For a listed public company, the resolution must be passed through postal ballot.

### (c) Cap on voting power

Voting power of DVR shares shall not exceed 74% of total voting power at any point of time.

### (d) No default in filing

The company must not have defaulted in filing annual accounts and annual returns for the 3 financial years preceding the year of issue.

### (e) No default in payments

The company must not have defaulted in payment of:

Declared dividend, interest or coupon
Redemption of preference shares or debentures
Repayment of matured deposits

### (f) No default in obligations

The company must not have defaulted in:

1. Payment of dividend on preference shares

2. Payment of interest on / Repayment of term loan from a PFI, SFI or Scheduled Bank

3. Repayment of term loan from PFI/SFI/Scheduled Bank

4. Statutory dues relating to employees

5. Crediting amount to Investor Education and Protection Fund (IEPF)

> Cooling-off rule: A company may issue DVR shares upon expiry of 5 years from the end of the FY in which the default under (f) was made good.

### (g) No specified penalty in last 3 years

No penalty by Court/Tribunal during the last 3 years for any offence under:

1. RBI Act, 1934

2. SEBI Act, 1992

3. Securities Contracts (Regulation) Act, 1956

4. FEMA, 1999

5. Any other special Act under which the company is regulated by a sectoral regulator.

## Other key provisions of Rule 4

### Explanatory Statement (Notice)

Must contain particulars of the issue — size, details of differential rights, etc.

### Prohibition on Conversion

Existing equity shares with voting rights cannot be converted into DVR shares, and DVR shares cannot be converted into ordinary voting equity shares. Conversion is prohibited both ways.

### Disclosure in Board's Report

Board must disclose specified particulars in the Board's Report of the FY in which the DVR issue was completed.

### Other rights preserved

Subject to differential rights, DVR holders enjoy all other rights of equity shareholders — bonus shares, rights shares, etc.

### Register of Members

Relevant particulars of DVR shares and the shareholders must be entered in the Register of Members maintained under Section 88.

## Historical note

Before the 2000 amendment to the Companies Act, 1956, differential voting rights shares were not permitted to be issued — though such rights existed before 1956.

## Quick recall map

Requirement	Trigger
AOA authorisation	Always
Ordinary resolution / Postal ballot (listed)	Always
74% cap on voting power	At all times
No default in filings	Last 3 FYs
5 year cooling-off	After making good default in (f)
No penalty under specified Acts	Last 3 years

Worked example

### Example 1

Example 1 — Cap on voting power

ABC Ltd has a total voting power of 1,00,000 votes. It proposes to issue DVR shares carrying 80,000 votes. Is this allowed?

Answer: No. DVR voting power cannot exceed 74% of total voting power. Maximum permitted = 74,000 votes (74% of 1,00,000). The proposed issue of 80,000 votes is invalid.

### Example 2

Example 2 — Default cooling-off

XYZ Ltd defaulted in payment of statutory employee dues. It made the default good on 15 March 2022 (FY ending 31 March 2022). When can it next issue DVR shares?

Answer: 5 years from the end of FY 2021-22 — i.e. only after 31 March 2027.

### Example 3

Example 3 — Conversion

PQR Ltd already has 10 lakh equity shares with full voting rights and wants to convert them into DVR shares with 1/10th voting. Is this permitted?

Answer: No. Rule 4 expressly prohibits conversion of existing equity shares with voting rights into DVR shares, and vice versa.

⚠️ Common exam mistakes

Confusing the 74% cap as a cap on the number of DVR shares — it is a cap on voting power at any point in time.
Assuming a special resolution is required — only an ordinary resolution is required (postal ballot only for listed public companies).
Forgetting the 5-year cooling-off period after making good the default mentioned in clause (f).
Believing DVR shares can be converted to ordinary equity shares (or vice versa) — conversion is prohibited both ways.
Overlooking that DVR holders still get bonus/rights shares like ordinary equity shareholders.

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

Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 — Equity shares with differential rights: (1) No company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions, namely:— (a) the articles of association of the company authorizes the issue of shares with differential rights; (b) the issue of shares is authorized by an ordinary resolution passed at a general meeting (listed companies — postal ballot); (c) the voting power in respect of shares with differential rights of the company shall not exceed seventy four per cent of total voting power including voting power in respect of equity shares with differential rights issued at any point of time; (d) the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares; (e) the company has no 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 such deposits or debentures or payment of dividend; (f) the company has not defaulted in payment of the dividend on preference shares or 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 or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government; (g) the company has not been penalised by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

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Equity Shares with Differential Rights (Rule 4)

Worked example

⚠️ Common exam mistakes